The Ghost of Enron Haunts the Texas Power Grid

Casino capitalism, bankruptcies, bailouts. Sound familiar?

“There is one fundamental lesson we must learn from this experience: electricity is really different from everything else. It cannot be stored, it cannot be seen, and we cannot do without it, which makes opportunities to take advantage of a deregulated market endless. It is a public good…”

These earnest phrases sound like something said during one of the recent inquiries into the Texas power outage.

They’re not. They were made by the Chairman of the California Power Authority — on May 15, 2002.

What do the California and Texas black-outs possibly have in common?


Enron has been dead twenty years — it declared bankruptcy on December 2, 2001 — but its spirit lives on in the Texas power grid.

The Texas electrical system is a relic of the 1990s — not that its equipment is that antiquated, but because its conception dates back to that peculiar era of hubris and political cronyism. For those old enough to have lived through them, the Clinton years are now sometimes thought of wistfully. The (cold) war was over and the economy was booming. It was the closest the Baby Boomers got to having their very own Roaring 20s.

Forgotten in the rosy glow is the corporate cronyism of that pro-business era, including a long list of special favors handed out by politicians of both parties. These left us with a financial system that froze up in 2008. The decades-on consequences of some — such as Section 230, which privileges internet platforms like Facebook — are very much with us today. As are the laws that left us with power grids that freeze up from time to time.

Twenty years ago, Enron’s clever traders, understanding the inner workings of the market system they had lobbied to create, held a gun to California’s head. The ensuing fiasco wiped out the state’s budget surplus, bankrupted its 100-year-old utilities, and raised electricity rates for years.

Enron’s loaded gun was left lying around. In February, the Texas Public Utilities Commission picked it up and shot itself in the foot with it.

The power grid is a touchy thing. The thing we call electricity arguably doesn’t exist without one. When you turn on a light switch, the effect — while tiny — is felt all the way back along the wires to the dynamos at the power plants. It’s a factoid of physics: electricity consumed must be balanced by electricity produced.

In normal times, this balancing act is the worry of engineers who are well-schooled in its dangers. Demand cannot exceed supply for very long. If it does, expensive things attached to the grid can spin out of whack and fail hard. The very idea of “deregulating” a power grid should give pause. “Think of an airline system,” one person put it, “Where if one plane is five minutes late at the gate, every other plane falls out of the sky.”

When the grid becomes underpowered, the only quick fix is to “shed load” — industry speak for blacking people out. That drastic action, of course, immediately cuts demand below supply. The regulated utilities had an old-fashioned approach to staving off load sheds: their rule of thumb was to keep a “reserve margin” or cushion of 20% capacity over demand.

After the deregulations of the 1990s, reserve margins steadily declined. Grids inched toward the edge of chaos.

Enron’s traders discovered something very interesting in California in the hot summer of 2000. A power grid running on the edge might be a problem for utility engineers, but was an opportunity for them. When demand was tight, the entire grid became your hostage. As with ransom demands, the amount money involved was no longer the main point. Saving the grid was.

Traders loved it when the grid was in the edge state. Market prices not only went up, they went up exponentially. It was called the “hockey stick:”

Over two summers, Enron’s traders poked and prodded the California grid to keep it tap-dancing on the edge of chaos. On days when demand was expected to be high, they made sure power plants were taken off-line for maintenance. In internal emails, Enron traders circulated the these lyrics, set to the theme of the TV program “Rawhide”:

Rollin’, rollin’, rollin’,
Though the state is golden,
Keep them blackouts rollin’, statewide.

The chorus might now be sung in Austin:

Brown ’em out, black ’em out,
Charge ’em more, give ’em less,
Let the pols fix the mess, statewide!

In Texas in February, the a cold snap pushed the grid over the cliff. On Sunday evening February 14th — Valentine’s Day —demand was up, but the grid was handling it. ERCOT sent out this Tweet at 8:37 p.m., after usual peak load time, which occurs around dinner:

It was not until the wee hours of Monday, February 15, (a time of day when demand is traditionally low), that the generating plants started freezing up and dropping off the grid:

“Load-shed Ordered” is utility-industry speak for “Let the blackouts roll.”

ERCOT’s decision to pull the plug on the grid was the correct one, and unavoidable.

What followed the next day was not.

In a definitive book called Atomic Accidents, Georgia Tech PhD James Mahaffey makes a point that “the worst nuclear accidents were caused by reactor operator errors in which an automatic safety system was overridden by a thinking human being.” Three Mile Island would have be a glitch — if one of the control room operators hadn’t thought it was a good idea to turn off the emergency pumps the safety system had turned on automatically. At Chernobyl, an impatient supervisor ordered the safety system turned off and a long-delayed experiment run in the middle of the night. He then dithered while refusing to credit the instrument readings in front of him. Even at Fukushima, where the 9.0 earthquake and tsunami were acts of God, it took a human to really screw things up:

closing those two valves at Unit 1 was the turning point. With that simple action, overriding the judgment of the automatic safety system, an operator doomed Fukushima I to be the only power plant in Japan that suffered irreparable damage due to the Tohoku earthquake of 2011.

“There always seems,” Mahaffey concludes, “to be a single operator action that starts the downward spiral into an irrecoverable disaster.”

In Texas, the humans who thought they knew better and pulled the switch were the members of the state’s Public Utility Commission, the PUC.

There was some very interesting reporting just after the February 15 event. (It since seems to have disappeared from the record. All three members of the Texas PUC have resigned.) According to that reporting, during the day on Monday someone at the Texas PUC looked at the log of power purchases and concluded ERCOT’s auction computer had gone haywire. How else, they wondered, could it be buying power “for as low as” $1,200 per megawatt-hour? (Hardly low; prices the week before had been in the $35–50 range.) There was a second theory at the PUC, that the errant ERCOT computer was “turning off” power plants, when of course their power was needed. The Commissioners decided to override the auction computer and ordered ERCOT to start paying out at the legal maximum rate, $9,000 per megawatt hour.

By that simple act, The Texas PUC transmuted a weather tragedy into financial fiasco, one worthy of Enron’s legacy.

You don’t have to be a free market fanatic to see the $9,000/hour as an administered price. Government price-setting was the very thing Texas deregulated had its power markets to avoid in the first place. But the 1999 Texas law had left the PUC around, a sort of nominal regulator of last resort.

There’s the football explanation. The Texas PUC had been out of the regulation game for 20 years. In February, like a retired player excitedly watching from the sidelines, it grabbed its helmet and put itself in the game. A face-plant on the first play was no surprise.

Regulatory capture offers another explanation. There’s no evidence of the financial kind — bribery, revolving doors, political donations, and so on (not that it should be preemptively ruled out). “Cognitive” capture is more subtle. Regulators are put into a situations where they are supposed to be working in the public interest, but they constantly rub elbows with, and often come to identify with, people in the industry they are supposed to be regulating. They don’t see — as in perceive — themselves doing anything out of bounds. Often, in their previous jobs, they were in the industry. DeAnn Walker, formerly of the Texas PUC, was before that, an associate general counsel of CenterPoint Energy. Her background is typical.

A third explanation is that both Texas and California got half-way systems that included just as much restructuring as Enron wanted. Enron didn’t want an absence of rules. It wanted different rules, that would advantage it when it cut itself into the game. And Enron had the political clout to get what it wanted.

“Enron was everywhere, literally everywhere,” a Federal Energy Regulatory Commission (FERC) staff member recollected about the 1990s. “If you walked into an energy meeting anywhere in the world and Enron lobbyists weren’t there, you figured you were in the wrong place.”

South Carolina Senator Ernest Hollings was more blunt. “In my 35 years in the Senate, I have never witnessed a corporation so extraordinarily committed to buying government,” he wrote in 2002.

The spirit of the 1990s is best personified by two economics PhDs, the husband-and-wife team of Texas Senator Phil Gramm and wife Wendy Gramm. Phil Gramm’s 1992 reelection campaign was chaired by Kenneth Lay, CEO of Enron. Wendy Gramm had been appointed chairman of the Commodities Futures Trading Commission by George H. W. Bush.

In January 1993, just before Clinton took office, Wendy Gramm pushed through a vote of the Commission that exempted energy derivatives and related swaps from government oversight— something Enron very much wanted. Five weeks later, Wendy Gramm was appointed to Enron’s board of directors, for which she received $50,000 a year for attending its meetings and, much more lucrative, Enron stock options. (After Enron’s bankruptcy, its board of directors settled a $168 million lawsuit for insider trading.)

Not to be outdone by his wife, Senator Phil Gramm ushered through the Commodity Futures Modernization Act of 2000. This included — against all advice — a last-minute provision put in by Gramm known as the “Enron Loophole.” This was the bill the created the regulatory blind spots for credit default swaps, the ones that imploded in 2008.

But what Enron needed most of all from politicians in the 1990s was help knocking off its competition — the regulated utilities.

Visitors to Jeffery Skilling’s group at Enron in the mid-1990s were struck by its “messianic fervor,” to use the term of Kurt Eichenwald in his 2004 history of the company, Conspiracy of Fools. Enron, as Eichenwald writes, saw itself as creating a New Order. It was going to “take power away from the monopolies, finance the dying gas industry, [and] create markets that had never existed before.”

Enron had lobbied for, and very skillfully surfed, the wave of deregulation in natural gas. By the mid-1990s, Enron was everywhere in that market— especially in the middle. Enron was the indispensable intermediary, the market-maker. But the buying and selling of physical natural gas had limited upside. Enron was in a hurry. Moving fast to front-run Wall Street, Enron created a speculative financial market of tradable contracts and risk-management tools. Trading soon eclipsed boring physical as an Enron profit center.

Enron drew a simple lesson from its success in natural gas: what had worked there could be made to work on anything. Enron was going to trade water. Broadband. Weather derivatives. No idea was too crazy. “Enron,” Skilling repeated often, “had found the one successful business model that could be applied to any market.” In its 1996 annual report, Enron’s stated goal to was “become the largest retailer of electricity and natural gas in the country.”

Enron’s problem was that the largest retailers of electricity were then well-established, century-old utilities. Enron had grown up with the natural gas business, having been formed in July 1985 by the merger of Houston Natural Gas and InterNorth of Omaha, Nebraska. But in electricity, Enron would be an interloper. The regulated utilities would have to be taken out.

Red River Rivalry gets a new twist. Oklahoma had as bad a freeze, but OG&E is a regulated utility.

Enron’ evangelical crusade against the utilities at times smacked of jihad. “I believe in God and I believe in free markets,” Enron CEO Ken Lay said. “We’re on the side of angels,” Jeffery Skilling said. For the utilities, a little righteous flagellation was not out of line. “Enron,” Skilling said proudly, was “disciplining the monopolies of 100 years.”

Enron needs MOA

Enron’s free-market rhetoric was designed to appeal to politicians, although many, including libertarians, saw it as a very un-free market attempt to win special political favor. For example, to insert itself into the electricity markets, Enron needed politicians to give it something called MOA —mandatory open access — to the transmission lines of the existing utilities.

The utilities were quick to point out that these were, in fact, private property. They’d spent a lot of money building them. Laws mandating open access, lawyers such as Laurence H. Tribe argued, were a government “taking” in the Fifth Amendment sense, an exercise in eminent domain.

Aside from the fairness of it all, there was a practical matter. If interlopers like Enron were allowed on the grid, who would have the economic motive to maintain it in the future? AT&T chairman and Michael Armstrong pointed out: “No company will invest billions of dollars if competitors who have not invested a penny of capital nor taken an ounce of risk can come along and get a free ride on the investment and risk of others.”

S crapping the old system and replacing it with a new one, no matter how intricately worked out on paper — would a tough sell. Ideology aside, there was only one good argument in favor of utility deregulation — a promise it would save consumers money. Politicians, incapable of understanding the complex market plans, took it on faith that deregulation would do for the power industry what it had done for the airline and telecommunications industries.

(In retrospect, that promise was not kept. A Wall Street Journal analysis of U.S. Energy Information Administration data showed U.S. consumers who signed up with retail energy companies from 2010 through 2019 paid $19.2 billion more than they would have if they’d stuck with incumbent utilities. A 2018 report by The Texas Coalition for Affordable Power (“TCAP”), looking at rates from providers outside deregulation, including municipally-owned utilities and electric cooperatives, totaled the cost of deregulation for Texans since 2002 at $25 billion, an amount that ranged from a half billion to over $3.5 billion per year.)

the message for consumer was you can save money if you drive without insurance

But the promise of lower prices was easy for companies like Enron to make — because the message really was, you can save money if you drive without insurance. And you can, until statistics catch up with you. The rates charged by regulated utilities included little tithes for a lot of things besides the electricity itself. Some went toward keeping up the utility’s plant and equipment. Some went to new investment, or to pay off old ones. There was also, of course, a regulated and “reasonable” profit for the utility.

Retail customers liked the promise of lower prices — although the explanation that they were buying a commodity like soybeans was somewhat alien. Homeowners and renters see electricity as a service they pay for, more akin to Netflix than tofu delivered by wire. And electricity is, of course, like drinking water, an essential service. As Enron discovered, if you hold it hostage, someone will pay.

ERCOT instant jackpot: $47 billion

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.

— J.M. Keynes, The General Theory of Employment, Interest, and Money (1936)

The accepted back-of-the-envelope calculation for the non-human cost of the February freeze in Texas — megawatt hours generated during the week times $9,000 — is $47 billion.

A billion dollars isn’t what it used to be, but for scale, estimates of all economic damage suffered by California during its power crisis of 2000–2001 run between $40 and $45 billion. In 2020, the value of all the electricity sold in Texas for the entire year was $35.1 billion.

The $47 billion figure feels a bit unreal. Some of it may well be, like Federal Reserve funds created out of thin air. No one knows exactly how much hard cash will finally change hands. Bankruptcies (4 have already been filed) will wipe out some of it. Easy come, easy go.

Equally unreal is what, exactly, the Texas PUC got for it. The PUC says the windfall was needed to “incentivize” the power generators. But by all reports, the power plants that could produce power were putting out as much as they could. Those that couldn’t had no natural gas and no choice. The PUC’s premium “incentivized” working generators to do what they were already doing. It paid a bonus to get was it was already getting.

The Texas PUC simply should have let the market run as designed. If it wanted to incentivize power generators, there was an old-school crisis management tool, the telephone. Instead, the PUC flipped the max-rate switch — and kicked off what the San Antonio municipal utility calls “one of the largest illegal wealth transfers in the history of Texas.”

Where are these billions going? Detailed information is surprisingly hard to get out of ERCOT. If you listen to ERCOT’s lawyers, the non-profit is a public agency that can’t be sued, while at the same time a private organization not subject to freedom of information requests.

But we can draw a crude map to try to follow the money.

Biggest Winners: Electricity generators who kept running

When and if the figures come out, the biggest winners will clearly be the electric power generators who were able to keep running. These sold their power to ERCOT at the $9,000 price.

We shouldn’t let the fact that they received a windfall — that they didn’t ask for — blind us to the fact that they were good guys who kept the lights on. They deserve something. How much should be the question. The hypothetical $9,000 rate would pay a one-gigawatt (large) generator for the hours of the freeze week around $1 billion.

Few are doing much talking at the moment. One that has, ironically, is Avangrid Inc., whose wind farms on the Gulf Coast kept running during the freeze. The CEO of its majority owner, Spanish utility Iberdrola SA, said “We got good money from this,” in an interview. The interviewer estimated the amount for the modest wind farm to be in the tens of millions.

Companies that had plants that went down, such as Calpine Corp. and NRG Texas Power, missed out on revenue, which is not the same as losing money.

All generators will complain, with varying amounts of righteousness, about high natural gas prices during the freeze. Which leads to the next set of big winners.

Winners: Anyone with natural gas — who could deliver it

Enron declared bankruptcy before the fracking revolution hit home around 2005. Jeffery Skilling’s group would have been thrilled to see how quickly the deregulated electricity markets became shackled to natural gas. California noted this in a post-crisis report in 2004. “Markets for natural gas and electricity in California are inextricably linked, and dysfunctions in each fed off one another.”

The spot price of natural gas started going up only on Friday, April 12. This was the start of three-day weekend, where the markets would be closed Monday the 15th for President’s Day.

There are a number of places where spot gas is traded, so there’s no single price, but on some exchanges the price of spot gas reportedly climbed from $3 to over $150/MMBtu. (U.S. natural gas prices are, for historical reasons, quoted in million British Thermal Units; 1 MMBtu = 28.263682 cubic meters of gas, at a defined temperature and pressure.)

Spot gas prices are easy to get, but tell only part of the story. The last thing most big natural gas customers want to do is to buy on the spot market. Most have long-term contracts with suppliers. To make things more complicated, prices paid under these contracts can be indexed to the spot price.

Natural gas producers don’t profit automatically from higher spot prices. Most pre-sell over half of their production, holding back only some to sell on the spot market. The motive is prudence, not profit. For a producer, it’s embarrassing — and potentially expensive — to have to go out and buy gas at spot to make good on a contract commitment.

Comstock Resources, Inc., an independent natural gas producer controlled by Dallas Cowboys owner Jerry Jones, blurted out one comment, later walked back as “insensitive.” Comstock had held back some 35–40% of its production for the spot market, a little more than usual. “This week was like hitting the jackpot,” Chief Financial Officer Roland Burns said in earnings call Feb. 17.

Raw Texas gas, especially from the Permian, is not ready to burn and needs to be processed before it can be used, so focusing on production problems is not quite on the mark. The water and other liquids in raw gas can freeze at a number of places in the the process: at the wellhead, in the gathering lines, or at the processing unit.

Thus “being able to deliver it” was the most important thing. Gas was available: natural gas is routinely “injected” into underground storage during the summer months and withdrawn during the winter. EIA figures show that while withdrawals during the week of the freeze were very high, they did

not set a new record. The U.S. as a whole did not run out of gas.

Getting gas where it was needed, however, was a problem. Most pipelines now depend on — wait for it — the electric grid. The pumps that pressurize the pipes, once powered by the gas itself, are now electric, thanks in part to green-house-gas concerns.

Loser: Mexico

Little-mentioned in the Texas fandango is its effect on northern Mexico. Mexico had Texas natural gas cut off. Millions use it there for both heating and electricity. The government-owned electric utility uses gas to generate about 60% of its power.

Biggest losers: retailers

What bankrupted Pacific Gas & Electric in 2001 — then the largest investor-owned utility in the country — was the fact that it could not raise its retail rates as the wholesale price soared. PG&E and Southern California Edison bled out slowly. Retailers in Texas were blown away within a few days.

Two large companies, NRG and Vistra, descendants of old regulated utilities, have between them some 85 percent of the Texas retail market. (Vistra is parent company to retail providers TXU and Ambit.) While recently downgraded by S&P, these two apparently have the resources to take big losses if unavoidable.


To date, at least four retailers have filed for bankruptcy protection. “Protection” is an operative word in this context. Most would like to continue in the business. Ironically, the entity they seek protection from is ERCOT.

ERCOT has played rough with the retailers, kicking some out of its market for slow or non-payment. Entrust Energy Inc., for example, owed ERCOT more than $290 million; ERCOT cut it off and transferred its 40,000 residential customers and 10,000 commercial customers to newcomer Rhythm on Feb. 29.

On March 1, 2021, the Brazos Electric Power Cooperative, Inc. filed for Chapter 11 after receiving a $1.8 billion bill from ERCOT. On March 9, Just Energy Group Inc., filed for debtor protection in Canada, home of its parent company. It owes ERCOT around $250 million. Houston-based Brilliant Energy LLC filed for Chapter 7 on March 17.

And then there’s Griddy

Much-maligned Griddy also filed for bankruptcy on March 15, listing its debt to ERCOT at $29 million.

Texas Attorney General Ken Paxton is trying to score points off Griddy, suing it for deceptive practices because it “passed skyrocketing energy costs to customers with little to no warning.” Griddy did have customers on autopay plans whose bank accounts got hit for large amounts.

Griddy’s sin was to take Texas free-market bloviation at face value

But a word in defense of Griddy. Griddy’s only real sin was to take Texas free-market bloviation at face value. It’s model was simple: it charged a monthly fee and then passed through ERCOT’s changing market prices directly to its consumers. Many of these were price-conscious and practiced “demand management,” meaning they consume less when prices are high. They are the very consumers proponents of markets fantasize about.

That they were suddenly hit by an administered price is neither their nor Griddy’s fault. An interesting question is how Griddy customers would have fared had the PUC not gone to the $9,000 rate. Griddy’s co-founder, Gregory Craig, thinks Griddy’s customers could have accepted a week of higher rates in exchange for lower rates the rest of the year. “Our model worked in August 2019,” he said, “and would have worked in February 2021, had the grid not failed and the regulators not intervened.”


One retailer, Patrick Woodson, CEO of Green Energy Exchange, predicted early in the crisis that some 22 retailers might fail. Their customers would be assigned to what is charmingly called the “provider of last resort” (POLA) in their area. NRG and Vistra are likely to end of with most of these customers, at least initially (they can switch after). A shake-out among small retailers would push the Texas market in the direction of the old regulated model, with NRG and Vistra being the new-old utilities left standing.


Bankruptcies start dominos falling in most financial crises. Griddy’s bankruptcy filing, for example, shows it not only owes ERCOT $29 million, but also owes over $1 million each to two electric distributors, Houston-based CenterPoint Energy, Inc. and Dallas-based Oncor.

Most caught-in-the-middle, of course, is ERCOT. The most recent figures show ERCOT trying to collect $2.46 billion from retailers while owing $1.3 billion to the power generators.

ERCOT has a peculiar mechanism available for dealing with such a cash shortfall — the “uplift.” Basically, amounts not paid by its bad customers get “uplifted” onto the bills of its good customers.

This practice is hardly popular with the good customers. The city Denton has sued ERCOT over it, saying the city is prepared to pay its bills, but not those of others. Denton Municipal Electric, being owned by the city, claims it has the Texas constitution on its side. It contains a clause prohibiting cities from letting other entities use their credit.

Neither bankruptcy nor a taxpayer-funded state bailout is out of the question for ERCOT.

Eventual losers: Texas ratepayers and taxpayers

If we track the mighty river of money back to its source, it originates in tiny streams from individual ratepayers. The question is not if Texas ratepayers will ultimately pay for the crisis, but when, and over how much time. Griddy’s customers got the bad news all at once. Others will have it broken to them gently.

Utility ratepayers are time-honored marks for special levies. Ordinary Texas taxpayers might also find themselves on the hook in a variety of ways, some subtle. California eventually issued “power crisis bonds,” which were repaid out of utility rate surcharges, but had to be guaranteed by the state itself. The Texas legislature is considering a similar scheme.

Is it possible to de-mess Texas?

At the moment, the Texas state legislature appears concerned with passing something about winterization and moving on. It declined to roll back some $16 billion in ERCOT charges that were levied after the emergency was technically over. The reason, again, was “incentive.”

The bankruptcy chips and losses may just fall where they land. In Texas, with the oil wildcatting tradition, bankruptcy is normal, especially in the energy business.

There are two possible approaches that would be more fair, if more complex than the Texas legislature wants to consider. One, first adopted in the UK after price spikes on grids near the edge, is an excess profits tax. This would recycle — somewhere — some of the money overpaid to the generators. Establishing what is “excess,” of course, would require a commission or arbitration board of some sort.

There’s a determination that might be possible from ERCOT data, if the original market bids have been preserved. ERCOT apparently used payments for “auxiliary services” (normally these are modest payments for grid stabilization) to make up the difference between $9,000 and the electricity part of the bid. Generators are supposed to bid at the lowest level where they feel comfortable they won’t lose money if their bid is accepted. Given the rules of the auction, their profit comes when other bids are higher. Those bids would, presumably, incorporate the higher natural gas costs.

If the bid data is gone, or if the generators started making artificially high bids — known, naturally enough, as “hockey stick bids” — the only answer would be for this hypothetical commission to determine, as a real one was forced to do in California, the actual cost of service. Cost-of-service, plus a reasonable profit, was for a century the bedrock principle of regulation.

This would require the Texas legislature to swallow its pride and admit that maybe it got a few things wrong under Enron’s influence back in day. As Enron always realized, it’s not really about markets, it’s about politics. Texas, at the moment, appears willing to live with a power grid that is a by-product of a casino. And, as Keyes pointed out, job is likely to be ill-done.

You can follow my writing on Twitter @Will_Bates_sci

Will Bates writes about science, technology, and business. His journalism has appeared in the New York Times, the Wall Street Journal, and numerous magazines.

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