Tuesday, April 16, 2024 Apr 16, 2024
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Local Government

Two Men Who Saw the Storm Coming and Sold Their Electric Companies Before Disaster Hit

Ambit's Jere Thompson and Stream's Rob Snyder determined the system was set up to fail.
Imani Lytle

State lawmakers in Austin spent all of Thursday grilling the people responsible for keeping the power on in Texas. They want to know where and how the system broke down last week. But it really isn’t all that hard to figure out. Two former CEOs in Dallas saw this coming years ago, which is why they sold their companies. They’d separately come to the same conclusion: if something like last week occurred, it would put them out of business. One of those CEOs believed a disaster was likely, if not imminent.

Stream Energy and Ambit Energy are electricity retailers. Both companies have, by all accounts, achieved great success. After Stream began registering users, in March of 2005, it took only 10 months to become the fifth-largest retail electricity provider in Texas. This was three years after the Legislature deregulated the state’s electricity market, turning what the rest of the country considered a closely regulated utility into a free-market spree.

For the first time, Texans could choose their energy provider. Upstart retailers didn’t generate their own power but would instead buy wholesale from major generators. They would market that energy to consumers, usually undercutting the retail arms of the larger producers. (The Legislature froze established rates to trigger market competition.) The retail market ushered in creative delivery plans like free usage during nights and weekends. Some credit the proliferation of Smart Meters directly to this free market approach.

The idea of deregulation was to let the market drive energy production instead of any government agency, but that didn’t translate into sufficient reserve power or infrastructure improvements that may have helped keep the plants online in single-digit temperatures.

The Electric Reliability Council of Texas, known as ERCOT, manages the grid. It can order utility providers like Dallas’ Oncor to cut power to preserve the grid during periods of extreme demand, which is what happened last week. But ERCOT is supposed to be overseen by the Legislature and the Public Utility Commission of Texas, known as the PUCT. Neither did nearly enough to motivate generators to winterize their facilities or create enough additional power to fall back on in an emergency. The federal government even warned the electricity grid manager to do this in 2011.

ERCOT can make its utility partners like Oncor put customers in the dark, but it can’t order the private generators to pay for infrastructure improvements to prepare its generating units for a freak storm: insulated power lines, de-icing equipment on wind turbines, removable structures for natural gas plants, all of which is less expensive if you’re not retrofitting existing generators.

That’s not to say the state government didn’t dangle carrots. Deregulation introduced scarcity pricing. Generally, a megawatt of energy costs anywhere from $40 to $150 to produce, depending on the source of that energy—coal, natural gas, renewables—and the conditions under which that energy was being generated. But renewables were becoming so subsidized that it was actually priced negatively, spurring the PUCT to come up with a way to motivate more natural gas generation. (A megawatt can power about 200 Texas homes during peak demand, according to ERCOT.)

So when demand soared, the state allowed energy generators to sell electricity for an inflated price. It was capped at $1,000 per megawatt, then $3,000, then $4,500, then $9,000. The idea was to use this inflated pricing to motivate generators to produce more when prices were higher. The Public Utility Commission of Texas’ hope was that this would prompt these private generators to build more natural gas facilities; the more power you generate, the more money you make during moments of scarcity.

But for years, Texas generators rarely charged the inflated cap, especially not for consecutive hours. That wasn’t the case last week, when unprecedented temperatures froze natural gas in the pipelines, shuttered some coal production, held wind turbines in place, and knocked off a nuclear plant. Natural gas, coal, and nuclear account for 70 percent of the state’s production. It’s rough to lose renewables like wind, but when those traditional sources fail, we have a problem. And the traditional sources of energy lost about 41 percent of their generating capacity in a flash.

Texas had no backstop. And, ironically, some generators couldn’t benefit from the scarcity pricing because the cold had stifled the gas production.

Nevertheless, Stream almost certainly would have had to purchase wildly inflated electricity for its customers at the height of last week’s storm. The difference between that inflated cost and the lower income from its customers might have sunk the company. Its general partner and founder, Rob Snyder, sold the operation and its customers to NRG in May of 2019 for $300 million.

The company was doing well at the time of the sale. In May of 2019, days after the deal closed, Snyder quipped in an email to a Dallas Morning News editor that Stream was “such an efficient cash flow machine that I have almost become numb to the size of the federal income bills that I have been paying over the past seven years.” 

So why sell? Stream and Ambit sold energy like Mary Kay sells cosmetics, through thousands of direct-to-consumer salespeople.

Snyder says he saw last week coming and got out. He predicted the circumstance, if not the timing. He figured the grid would fail, or come close to failing, during the summer. That’s when demand has historically been at its highest, when rolling outages were sometimes necessary to conserve energy. Besides, Texas just doesn’t dip into single-digit temperatures, especially not across the entire state. But then it did.

A quarterly NRG earnings report in 2019 caught Snyder’s eye. Generally, ERCOT wants a reserve margin of 13.75 percent that can be deployed if generators can’t produce for whatever reason, including extreme weather. But there is no legal requirement for such safety nets. By 2021, Houston-based NRG was predicting reserves so low that the state wouldn’t be able to sustain even a day without blackouts if generation failed. The market had not motivated enough new generation to keep up with all the new Texans and their power usage should a catastrophe occur that resulted in generators not being able to operate.

“If we have a recurrence of the summer of 2011 (when we had 40+ consecutive days of 100+ degree weather), there is virtually no chance for the survival of independent retailers that do not have vertical integration with significant generation capabilities,” Snyder wrote in his email to the editor at the News. He was saying that companies needed to be in the generation game if they wanted to stay in the retail business. He sold to one of those generators.

Snyder said he saw retailers like Stream to be “shock absorbers” for when there was volatility in the market. Generators like NRG benefit because they can sell the electricity they produce at an inflated margin when energy is scarce. Customers who were locked into fixed-rate plans would be protected from market swings. The retailers—known as REPs, Retail Electricity Providers—would be the ones left holding the bag. (Customers with variable-rate plans would feel the pain, too. That is what happened with the much-publicized California-based Griddy. Powering your home at wholesale rates is great when demand and prices are low, but when scarcity pricing kicks in, five-figure electric bills follow. During Thursday’s hearings, the head of the PUCT said about 40,000 to 45,000 Texans out of 7 million total customers were enrolled in such a plan.)

Rob Snyder, photographed here in 2005.

“You’re setting up the REPs to be the shock absorbers in this scarcity plan,” says Jere Thompson, the founder and former CEO of Dallas-based Ambit Energy. “Retail providers can hedge very well, but if they have to buy that incremental power at these catastrophic rates, these $9,000 rates—well, no matter how good you are, you’re not that good. Your balance sheet can’t take it.”

Thompson independently came to the same conclusion that Snyder did. The megawatt cap had been elevated to such an extreme that if retailers had to buy at that price, it would imperil their entire business.

“You could build a company that does everything right — great systems, low cost of customer acquisition, you can provide excellent customer care, the best customer care in the marketplace, even,” he says. “But you have a week like last week and it could all fly apart in a single week, despite doing everything right for 10 or 15 years.”

In August of 2019, three months after the Stream sale, Dallas-based Vistra Energy bought Ambit and its customer base for $475 million.

Before last week’s storm, Vistra and NRG together claimed about 70 percent of all Texas energy consumers. NRG owns Reliant and Vistra owns TXU. Their market share will almost certainly increase as retailers that didn’t get out in time fail.

Their customers will be shifted to subsidiaries of Vistra and NRG, the two enormous generators, which are, in state parlance, “Providers of Last Resort.” They will take on the influx without interrupting their service, growing their customer base in the process. The generation unit won when the grid failed, and the retail unit will win after it is stabilized. In some ways, deregulation wound up concentrating the market.

“One of the things that’s been ugliest here, just from a retailer standpoint, is these price caps,” Snyder says. “It’s a completely artificial number.”

Snyder took his messaging crusade on tour, explaining to investors and salespeople why he was making the decision to sell the company. Thompson says he voiced his concerns to the PUCT directly.

“They were somewhat dismissive,” he says. “I remember talking to one member in the hallway and she said, ‘You’re in a big boy’s game. If you’re gonna play this game, you’ve gotta be ready to deal with whatever comes your way.’ And I looked at her and was like, what?

“The PUCT was much more interested — and many would say this is their primary responsibility — with keeping the lights on and keeping deregulation moving forward,” Thompson says.

By “keeping the lights on,” Thompson doesn’t mean “protecting consumers.” He means “doing the bare minimum to keep the system operating.” The state was raising the cap to incentivize more energy production that would offset the older generators that were being retired. It knew it needed to ensure that the grid could power the homes of all the new Texans—and their energy-hogging companies—who flocked here chasing the state’s lauded miracle. It’s now clear that didn’t happen. And making sure it doesn’t happen again will likely be expensive.

“The questions going forward for everybody are: what kind of procedures will be put in place and what’s going to be done about it next time? But more importantly, how much is that going to cost?” says Bruce Bullock, the director of the Maguire Energy Institute at SMU. “It’s like an insurance policy. How much insurance are you really going to take out for something that’s not likely to occur?”

Deregulation was championed by both Democrats and Republicans. Democratic state Rep. Steve Wolens — husband of former Mayor Laura Miller — shepherded the 1999 bill through the House. Republican state Sen. David Selby co-authored and introduced the legislation, Senate Bill 7, in the Texas Senate. Former Gov. George W. Bush signed it into law. And neither party has ensured that enough reserve power exists to hold us over in an emergency — or that the plants producing the electricity are capable of operating in extreme temperatures.

OPEN SPACE: Ambit’s Chris Chambless, left, and Jere Thompson Jr. stay humble working on unassuming fold-out tables in the West End.

Supporters of deregulation point to the innovation that has occurred within the state. Overall, Texas still produces more than double the amount of the second highest energy producing state in the nation, according to the U.S. Energy Information Administration. Texas also generates about twice as much wind energy as the next highest state, Iowa. (Federal subsidies certainly helped that proliferate here, however, and the PUCT’s inflated cap was partly to incentivize more natural gas when renewables were far less expensive to operate, Snyder says.) Last week, Texas couldn’t access all of that production when it needed it most.

“I think our system and our deregulation has done an incredible job at meeting and in fact feeding the business growth in this state,” Bullock says. “If you look at what would’ve had to have been built in terms of generation capacity over the last 20 years and being able to do it in an economical way, I don’t think a regulated system could do that.”

But it’s not clear that deregulation actually resulted in lower prices for consumers. The Wall Street Journal analyzed data from the EIA and found that residential consumers actually paid $28 billion more for power since 2004 compared to residents in other states that use local utilities. And most of that came from retailers, which charged an average of 13 percent more than the nationwide rate from 2004 to 2019. (NRG’s CEO contested this report during yesterday’s hearings.)

Nor did deregulation spur a robust enough energy reserve, or even infrastructure that would help keep the generators online. Of the 600 generating units that feed the state’s electric grid, 185 failed.

Vistra Energy CEO Curtis Morgan told the Legislature on Thursday that a company meteorologist warned ERCOT of the coming storm. Yet, the agency didn’t start notifying the public to conserve until Sunday, hours before it began ordering utilities to force outages. Reportedly, Texas was fewer than five minutes away from a grid failure.

And ERCOT itself noted in a deck that “the only entity that can confirm that a ‘plant’ is weatherized to any particular standard is the entity that owns or operates the plant.” Lawmakers could have given it fangs. Instead, we almost broke our entire energy system. And that wasn’t a surprise to everyone.

“This is like being told you’ve got stage four cancer,” Snyder said. “It was just a matter of time.”

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