After severe winter weather forced Texas into experiencing power outages and rolling blackouts, there will likely be resulting federal and state investigations into the outages, federal investigations into commodity and futures price spikes during the storm, force majeure inquiries, and demands for corrective actions to ensure future reliability of the grid system.
An unusually severe winter storm has left millions in Texas without natural gas and electricity as the state’s grid operator, the Electric Reliability Council of Texas (ERCOT), implemented rolling blackouts. The severe cold has left electric generators in ERCOT unable to meet base load requirements as a number of natural gas producers shut in production, some pipeline transporters were unable to transport natural gas due to the effects of the severe weather event on pipeline assets, and other thermal and renewable generation assets were unable to operate.
ERCOT announced it had set a winter record for power demand: 69,150 megawatts on February 14. However, more than 40,000 megawatts of power generation had been forced off the system due to the severe cold.
While the root causes and potential solutions will be debated over the ensuing weeks, and the resulting investigations could last for many months, we expect to see fallout from the prolonged outages in ERCOT, including the following:
The Federal Energy Regulatory Commission (FERC) and the North American Electric Reliability Corporation (NERC), which sets reliability standards and monitors reliability, have announced a joint inquiry into February’s outages. FERC Chairman Glick issued a statement that FERC is closely monitoring the extreme weather conditions and will examine the root causes of the reliability event. After Texas experienced similar cold-related outages in 2011, FERC and NERC’s joint review is likely to include an evaluation of how utilities implemented the various winterization recommendations from 2011. ERCOT will also likely conduct its own investigations, while Texas Governor Greg Abbott has called on the state legislature to investigate ERCOT, and the state legislature has already announced that it plans to hold hearings.
We recommend all generation owners and operators anticipate outreach from FERC, NERC, and ERCOT staff, including a strong possibility of lengthy data requests, seeking to understand the causes and impacts of the prolonged outages.
Price spikes in the physical and futures markets for gas and electricity will likely result in investigations by both FERC and the Commodity Futures Trading Commission (CFTC). On the day that severe price impacts became apparent, February 12, physical natural gas prices at all trading points in Texas and Oklahoma and on the Gulf Coast experienced extreme price spikes, exceeding 500% and (in some cases 1,000%) of their recent price patterns.
These prices existed throughout the trading day and resulted in historically high settlement prices heading into a three-day weekend for gas trading. The natural gas futures market also experienced price increases from the March contract. And as numerous media reports have highlighted, electricity prices in Texas experienced historic price increases, trading several thousand dollars per MWh (in comparison to a $25/MWh average from last year).
Historically, either or both FERC and the CFTC have investigated trading and marketing of regulated products following severe price volatility, even in connection with severe weather events. We believe the events of the week of February 8—and the trading on February 12 in particular—may serve as the basis for data requests issued by either or both Commissions.
Further, either Commission might conduct an industry-wide inquiry in which they transmit data requests to any entity trading regulated products during this period of historic price increases. Both FERC and the CFTC take a broad view of what may constitute “fraudulent” or “manipulative” trading, and have expressly refused to establish clear bright-line tests about whether certain trading is permissible or problematic.
Nevertheless, based on the price movements, we also expect the Commissions to pay particular attention to entities (such as marketers) that (1) purchased a sizable physical supply of natural gas on February 12 and the days shortly thereafter and (2) also held long positions for the March futures contract. The Commissions will be especially interested in any companies that posted bids for physical gas that were at or in excess of existing offers—this could raise a red flag for regulators.
The difficulty in delivering natural gas or electricity as well as regulatory actions within Texas may make it difficult for those supplying or relying on these resources to meet contractual demands. We expect to see many force majeure claims arising from this weather event, with buyers and sellers potentially taking differing views on whether the provisions of their contracts require the counterparty to take action to deliver gas or electricity at any price.
The unusually cold weather in Texas forced multiple generating sources offline, and this was not limited to renewable energy. While initial indications suggest that cold temperatures froze wind turbines and inhibited solar generation, the cold weather also forced a shut-in of natural gas production while gas pipelines froze, inhibiting natural gas generation.
Further, Texas’s electricity grid is designed for maximum output during the summer, and some of the energy sources that power the grid during the summer are offline during the winter. Increased load demands may have also resulted in equipment failures.
Addressing these challenges could drive changes to the wholesale market structure, requirements for generator winterization and resulting compensation mechanisms, and a return to the policy questions surrounding resilience in the face of unusual system events.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Washington, DC
Steve Spina
Levi McAllister
Kirstin Gibbs
Dan Skees
Patrick Pennella