The next chapter of the Texas deep freeze/blackout saga has begun, with bankruptcies, obscene energy bills, and lawsuits. This was a market failure as well as an engineering, forecasting, planning and resilience disaster. Texas’ deep freeze was the result of a series of deliberate choices about risk: who gets rewarded for risk taking, who pays the price for risks gone bad, and what protections are in place for risk decisions that don’t work out.
Energy policy is not the only Texas risk choice in the news. When Governor Greg Abbott lifted all mask mandates and opened businesses back to full capacity despite warnings from local health officials and the CDC. Multiple Texas companies are still urging mask wearing and have declared they are still abiding by the CDC’s protocols and not politicians.
Texas’ risk choices on energy and masks are both clear examples of the central argument of my new book, You Are What You Risk: The New Art and Science of Navigating an Uncertain World(Pegasus Books, April 6, 2021). The choices we make as individuals, organizations, and societies –or in this case, state governments– define us as distinctively as a fingerprint. Understanding the origins of these decisions illuminates the values of decision makers and holds clues about the health of a society and economy, both now and extrapolating into the future.
A key part of a risk fingerprint is what I call a risk ecosystem: the set of policies and institutions that create incentives or deterrents for certain kinds of risk taking. These ecosystems affect individual and business risk decisions: like whether to winterize or buy a generator, or whether to wear a mask or vaccinate or require your employees or customers to do so, or how much contact you have with others during a pandemic.
The blackouts during the Texas deep freeze represented the spectacular failure of a risk ecosystem caused by probability calculations that were way off, an unequal distribution of potential upsides and downsides, mispricing of risk, skewed risk and reward incentives, and in turn a set of cost-benefit bets that went oh so wrong.
My friend Howard Gerwin –a classmate from Rice who now lives in Chicago but was in Texas during the blackout because, ironically, he wanted to escape Chicago winter weather— talks about it as a systems failure. Howard kindly did a guest post for me on his take. Some people try to wrap it up in hot potato summaries like regulation vs deregulation. Texas Monthly, one of my favorite magazines, has a great piece recounting what went wrong and why, at least in terms of the mechanics.
As more information comes out we’ll get a clearer picture of what all went wrong where –and hopefully what went right, since I’m hearing more and more reports from Texas friends whose power stayed on.
Some new developments are giving an initial look at the costs of the blackouts:
- Huge energy bills, which reached into the five figures for some homeowners when suppliers had to buy power on spot markets and passed the cost along to consumers.
- Legal challenges like the billion-dollar class action lawsuit against power provider Griddy for its price gouging and failure to provide power. The outcome is still to be seen, as will be those of other lawsuits, some still to come and a $100 million wrongful death lawsuit against Electric Reliability Council of Texas and Entergy Corp by the family of an 11 year old boy who died because of the blackouts.
- Financial windfalls for some companies –with some making a typical year’s worth of revenue in a day or two—and bankruptcies unfolding for others (Bloomberg Quint) Brazos Electric Power Cooperative, Texas’ oldest and largest electric power cooperative, is one of the first bankruptcy announcements after a $2.1 billion energy bill for the week of the crisis.
- Carol Williams details some of the broader costs in her ERM Insights blog: $18 billion in insured losses, 80 human deaths, 40 percent of Texas’ generating capacity offline at the deepest point of the crisis, and a 20 percent drop in oil and gas production.
- The biggest losers were generators whose plants failed, retail power providers whose usual suppliers fell through; and consumers. You’ve read the stories about how the blackouts affected individual consumers, from days shivering in the cold to the exorbitant bills that followed.
- The Washington Post detailed several companies that paid a high price: Exelon lost between $750 million and $950 million after having to buy energy on the spot market –where prices rose as much as 300 fold–after two plants failed. Power producer Vistra estimated it would take a hit of between $900 million and $1.3 billion because of the freeze. Subsidiaries of American Electric Power in Texas and Oklahoma had to reach into their pockets for roughly $1 billion for natural gas just in the week of crisis, or about equal to its entire budget for this year.
- Workers whose employers are docking their pay because workplaces -both onsite and work-from home—did not have power.
Though the losers are far and wide, there were a few winners in small pockets of the market: Traders in energy markets, and generators whose plants stayed online. Macquarie Group, for example, was expecting 2021 profits to be up by 5 to 10 percent over last year, or over $200 million.
By some estimates, winterization measures add around 5 percent to the cost of a turbine. Clearly, too many Texas companies calculated that that was too much. Those companies paid a high price.
It will be a while until we can tally the full costs of not winterizing and how they compare to if companies had made that investment in resilience. Enki Research, however, has made an initial estimate in the ballpark of $90 billion. Just think about the winterizing that such a sum could accomplish.
A large part of those costs will fall on people and businesses who had no say in the decisions not to winterize (not to mention the set of policy decisions that led to a market failure). This is a classic problem of externalities: that is, costs that are caused by one party but whose burden falls on others.
Some commentators have suggested that lower prices most of the time were worth occasional failures. The outsized energy bills arriving in mailboxes show that the government and companies welched on the “low price” part of the supposed deal.
Former Texas governor and US energy secretary Rick Perry famously remarked that Texans willingly would go without power for days at a time in exchange for the ability to keep the federal government out of their business. I’m not so sure about that, but I am sure that conversations that are pro- or anti-government miss the point: the real question is where citizens, business, and governments each play the most appropriate role in solving problems and creating opportunities.
The relationship between governments and citizens is based on the understanding that a government’s legitimacy depends on it protecting citizens from certain risks. Today, in most (though sadly, not all) parts of the world that includes ensuring that they have access to power and water –as Americans certainly expect from our government.
When it came to power and water risks and rewards, Texas privatized profit for some lucky companies, and socialized the cost among consumers and unlucky companies. But successful economies and societies depend on healthy risk ecosystems that involve smart distribution of risk and reward, on citizens being able to count on basic services, and on governments providing the appropriate risk umbrella for when things go wrong despite best efforts.
I love Texas, where I lived from eighth grade through college and where I still have many friends. I get the frontier mentality that no doubt is part of why Texas has made the risk decisions that it has: self-reliance and grit are key values. But at some point those values clash with other values: being a place where businesses and residents feel that there is a smart risk umbrella that protects them from extreme weather and price gouging.
Texas is what Texas has risked: for better and for worse, whether pandemic response or energy stability or any number of other risk decisions. Texas now has a choice of what kind of a state it wants to be: one where things work and where businesses and citizens can count on power supplies and other infrastructure they need to thrive. The answer to that question depends on how its policy makers and energy providers adjust their ideas about what risks are worth the reward, and which ones simply are not worth taking.
COMING APRIL 6, 2021: YOU ARE WHAT YOU RISK: The New Art and Science of Navigating an Uncertain World. Pre-order by April 5 and get bonuses including a sneak preview, bookmarks and autographed bookplates, exclusive invitations and more.
This article is part of my LinkedIn newsletter series, “Around My Mind” – a regular walk through the ideas, events, people, and places that kick my synapses into action, sparking sometimes surprising or counter-intuitive connections.
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