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AUSTIN, Texas – Ken Lay, the former CEO of the energy and utility company Enron, was fond of writing letters to his friend George on stationery bearing his company’s famous crooked E.
Crossing out the “Dear Governor Bush” typed by his secretary, and penciling in “Dear George” in its place, he wrote to invite Bush to musicals, commiserate over knee surgery, thank the governor for a Christmas gift — and lay out the “benefits of competition” that electricity deregulation would bring.
“We have already glimpsed this energy future, and it works,” Lay, who died in 2006 shortly after being convicted of a massive securities fraud, wrote to Bush in 1996, a year after Texas lawmakers had started to dismantle the electric utility monopolies.
Twenty-five years later, a fierce debate has erupted about whether the deregulation of the Texas electricity market contributed to the most calamitous week in recent Texas history, one that saw millions of Texans desperate and shellshocked as they sought out the most basic comforts of modern civilization — food, water, heat.
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Was the future, in other words, as glimpsed by Lay, the closest many Texans will ever get to the Stone Age?
“We have a deregulated power system in the state, and it does not work," Austin Mayor Steve Adler said Friday on NBC'S "Today Show," "because it does not build in the incentives in order to protect people and that has to change.”
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A grand bargain
Back in the 1990s, Ken Lay had many willing partners in his deregulation mission, including a governor who had presidential ambitions, Democratic and Republican state lawmakers, and, especially, the utilities and their biggest customers.
The utilities had been regulated by the Texas Legislature since the 1920s, when lawmakers created a single system for generating and transmitting power. Before that, utilities built their own power plants and wires, leading to an uncoordinated, ad hoc system in which work was often duplicated and some areas remained unserved.
Regulation through the years stabilized prices and ensured the lights stayed on. And the electric utilities grew in size and clout, serving customers within specified geographic areas.
But the utilities and their biggest customers badly wanted to shed that government regulation. Those customers, which included large manufacturers and refiners, thought competition would lower their monthly bills. And the utilities wanted access to new markets, beyond their conventional, geographically delineated service territories like Houston or Dallas.
They had a key ally in Bush, who had ushered into government a cast of young conservatives eager to remake the face of government.
In a March 1995 Public Utility Commission newsletter, the Bush-appointed chair of the agency, which was charged with regulating the utility market, expressed his regulation philosophy this way: “With a close watch on the best interests of all Texans, I would like to see the market replace the regulator where possible.”
In wide-ranging testimony before a Texas House committee in April 1998, Lay, who had hired former state House Speaker Gib Lewis as a lobbyist, said that “the market can still make those choices better.”
In a grand bargain, the legislation broke up existing electric utility companies into power-generating companies, transmission and distribution utilities and companies that sold power to consumers, and it would allow the last group to compete to serve homeowners and businesses. (Among the carve-outs, as part of the bargain, were city-owned utilities: Austin Energy, San Antonio’s CPS Energy and others were allowed to keep a monopoly in their service area.)
Ultimately, Texas politicians had allowed power companies, not state regulators, to determine when and how to build and maintain power plants.
Deregulation to blame?
This history was not the top thing on the minds of the millions of Texans — at least 4.3 million at one point — who were without electricity this past week.
But huddled in their cars, or recuperating at a warming center, many took to their phones, and to the virtual hustings, to shout about how government had seemingly abandoned them.
Suddenly, the deregulation project that helped send George W. Bush to the White House two decades earlier now potentially threatened whatever higher-office ambitions might be harbored by Gov. Greg Abbott, whose Republican administration had long considered regulation a bad word.
“This weather event turned into a man made disaster due to failed leadership from our Texas state leadership,” Alejandro Villegas of Houston wrote on Twitter. “We need a federal investigation into this deadly debacle. #GregAbbottFailedTexas”
A debate unfolded about whether Texas’ approach to energy regulation was to blame for the catastrophe, as utilities had little incentive to upgrade their facilities as they strove to pump as much energy into the grid as they could, as cheaply as possible.
Rick Perry, the former governor and ex-U.S. energy secretary, struck back at the idea that Texas would reverse its deregulation tendencies — especially anything that would put the Texas electric grid under the oversight of the Federal Energy Regulatory Commission.
“Texans would be without electricity for longer than three days to keep the federal government out of their business,” Perry was quoted as saying in a blog posted on U.S. House Minority Leader Kevin McCarthy's website. “Try not to let whatever the crisis of the day is take your eye off of having a resilient grid that keeps America safe personally, economically, and strategically.”
But Rebecca Anne Goetz, a New York University history professor who lived in Austin from 1989 to 1996 and in Houston from 2006 to 2013, wrote on Twitter that deregulation “has led to decades of neglect for (power) generation.”
“Maintenance is ad hoc and improvements are largely done as necessary and not part of a long term plan,” she wrote.
“This has been a slow-motion catastrophe caused by blind fealty to the almighty market and greed,” she continued. "People are going to freeze to death in their homes bc TX has chosen to mismanage its grid for decades.”
David Spence, who teaches about the law and politics of energy regulation at the University of Texas’ law and business schools, told the Austin American-Statesman of the USA TODAY Network the calamity raises questions less about the design of the deregulated Texas electricity market and more about utility reliability and the responsibility of grid operators.
“It’s more of a question whether should they have prepared for a low-probability, high-cost event,” he said.
“If you want to pick at the super-conservative mindset,” he continued, speaking of the state’s Republican leadership, “it’s an unwillingness to pay for this kind of insurance.”
Michael Webber, a UT energy resources professor who also serves as the chief science and technology officer at ENGIE, a Paris-based global energy and infrastructure services company, said, "Maybe if you had more heavily regulated the grid, grid managers could have mandated generators properly winterize."
But, he said, "it's not clear regulation versus lack of regulation is a factor — regulated utilities in Louisiana are also having outages."
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Abbott looks for ERCOT reform;
Abbott has made reform of the state electric grid operator an emergency issue for the Texas Legislature, which is now in session.
"We want to make sure that whatever happened in ERCOT falling short never happens again. Even if it means the state stepping up, providing funds to ensure that all of the machinery that froze up and was unable to generate the power that you need. That may require funding — the state of Texas to step up and provide that funding," Abbott said at a Friday news conference.
He also said Texas' energy pricing model "may have affected that ability to get power. ... That's something we need to get to the bottom of."
But any broader discussion of curtailing deregulation, in a state whose conservative-minded leadership is aligned with free-market principles, is an open question.
Steve Wolens, a former Democratic state representative from Dallas who was one of the architects of major 1999 electricity deregulation, pushed back on the idea that deregulation is to blame for the outages.
To the contrary, he said, "the principal reason for passing electric dereg in 1999 was to avoid blackouts and brownouts."
The idea was to encourage investment in new generation to avoid the outages seen in other parts of the country, he said.
"The regulated market had an unpredictable guaranteed rate of return that discouraged private investment in new generation," Wolens said. "And restructuring was successful with new investments in gas fired plants and renewable energy like solar and wind, accompanied by the retirement of dirty coal plants."
"It’s imperative for the Legislature to determine the causes" of the crisis, Wolens told the Statesman. "If they were foreseeable, then shame on us for permitting it. If unforeseeable, then fix it."
Parts of this story are drawn from "The Great Texas Wind Rush," co-authored by Kate Galbraith and Asher Price and published by the University of Texas Press.
Follow reporter Asher Price on Twitter: @asherprice
This article originally appeared on Austin American-Statesman: Were Texas power outages a result of electricity deregulation?