Storm Uri: The Supreme Court’s Decision (Part 3)

Editor’s Note: The following concludes a three-part series by the Energy Alliance, a project of the Texas Business Coalition, examining how the Public Utility Commission of Texas has violated consumer choice and market forces in the Texas electric market. Part I was Storm Uri: The PUCT’s $26 billion Electricity Tax and Part II: Texas Defeats Electric Competition.

This Tuesday, January 30, the Supreme Court of Texas will hear arguments to determine whether the Public Utility Commission of Texas illegally imposed a $26 billion monopoly tax on Texas electricity users during Winter Storm Uri. The Texas Third Court of Appeals has already determined that the PUC’s monopoly tax was illegal.

At stake in this case is whether Texans might experience some relief from the billions of dollars from the tax that have been passed on to them in the form of higher monthly electricity bills.

The Supreme Court is hearing this case because the PUC is appealing the ruling of the appeals court that it acted illegally, the appeals court based its decision on a provision in state law that “electric services and their prices should be determined by customer choices and the normal forces of competition.” Instead of the PUC relying on competition, the court found “in extreme circumstances under extraordinary pressure, the Commission exceeded its power by eliminating competition entirely.”

During Uri, Texas politicians were pushing the PUC to do something—anything—to get the lights back on. Unfortunately, not only was the PUC’s action illegal, it was also ineffective. It did nothing to shorten the blackouts.

The PUC claims that it does have the authority to set electricity prices, despite the Legislature’s statutory direction. It claimed it had the authority to set the price of electricity at whatever price it chose when adopting its 2021 price-setting rule. Today it still insists that it had and has this authority in its brief filed with the Supreme Court: “PURA authorized the [PUC’s] Orders.” Joining the PUC in this claim are energy generators Calpine and Talen Energy who claim the “PUC has complete authority over … the wholesale electricity market.”

The PUC’s claim of authority is a recipe for undermining or even eliminating the clear benefits to generators, consumers, and the Texas economy in what was once known as “the most competitive electricity market in the United States.”

Nobel Prize winning economist Friedrich A. Hayek specifies “that the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place.” He goes on to explain that “this problem can be solved, and in fact is being solved, by the price system.” This price system is “a mechanism for communicating information” between market participants. But if regulators set or have the authority to set prices, the resulting uncertainty disrupts communication of information in the price system and reduces the efficiency of markets.

As economist Frank Shostak explains, “For an entrepreneur to make profits, he must correctly anticipate consumer preferences, the future prices of products and the future prices of the factors of production. Entrepreneurs who excel in their forecasting of future prices make profits, and those that misjudge future prices will suffer losses.” Entrepreneurs and investors will be much more likely to misjudge future prices if they must add to their calculations the complicating factor of guessing when a regulator will decide to manipulate or abolish market prices. If the courts allow the PUC to exercise “complete authority over … the wholesale electricity market” in violation of state law, efficiency and profits will decline in the Texas electricity market, leading entrepreneurs and investors to put their skills and capital into other, more profitable investments.

The lack of investment in reliable and dispatchable sources of generation in ERCOT has already led to a decline in the reliability of the grid. This has occurred in part because of regulatory uncertainty about how prices will be set—through competition and consumer choice or by regulatory fiat. Billions of dollars of federal, state, and local renewable subsidies have exacerbated the problem. Further declines in generation from dispatchable sources will further increase prices for Texas consumers—on top of whatever price hikes the PUC may have planned for them.

The PUC’s price-setting rule and the uncertainty it created in the market have already led to significantly increased wholesale prices in 2021 and 2022. The IMM has estimated that they increased again in 2023—by as much as $12 billion. These higher prices are being transmitted to consumers. Residential electricity prices are up 5% YTD in Texas through October to 14.29 cents per Kilowatt hour. This is an increase of 19.8% over the price of 11.93 cents in October 2020.

Unless the Third Court of Appeals decision is upheld, the stage will be set for the PUC to again intervene in the market and set prices itself the next time commissioners do not agree with the “prices … determined by customer choices and the normal forces of competition.” This will undermine regulatory certainty, harm the reliability of the Texas electric grid, and increase the price of electricity paid by Texas consumers. And destroy what little competition is left in what used to be a world-class electricity market.

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