Texas Oil Boom Drives Up Electricity Prices

Jul 30, 2013
Originally published on July 30, 2013 2:44 pm

The Texas oil boom that’s pumping millions of dollars into the region’s economy is simultaneously wreaking havoc on local towns and businesses.

In an ironic twist of energy fate, the electricity needed to power the oil drilling and production equipment is outpacing the ability of local power grids to transmit it.

That, in turn, is causing price hikes of 20 percent or more for some customers and businesses.

Energy reporter Tom Fowler is covering the issue for the Wall Street Journal.


  • Tom Fowler, energy writer for the Wall Street Journal, based in Houston. He tweets @HoustonFowler.
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It's HERE AND NOW. Why would the Texas oil boom that's pumping millions of dollars into that region's economy simultaneously be hurting local businesses? Well, it's an ironic twist of energy fate. The electricity needed to power oil drilling and production equipment is outpacing the ability of local power grids to transmit it. There's literally power gridlock, causing price hikes of 20 percent or more for some customers and businesses.

Now energy reporter Tom Fowler writes about all of this in the Wall Street Journal and joins us from the studios of KUHF in Houston. And Tom, we rush to say that you write that state regulations protect residents from these extra costs. But give some examples of how this is hitting businesses and towns.

TOM FOWLER: Sure, so for instance the city of Midland, it's a city of a little over 100,000 or so, really low unemployment rate, business is booming out there, but for the power that they buy for their own buildings and offices, they saw big spikes last year from these what they're called congestion costs, basically. They saw it up to 20 percent, just depending on - it can vary from day to day and month to month.

Also last summer, and obviously it's happening this summer as well, companies like Kinder Morgan, which is a big, mainly a pipeline company, but they also produce oil, and one day they had to pay about $400,000 in these additional congestion costs. Also talked to some folks, Frontier Texas, which is a history museum in Abilene, they had a similar thing where they would suddenly, you know, $6,000 added on to their power bills from these costs that they weren't expecting. They all thought they had fixed rates for their power, and if you're running a small nonprofit like a museum, that can kind of hurt.

YOUNG: Well, in fact they had to cancel a festival last fall because of higher costs.

FOWLER: Yeah, it was one of the factors. They said no, you know, it wasn't 100 percent because of that, but it definitely played a factor because the extra $6,000 they got on this one-month bill, I think it was in July, was the equivalent of another 600 or so customers coming through the door. And that's - you know, it's not as though, you know, you can make that up very easily.

YOUNG: Well, so this is all about not just the electricity, there's tons of it, but the capacity to deliver it. It's overwhelming the grids. But we understand that this cost used to be passed along the state, and there was a change there.

FOWLER: Yeah, so these are - they're called congestion costs. So basically it's when, if you're in an area, and you're - you need a lot of power, and the power lines to your area are full, they're, you know, it's like a highway that's just jammed up with power, they want to try to get that to you some other way. So they'll use an alternate route.

But they're going to be calling on another power source, another power plant possibly, to get it to you through that route. In a lot of cases, it could be a more expensive power plant. You know, it could be - usually if you're a power company, you're going to have your cheapest plant running first. So you're going to be (unintelligible) more expensive. So that means it's going to be costing more.

In the past those costs were distributed throughout the entire state of Texas. So the folks down here in Houston, we'd be getting, you know, a little smidgeon of what they're being charged for congestion up that way, and it was spread out throughout a very large area. In 2010, the state switched the way that they do that in an effort to sort of get better price signals of where there's issues and to try to create more incentives. And so now it's centered on these different regions. And West Texas, because they're growing so quickly, they're getting it more.

YOUNG: Well, you mentioned Kinder Morgan, which is one of the oil and gas companies that's also being hit by the charges, but why aren't the oil and gas companies taking all the charges?

FOWLER: Well, the way the grid works, it's not as though you can single out exactly who exactly is to blame for all of this. So most of West Texas is a lot, a lot of rural areas, and then you have some cities: Odessa, Midland and so forth. And so trying to figure out exactly who's drawing more power where, they are seeing it in their bills.

Actually there's another company, Apache Corporation, that I noted that they've seen their power prices go up a lot. But it's really because it's sort of how the power grid works is that it's - the costs are spread out through all the users because you really can't - when you've got a big distribution line, you can't single out OK, this much power is going to this provider way over here or to this company way over there.

YOUNG: You know it's not the Frontier Texas Museum, you know...


FOWLER: Well yes, this is true.

YOUNG: ...which is doing it. And is there any thought about what might be changed? I mean, this is a business-friendly state, but it's small businesses that are being, sounds like, small businesses and towns, municipalities, that are being hurt.

FOWLER: Really everybody was. If you've got a business there, big or small, you're going to be hit by these charges unless you sign up for a contract that, you know, that hedges against that kind of risk. Really what needs to happen is that the power grid has to be built out to meet this demand. And the folks that run most of the power grid in that area, a company called Oncor, they're out of Dallas, they are building out the power lines and substations and so forth, but it's just hard to keep up with because you really do - most people don't realize just how big Texas is.

You look at it on a map, but if you're living in it, in an Eastern state, you can pretty much fit most of New England between Houston and Dallas. So there's a lot of area to cover with these power lines.

Other parts of Texas, interestingly enough, where there is an oil boom, as well, companies have been actually doing it themselves. They've been building their own power lines and substations to sort of get around that problem.

YOUNG: Well, but I just want to underscore something that you said. So you mentioned Midland, you know, low unemployment rate, town that's doing pretty great, but the cost for their offices and facilities, everything that's run by the city, climbed more than 20 percent in 2012, 20 percent more even though they used the same amount of power as they did the previous year. Other towns that maybe didn't have that low unemployment rate, they wouldn't be able to sustain that hit.

FOWLER: No, that's true. It is hard. If you're managing a city budget, it would be very difficult to deal with something like that. And again, these things fluctuate, though. I mean, you can have other months when it's not quite as bad. And the cost of power is hard to manage in any case. I mean, you can get a fixed rate for a lot of these things, but it varies greatly, and everybody kind of knows that in Texas, especially where we get such, you know, such extremes in the summer where you have these kinds of charges or other things that happen, as well, that can add extra to your bill. So it's not exactly unheard of, but it definitely is - you're right, it could be crippling for some cities.

YOUNG: But how are people in Texas responding to this, by the way? Are they taking it in stride, given the other things that are provided by the boom in oil, the low unemployment, you know, things like that? So is this just something they're taking in stride or no?

FOWLER: Well, they're complaining about it. Certainly a number of the cities and the businesses have complained to the state power regulators, the public utility commission about this, encouraging and pushing Oncor to expand more quickly, which they are definitely spending a lot more money out there to do that or to find other ways of sort of managing these charges, managing this market where these charges show up to put some sort of a cap on it.

There's an effort to do that, but again it is one of the things where there's very much a free market sensibility in much of the state, and, you know, with the boom there are unintended consequences, unfortunately, and that's what some of the folks are seeing that, as OK, well, we're - this is unfortunately one of the prices we're paying. We're not liking it. We're complaining about it, and we're hoping that they can do something, but power in Texas, electricity in Texas, is a very strange beast compared to the rest of the country in the way it's been deregulated.

YOUNG: Tom Fowler, Wall Street Journal energy reporter. We'll link you to his piece at hereandnow.org. Tom, thanks so much.

FOWLER: Sure, my pleasure.



And while we're talking energy, some news today that federal regulators are hitting JPMorgan Chase with $410 million in penalties, accusing the bank of manipulating electricity prices in California and the Midwest. The Federal Energy Regulatory Commission says JPMorgan used improper bidding strategies to get excessive payments from the agencies that run the power grids in those regions. The bank has agreed to pay the penalty but is disputing the accusations.

Well, still ahead today a conversation about parenting with a mother who takes it to an unusual extreme. News is next, HERE AND NOW. Transcript provided by NPR, Copyright NPR.