On July 8, Hurricane Beryl made landfall and made its way to Houston. At its peak, about 2.26 million customers were without power. Ten days later, CenterPoint Energy had restored 99 percent of those connections.
On the one hand, restoring an average of 226,000 customers a day is quite a feat. On the other hand, there is extensive discussion about the utility's failure to properly plan, prepare, and spend its customers’ dollars wisely. That is, why did more than 2 million customers lose power? Some for more than 10 days?
Ultimately, this is a story about incentives, regulation, and stymied innovation. Texas is the best market for energy innovation. However, it has failed to foster enough innovation or prepare the monopoly operating the wires for success.
Regulated incentives and guaranteed returns
A central challenge is the system of incentives created by utility regulation. Wire companies that build and operate the physical infrastructure carrying electricity earn a rate of return based on what they own and operate. This is called rate of return regulation (ROR).
Lynne Kiesling at Knowledge Problem (and an Abundance Institute fellow) has a great explanation of ROR and its policy implications. As she puts it, the core “idea is to control the profits of regulated utilities, ensuring that they earn a fair return on their investments while protecting consumers from excessively high rates.”
Wherever you are, this ROR is almost certainly the norm. In fact, outside of Texas, it’s likely applicable to both wires and electricity generation. Here’s Kiesling’s explanation of the problem that this creates:
A regulatory system predicated on rewarding capital investment doesn't provide incentives to do things that aren't capital intensive. And since the utility has a monopoly, other people are legally prevented from doing many other things that would increase both resilience and reliability. The best people to make investments for reliability and resilience aren't always the utility.
That last line is worth emphasizing–the best people to make investments for reliability and resilience aren’t always the utility. In simple language, we are inefficiently centralizing the grid.
What can we do about it?
Policymakers have a few options. A simple one is adapting ROR to penalize the relevant utility for outages. In this case, some defined reduction in the return that utilities receive will be applied for each outage. This fits under a broad umbrella known as performance-based regulation.
A more complicated but necessary step is unleashing innovation. As Kiesling concludes, the current system discourages innovative solutions to outages. It envisions only one provider of resiliency and only one actor to be involved in decisions. The modern world can do much more. Yet outdated regulations incentivize unnecessary capital investments while hindering private investments like microgrids, thus preventing the adoption of modern technologies that could enhance resilience and affordability.
Consider The Houston Chronicle’s reporting on the $800 million spent on mobile generators that turned out to be neither mobile nor helpful for the hurricane recovery efforts. Only a tiny fraction of that spending ended up being useful in responding to Beryl. Here’s an almost unbelievable excerpt:
That’s partly because even though CenterPoint has referred to the equipment as “mobile generation,” the vast majority of it is not actually that mobile. Fifteen of the generators – each with a capacity of 32 megawatts, big enough to power entire neighborhoods – take several days to assemble and cannot be moved without a special permit, which itself can take days to secure.
None of those generators have been put in service since CenterPoint first began renting them in 2021. Indeed, the company told the Chronicle this week that they are “not for rapid response use” and “are not designed to be ‘mobile’,” even though it has repeatedly described them as “mobile” in news releases, regulatory filings and memos to investors.
The recovery efforts from Beryl deserve a full investigation. Early concerns are that perhaps incentivized by the returns they would be guaranteed on capital investments like the so-called mobile generators, the wires company spent funds there rather than on tree trimming or vegetation management. Tree trimming is rarely included in what utilities earn a return on. This leaves wires companies, like CenterPoint in Houston, without much reason to promote resilience to storms by trimming trees.
Capacity concerns are largely a distraction
There will be more blame to go around than CenterPoint deserves on its own. Some of that blame should lay at the feet of those with eyes only for trying to force capacity-market instruments into Texas’s energy system. Fundamentally, these mistake the problem as one of having generators available when what is needed are secure transmission and distribution systems to move generated power.
For those less familiar with Texas’s energy market, the state uses an energy-only setup. This means that the state primarily depends on price signals of where and when generation is valuable. In other energy markets, there are additional auctions not for energy but for the capacity to produce energy if called upon. It’s kind of like paying all the restaurants in your town a fee every day to be open just in case you want to go to one of them.
Yet these capacity tools would turn the lights on for exactly zero of the people without power in Houston. The outages are not due to insufficient incentives for generation. It’s the weather and the tree trimming! Yet a capacity market tool, like the proposed Performance Credit Mechanism (PCM), is directed only at generation availability.
“It’s crazy,” as Doug Lewin pointed out about the July 25 PUC schedule, “to spend 6.5 hours of commissioners, staff, and stakeholders’ time on the PCM when the PUC still hasn’t increased energy efficiency, addressed DER interconnection, created an application (much less moved a single dollar) for microgrid funding from the Texas Power Promise / SB 2627, etc.”
More bang for the buck in the transmission and distribution system than capacity tools
To add my own spin to Lewin’s, few regulators or policymakers are attacking the root of Texas’s energy woes by opening avenues for energy efficiency, microgrids, or the general private provision of resiliency. After all, part of the reason to doubt the PCM is that the Texas system already has several capacity mechanisms. As Lewin notes, Texas budgeted about $1.8 billion for microgrids but has no process to pay those funds out.
It is a breath of fresh air and, hopefully, a course correction for Governor Greg Abbott and Lieutenant Governor Dan Patrick to call for changes to how CenterPoint prepares for hurricanes. The entire state needs such voices calling to make sure the boring, mundane work of line maintenance, system hardening, and tree trimming is done. In practical terms, this likely means undergrounding certain wires, replacing wooden poles with tougher metal poles, and improving methods for knowing where customers are disconnected. Those in charge of running the wires system should be the best source of information, not the Whataburger app.
Policymakers shouldn’t take their eyes off the ball. Hours of staff time and other resources that are devoted to thinking about the distribution system instead of capacity policies will be much better at keeping the lights on.
Let the best person act
In the wake of Hurricane Beryl, it's clear that the current system has its flaws. But with thoughtful policy changes and a commitment to innovation, we can transform our energy infrastructure into one that is more resilient, efficient, and capable of meeting the demands of the future.
To forge a resilient and efficient energy future, policymakers must prioritize innovative and pragmatic solutions over outdated regulatory practices. By shifting from a rate-of-return regulation to a performance-based model, utilities may have the proper incentives to maintain reliability and resilience rather than merely expand their capital assets.
Solutions that empower the best person to act are far more likely to help the people affected by the next hurricane.