By Robert Smith, President & CIO of Sage Advisory

It is said that everything is bigger in Texas and so it goes for its winter storms. The devastating winter storm known as Uri arrived on the country’s President’s Day weekend bringing damaging ice and snow across Texas and the southwest region. As climatic events go it was surely a Black Swan that caught most Texans and government officials ill-prepared for the disaster and flat footed in their response.

Uri’s Origin & Cause

Many have said that Winter Storm Uri was but another extreme example of how climate change will reshape our winters in the future, but as scientists like to say, this is an area of active research. Indeed, scientists are divided over whether climate change is fueling extreme cold events like the one that hit Texas. There are a couple of competing ideas for how more global warming will change the likelihood of extreme cold periods. One group suggests that warming will make such events less likely, while another says that warming in the Arctic, which is occurring at a rate twice as fast as the rest of the planet, will increase the chances of frigid polar air spilling farther south, leading to more periods of extreme cold in the near term. The thinking behind this theory is that as Arctic air warms, it becomes less dense and more energetic. In this state, it can more easily break out from its natural climatic barriers and cause kinks in the jet stream, which then cause weather patterns to deviate significantly. This is known as the Arctic Oscillation.

Science Behind Polar Vertex

From this phenomenon, our environment undergoes a pattern of variability in the winds that encircle the Arctic. According to scientists, this cycle is currently in its negative phase, leading to a weaker jet stream with slower air currents. As a result, the jet stream’s typical circular route around the planet can become wobbly, with lobes that reach farther south across our planet. When that frigid air spreads farther south, it creates severe winter weather. Where the errant lobes of the jet stream may reach down can vary around the globe and are often difficult to predict in terms of timing or scope. Unfortunately, it just so happened that Texas was in the path of the recent perturbation.

The Woodwell Climate Research Center in Massachusetts co-authored a 2018 study that found warming in the Arctic is linked to more frequent extreme winter weather in the United States. In a subsequent 2020 study, Dr. Jennifer Francis, Senior Scientist for the Center, also noted that observations and computer models seem to come to different conclusions about the role of Arctic amplification in extreme winter weather closer to the equator. The bitter chill across the U.S. this winter is a sign of what is to come. “The large, persistent, southward dip in the jet stream responsible for this cold invasion is likely to happen more frequently in a warming climate, as are the warmer-than-normal spells that sit alongside this dip,” Francis said.

What is clear to us, is that a complicated mix of variables had to come into alignment to produce the severe cold that stretched across the U.S. and engulfed Texas, and such alignments do not happen very often, making them hard to study and even harder for governments and communities to predict into the future.

A Disastrous Impact

This historic and cataclysmic storm resulted in over 120 million Americans being placed under various winter weather warnings from the National Weather Service and caused one of the largest power blackouts in American history, affecting 9.7 million people in 5 million homes and businesses across the U.S. In Texas alone there were at least 20 direct fatalities and 13 indirect fatalities attributed to the storm, including a mother and child that perished due to carbon monoxide poisoning.

Texas Customers Without Power

Uri dropped prolific amounts of snow and ice across the region. This led to power grid failures across the Texas Interconnection, causing at least 4.3 million Texas residents to be left without electricity. The Electric Reliability Council of Texas (ERCOT), which handles 85% of the state’s electricity needs and manages the region’s power grid, ordered rolling blackouts in an attempt to manage the strain on the system and prevent widespread, long-duration blackouts. Through this process effectively 46,000 megawatts of power, enough to provide electricity to 9 million households on a peak demand day, were removed from the system for seven consecutive days.

This was necessitated because the grid was reportedly “barreling toward a collapse – it was 4 minutes, 37 seconds away, to be exact, as demand surged and supply plummeted[1]” and was likely to plunge the state into darkness for months. These blackouts were initiated just as demand for electricity to heat homes was spiking and three of the 10 largest cities in the U.S. were experiencing record overnight low temperatures, such as Dallas (−2°F, the city’s coldest temperature since 1930 and its second coldest on record), and Houston and San Antonio (13°F, the coldest temperature for both cities since 1989). In total, 356 generators were forced offline by the freeze versus 200 during the last major winter storm a decade ago.

Power Price Spikes

The rolling blackouts, longer-duration power outages and ice accretion caused by the precipitation and unusually cold temperatures led to widespread disruptions to 332 water distribution systems in 110 counties across Texas. Water line breaks occurred in many areas, and power disruptions impacted water treatment plants, which forced several cities, including Houston, San Antonio, Fort Worth, Abilene, Killeen, and Arlington, to enact health emergency boil-water orders. Indeed, water supply disruptions became so extreme that San Antonio firefighters fighting a large apartment fire caused by a water heater explosion were forced to use water trucks instead of fire hydrants, which had become inoperable due to the water shortages.

This also led to significant shortages of bottled drinking water in several major metropolitan areas, and resupply efforts were curtailed by impassable roadways for many vehicles. A couple of days into the storm, more than 13 million people in Texas lived in the 276 water systems covered by boil-water advisories. In addition, these harsh conditions led to water pipe bursts that caused significant damage to numerous residences, business establishments, schools, and health care facilities throughout the region[2].

A Texas Sized Cost

The Perryman Group, a Texas-based economic research firm, has projected that Winter Storm Uri could end up costing $195 billion to $295 billion. These figures include lost income as well as a long-term reduction in economic output stemming from factories and businesses that closed during the storm. Also, the damage to the state’s large agriculture sector could last for several seasons. Produce farmers in South Texas’ Rio Grande Valley, dubbed the state’s “salad bowl,” lost tons of vegetables. The storm also destroyed about half of the state’s citrus harvest, according to the Texas Farm Bureau. Undoubtedly the long-term effects of the storm are likely to have both local and national economic implications for years to come.

The Insurance Council of Texas expects claims to be on a par with 2017’s Hurricane Harvey, which was estimated to have caused state-wide insurance and reinsurance market losses of approximately $19 billion[3]. The loss estimate predicted for Winter Storm Uri includes home, auto, commercial, industrial, and business interruption lines of business, with the majority losses expected from small businesses and commercial enterprises. According to Moody’s, the magnitude of the losses from Uri are expected to be unprecedented since the last single winter storm event to exceed $1 billion in losses was Winter Storm Quinn, which hit the Northeast in 2018. Moreover, the financial impact of Uri is notable because totaled insured losses from U.S. winter storms have averaged a bit more than $2 billion annually between 2010 to 2019, according to Munich Re.

The financial ripple effects of winter storm Uri are now beginning to impact municipal power entities, which are quickly entering a real crisis. One example is found in the Brazos Electric Co-Op, the largest and oldest power cooperative in Texas serving 16 distribution member organizations that have 1.5 million electric service customers. This financially robust, stable company with a solid A/A+ credit rating received an ERCOT invoice the third week of February for $2.1 billion (an amount nearly three times its power costs for all of 2020). It responded by issuing a notice of force majeure, rejecting the bill and entering bankruptcy proceedings[4]. In its court filing, Brazos explained that it found itself caught in a liquidity trap that it could not solve with its current balance sheet.

Analysts at Fitch Ratings have indicated that the cost of the storm could exceed the liquidity immediately available to a range of these power generation entities and warned of potential credit downgrades for all Texas power distribution and generation organizations that used the state’s grid. Clearly, creditors and bond investors across the country will be dealing with this aspect of the financial aftermath of Winter Storm Uri for months to come.

As Goes Governance, So Goes Disaster Management

When the power grid crashed in mid-February fingers blaming a variety of culprits were pointed faster than guns at a Wild West shootout. Uri froze two of the largest components of the State’s energy mix, natural gas production and wind turbines, and thus choked off the supply of electricity as demand skyrocketed. As an aside, it is interesting to note that Texas leads the nation in wind power generation largely because of the deregulation of the energy market, which served to advance and promote decarbonization of the industry and the state-wide power source mix. This debacle was compounded by the fact that the state’s supplementary power sources, nuclear and coal-fired power generators, were underperforming due to the lack of proper winterization or not being fully operational at the time.

“This is the largest train wreck in the history of deregulated electricity[1].”

-Sen. Brandon Creighton (R)
Texas State Legislature

It is worth noting that ERCOT’s own staff meteorologist, Chris Coleman, alerted his management and customers in a Feb. 12th blog post on ERCOT’s website that the cold blast would go down as one of the most extreme events to ever impact the state and that temperatures would set records not seen since the 1980s[5]. Despite these public warnings state officials said that ERCOT offered assurances that the power infrastructure was prepared to endure winter conditions. “But those assurances proved to be devastatingly false,” Governor Greg Abbott said in statement, adding, “when Texans were in desperate need of electricity, ERCOT failed to do its job and Texans were left shivering in their homes without power.” ERCOT’s CEO, Bill Magness, who earned $803,000 a year, has since been fired by the board.

Even though Texas is one of the largest energy producers and consumers in the U.S., it is not subject to federal regulations, because it relies on its own energy grid. Texas began deregulating its power sector in 1999 under then Governor George W. Bush with support from both political parties. The concept was promoted by Bush and state lawmakers as a way to lower electricity prices and improve customer service.

Critics of this market approach suggest it failed to provide sufficient incentive for power companies to invest in winter preparedness since they were not obliged to do so by state regulation and thus led to vulnerabilities for consumers that were laid bare by Uri. For example, Texas is one of several states that has not mandated a capacity-building factor in consumer electric bills. This meant that there was no built-in incentive, as is common in the industry, for companies that run power plants to provide for back-up resources in the event of an emergency or even to “harden” their plants against winter weather. They also believe that lawmakers have repeatedly failed to pass measures over the past two decades that would have required ERCOT to ensure adequate reserves to shield against blackouts, provide better representation for residential and small commercial consumers on its board, and allow the state’s top emergency-planning agency to ensure power plants were adequately prepared for disasters like those brought on by Winter Storm Uri[1].

Moreover, various civic and consumer organizations have pointed to unheeded warnings in a federal report on Texas power vulnerabilities that examined previous winter storms and offered recommendations for preventing future problems. In 2011 a report by the Federal Energy Regulatory Commission and the North American Electric Reliability Corporation concluded, among other things, that power companies and natural gas producers had not properly readied their facilities for cold weather, including failing to install extra insulation, wind breaks, and heaters. The record suggests that Texas lawmakers and regulators, have repeatedly ignored, dismissed, or watered-down efforts to address weaknesses in the state’s sprawling electric grid, which is isolated from the rest of the country.

In the spring of 2014, the Texas Public Utility Commission (PUC) had sought regulatory changes that required energy companies to identify and address all potential failure points, including any effects of “weather design limits.” Unfortunately, the PUC failed in this effort, which experts suggest left Texas power plants — and ultimately consumers — more susceptible to the ravaging effects of the recent winter storm.

As a result of this unprepared and deregulated market, when Uri arrived the PUC let the wholesale market price of electricity rise to $9 per kilowatt hour, a 7,400% increase over the average 12 cents per kilowatt hour that many consumers were paying before the storm arrived. As a result, many Texas wholesale power consumers have received very expensive electric bills, as high as $450 per day, which is more than they might normally pay in a month. In total nearly $50 billion in electricity sales were carried out by ERCOT during the week of the storm, which was an amount equal to total system sales for the three previous years combined. While the unregulated orientation of the market was intended to be beneficial to consumers, it ended up creating a highly inelastic market environment where consumers could not defensively respond the rapid price escalation because of their desperate need for gas and electricity.

ERCOT Electricity Demand

According to Nicholas Akins, CEO of American Power, a company hit by a $1 billion Uri-related natural gas bill, “part of the problem in Texas is the disjointed structure of the business, with different companies handling different tasks, that makes it harder to act decisively in an emergency.” He also blamed ERCOT for doing a poor job of communicating with all the power sector participants during the crisis[1].

A couple of days into the storm and after much public misery and criticism, the rolling blackouts led to calls by Governor Abbott for the Legislature to conduct investigations into preparations and decisions undertaken by ERCOT in advance of the storm. He also vowed that scaling back the bills of consumers hardest hit by this event will be a top priority while also calling on lawmakers to mandate the winterization of generators and power plants. This has led to the resignation of the chairman of the PUC, DeAnn Walker.

In addition, the Federal Energy Regulatory Commission and Texas Attorney General are launching separate investigations into ERCOT and almost a dozen different power companies that serve the Texas market to evaluate possible unlawful price and market manipulation activity. The Texas Public Utility Commission also announced its own investigation into ERCOT and thus far six of 15 ERCOT sitting board members and one alternate have resigned under fire. Lastly, lawmakers have demanded that the PUC rollback recently allowed rate increases and are pushing for some package of emergency waivers or relief money to help badly hit consumers.

An interesting collateral aspect of the disaster is about to be fought in the courts as citizens seek restitution from the state in settlement of their Uri-related grievances. This is seen in the case of the family of an 11-year-old boy who died of hypothermia after the temperature in his house in Conroe, TX plunged during power outages. The family is suing Entergy Texas and ERCOT for a total of $100 million. The lawsuit cites that ERCOT and Entergy failed to “adequately inform” the plaintiff of the length of the blackouts, initially saying they would be rolling or temporary. Other lawsuits of similar nature are reportedly set to be filed against ERCOT in response to the recent power outages. What is at issue is not the cause of death for the child but rather can ERCOT, as a state institution, be held responsible for this wrongful death.

Sovereign immunity grants protections for state agencies against lawsuits, with some exceptions. It is unclear how sovereign immunity would come into play for ERCOT’s most recent legal challenges. The Texas Supreme Court is expected to receive this case and will likely decide this year on whether ERCOT is entitled to sovereign immunity. This case, if decided in favor of the plaintiff, could become a landmark case on the issue of the possible social liability that states may bare for their lack of preparedness as well as clear and proper emergency communications.

Lawyers also expect an avalanche of lawsuits that will rival the litigation that always comes after major hurricanes. “I think you’re going to see more litigation from this event, certainly more than (Hurricane) Harvey and even more than (Hurricane) Ike,” said Tony Buzbee, a lawyer in Houston[1].

Lessons Learned and Actions Needed

It is abundantly clear that Winter Storm Uri was a widespread disaster and major climatic event that brought much suffering to nearly every county in the state we proudly call home. But Uri also brought an opportunity to directly learn about and better understand the different and uncommon climate change challenges that may lie ahead for our region of the world. To be sure, Winter Storm Uri was truly exceptional in its severity and reach. Based on our analysis, it is unclear that the recommendations made by various oversight bodies after the last major winter storm a decade ago would have saved the day for all Texans this time around.

But what we do know is that the power grid failure was a crystalizing event that helped to establish a keen awareness that a great many Texans failed miserably to adequately comprehend the potential deathly impact of the storm and prepare accordingly. This happened in part because of our poor individual behavioral response to a phenomenon that has historically been a 1-in-10-type of weather occurrence. But as many climatologists have suggested, there is an increased probability that these types of events are likely to pick up in both frequency and severity. As a result, our traditional backward-looking, historically based climate risk assessment methods will need to change.

Dr. Samantha Montano, an assistant professor of emergency management at Massachusetts Maritime Academy, suggests that traditional approaches to risk assessment do not necessarily work with climate change. “Just because a certain hazard has not been a problem for a community historically, doesn’t mean that hazard is not going to be a huge problem in the next few years – or even now. A starting place is to rework those risk assessments and have broader conversations about what level of risk a community is willing to accept.” It is our hope that this long dormant conversation will finally emerge within the state’s leadership and usher in a badly needed public policy overhaul regarding meeting the future energy needs of Texas.

In her resignation letter to Governor Abbott, PUC Chair DeAnn Walker accepted her role in the situation but she also pushed back on criticisms and went on to call on others, including the Railroad Commission, ERCOT, the Legislature, gas companies, electric generators, and other industry players to “come forward” to acknowledge how their actions contributed to the power crisis — all of them, she wrote, “had responsibility to foresee what could have happened and failed to take the necessary steps for the past 10 years to address issues that each of them could have addressed.”

Her statement summarized well what was at the heart of this debacle: poor governance. In our view, like those of the European Union[6], we believe good municipal governance must reflect the following core characteristics: solid coordination, full accountability, clarity of purpose, execution credibility, total transparency, fairness to all, decisive law enforcement, and open communication with all stakeholders. It is clear, by our analysis, that many Texas leaders failed to exhibit and exercise these core tenets of good governance. Their reactive response to a fast-moving emergency vividly demonstrated that true risk mitigation starts with intentional, well-funded, and coordinated preparation that is executed consistently months and even years in advance. Indeed, as Spencer W. Kimball said, “preparedness when properly pursued, is a way of life, not a sudden, spectacular program.”

When asked to describe the recent events in Texas, Aneesh Prabhu, an analyst with S&P Global, said, “this is the classic definition of market failure[7].” So far, two weeks after the storm stunned the state, we have seen a rash of public resignations and a variety of investigations being launched but still no one single culprit to be punished for this market failure. That is because unlike the culprit we had in Enron’s corrupt management over two decades ago, this offense developed slowly but assuredly over a long period of time from poor market policy and design, subpar regulatory oversight, ineffective laws, inadequate infrastructure maintenance, poor policy planning for essential services, and inept agency management. All these challenges will take time to fix and reorganize. The necessary risk mitigation efforts will come at a substantial short-term expense to consumers, businesses, taxpayers, and investors. Research shows, however – and certainly at the Federal government level – that for every dollar spent on mitigation there are six dollars saved in future expense and recovery costs[8].

The words of one Texan seem to best reflect the post-Uri collective state of mind, “Honestly, I feel like we’ve lost faith in the people responsible for making sure we have what we need to be healthy and safe in our own homes,” she said. “That’s the hard part. Never did I think in Texas we couldn’t have what we needed, and unfortunately that’s how it is.” The full confidence of a government’s citizens is an essential requirement for its long-term success and the positive economic development of the community at large. To ensure a restoration of our collective confidence it will be important for government leaders to aggressively pursue meaningful energy policy and infrastructure reforms that will adequately strengthen state-wide preparedness gaps and seek to remedy the financial inequities that hit consumers like a cold artic blast.

Originally published by Sage Advisory


Sources:

  1. Rick Rojas, 3/1/2021, New York Times, Texans Demand Answers as They Grapple with Storm’s Lingering Wrath.
  2. HillCo Partners, Legislative Review, pg3 2/17/2021.
  3. Danielle Ling, 2/19/2021, PropertyCasualty360.com, Texas Ice Storms Likely to be Costlier than Hurricane Harvey.
  4. Kathleen Witte, 3/13/2021, www.kbtx.com, Brazos Electric Files for Bankruptcy after Winter Storm, Cannot and Will not pass ERCOT Prices to Consumers.
  5. Andrew Freedman, 2/19/2021, Washington Post, Meteorologist for Texas Grid Operator Warned of Winter Storms Severity.
  6. EU Forest Law Enforcement, Governance and Trade Action Plan (FLEGT), Why does forest governance matter?
  7. Will Englund and Neena Satija, 2/27/2021, Washington Post, As Texans Went without Heat, Light or Water, Some Companies Scored a Big Pay Day.
  8. National Institute of Building Sciences, 2018 Report, National Institute of Building Sciences Issues New Report on the Value of Mitigation.

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