 Welcome to Musclic. We have with us today Prabir Kulkastar, someone who dons many hats, but I think perhaps one of the oldest hats has been the one of India's leading experts on the power sector. We will talk to him today about the electricity crisis in Texas that followed the winter storms that this part of the United States faced last month. The storms led to multiple failures across the state, various power stations, prompting the regulator to institute or known as rolling blackouts across the state to save the grid itself from failing. But even as the bigger disaster of grid failure was averted, the blackouts themselves led to extensive damage across the state. Prabir, many commentators in the US media have called this a fallout of a natural disaster, because once in a couple of decades kind of event, although arguably the frequency of such events may increase due to global warming, but nevertheless the focus has largely been on the scale of the natural disaster itself that led to the power crisis. Do you think this kind of characterization is correct or appropriate, especially when we are talking about the electricity crisis the state is still facing right now? You know, this is an interesting issue because it's obviously the combination of various things that led to the larger crisis that we can see, because you would take low temperatures. Well, you know, LNG for instance is pumped through subzero temperatures in Siberia. You have the northern Europe, you have Canada, you have northern United States, which routinely faces subzero temperatures during long parts of the winter. So by itself that doesn't stop a grid from functioning or the power utilities from functioning. So obviously there is something else which also led to the grid coming to a near collapse and also not only rolling block blackouts as they have been characterized, but also the economic dislocation which took place subsequently, combined with the fact that electricity being a fundamental necessity, the temperatures meant people were near freezing and there you had no heat because of the gas failure because even the natural gas pipelines froze, the pumping stations stopped working. You also did not provide alternate ways of heating the houses. So you had that and a lot of people, in fact, dozens of people have died in Texas because of that or due to carbon monoxide poisoning, they went and sat in their cars and as you know, then you can get to a rise of carbon monoxide poisoning because of that. Also the utilities, for instance the municipal water systems supplies, there's a notice 8.7 million Californians have been asked now to boil their water, apart from the freezing of their pipes, bursting of the pipes, damaged to homes because a lot of the pipes are uninsulated, they froze and they burst and when the water came back, the temperatures dropped, the houses, the walls, the various other water damage took place. So you have a really much larger disaster that took place. So the question is why wasn't this considered, whether the electrical system or the natural gas system were actually being prepared for winter and so on? And this is something that Texas was known from 2011-2014. They have been near failures of the grid and the fact that you need to winterize the equipment was known. So the question really is why did it not take place even when it was known and the answer really rises the question that you have given that is it because of the kind of regulatory system that was there in Texas and this is something that as we said, we already know that Texas has had earlier near failures of this kind once in 2011-2014. So this was not something which was not known that we have to winterize the equipment, extreme weather conditions do take place and particularly with global warming, you have extreme weather conditions taking place more frequently. So the real issue was that there is no incentive to provide reliability for the grid. The entire deregulation and Texas is one of the most extreme cases of deregulating the electrical system as well as the energy system also. That means natural gas and other systems. So that basically it was left to the retailers, traders, the electricity producers to game the system that if there is a scarcity, if the grid power is short, the grid is short of power, the price goes up. So there is a purpose incentive therefore to have a crisis by which you can then make more money and this particular case, the price of electricity went up from $22 to $9,000 per megawatt hour. That's a huge, huge jump and it remained there for about five days. Now this total amount, that extra payment that had to the grid forced the people to pay to the generators is in the range of $45 billion out to which 33 hours of this kind of extreme pricing was thought to be what Arkad made a mistake, the grid operator, essentially Arkad is really the grid operator, they made a mistake and the persistent with this beyond the period required but nevertheless even the three days which this was really enforced which would have been what according to the regulator, the power utility commission or whatever it's called, that they said it should have been there only three days not five days but even if we take that into account it's still $29 billion extra. Why is this extra money being paid? Because when the electricity supply drops, the prices go up, this is the nature of the electricity market that is created and therefore there is no incentive for people to see there is no scarcity and in fact as I said there's a purpose incentive to actually promote a scarcity and then of course the utilities producers can push in more power at a higher cost. So this is one part of it and of course the fact that Texas had no reserves in terms of interconnection with the larger grid that the US has, it has two grids that operate, national level grids that operate, Texas is isolated from both as a part of its Texas exceptionalism that Texas will do something completely different from all others. So I think if you look at it, this is the key issue why there was no attempt to winterize the equipment, no attempt to look at reliability, the belief was markets will deliver the whatever is required and that reliability was not an objective of the market, the objective of the market is quote unquote efficiency and efficiencies achieved only by the pricing mechanism. This is the underlying philosophy that the Texas grid had and unfortunately as somebody has said electricity is what the laws of nature is what electricity obeys, not the nature of the market, not the laws of the market and I think this is the fundamental contradiction that appeared between the two. One would have thought that you know given what happened in California almost more than 20 years ago now with Enron with a similar kind of situation, market manipulation happening and not just I mean Enron is a big example but if you look across the world in a lot of situations in fact very aggressive market reforms have converted what would essentially reliable surplus systems to systems that function at nearest scarcity levels. So you know why would, why is it do you think that Texas still pushes with this kind of a, I mean at least now hopefully there are so many class action suits etc they would have opened up but I mean it's not just Texas I think there are lessons that we can learn definitely from it but because if you look at what's happening in India right now there seems to be a similar push for deregulation at least a push for including as many retailers, as many traders, distributors and generators as possible so that we have a functioning power market do you think that we have something definitely to learn from Texas at least this should give us some pause in terms of going ahead with this kind of an idea. Well it's an interesting question that you raise because Enron has its fingers in all the three issues even though Enron collapsed in 2001 because of fraud so that was the Enron demise but it was the California market that opened and it is the Texas market which is structured essentially under the painful influence of Enron if you will on the Texans don't forget it was operating out of Houston so it was located in Texas itself and they were the ones who pushed this blueprint for the Texas reforms as well as what they have pushed in California. In fact the California debacle took place earlier and that led to two of the power utilities they are folding up that actually gave pause to the larger US deregulatory processes and most of the states in fact the two major grids did not follow in the footsteps of California taking that as an example of what not to do but unfortunately Texas really did not follow that. Texas went to extreme deregulation now there are two interesting things in Texas itself one is of course what is already unfolded that there is reliability is nobody's baby so that and effectively the price mechanism does not build reliability into the system it's an externality that has to be built into the system otherwise there's a necessity and electricity is a necessity everything collapses if electricity is not available and that's a something which is a part of the social contract that the state has to look after but if we leave that out and the part that I think becomes important is Texans did they actually benefit from deregulation by actually paying less price and there's a Wall Street Journal article which details that actually Texan space paid 28 billion dollars more than what the regulated utilities charged their consumers so the unregulated Texan market forced the consumers to pay 28 billion dollars more the last 20 odd years then what the regulated utilities that there are regulated utilities still in Texas which are there what they charge to their consumers so even deregulation did not help and Texas is also very lucky in having really well endowed energy resources wind is plentiful sun is plentiful it has natural gas in large quantities so these are the you know this is this is all there in abundance so they benefited from being close to the gas reserves of course they had the reverse problem they had no storage because you can always pull it out of the ground so if that stopped because of freezing and so on they had really no reserves from the utilities so but apart from that Texans actually did not benefit from deregulation so if they paid 28 billion dollars in excess who got this money and the answer is obvious it is the utilities it is the traders it is the other people who are gaming the market who got the benefit and if you look at for instance arc and bond then you will find there's heavily loaded in favor of the producers and the electricity utilities as well as of course the traders but it had only one residential consumer on this board as opposed to six from the others eight if you include alternate so it's a heavily skewed in favor of those who had a bed who actually made the money when you talk about Enron in India if you remember that this whole IPP and opening up the power market of course Enron was one of the pushers but let's not forget this starts from actually Magi Thatcher and if you take a step back it really goes back to Chile where the Chicago boys of Milton Friedman actually structured this whole theory of power being a market and how could power become a market if you unbundled of electricity companies made the grid the something which was sort of owned by the state or heavily regulated it but the distributors and the generators would play in this market and there also would be retail electricity operators would be just traders so you created what I would call a regulatory market there's no real market electricity because you don't have storage anything that you produce has to be used immediately if you're short the grid will sink if you are surplus of electricity grid will again sink so because it has to be continuously in balance this is a market which is artificially created by rules of the game that the regulators write and unfortunately this is not helping the consumers we have what you raised in India that what is happening yes because of Enron collapse there was some breaking of the system all those IPPs which had promised the earth did not deliver all that happened but nevertheless the reforms of unbundling have continued and unfortunately the central government is the largest owner of IPP in the country NTPC is really an independent power producer where all the distribution is with the state governments so therefore the policies are further skewed in favor of the producers against the distribution companies and also for the traders again against the distribution companies and finally the state governments who have to subsidize the distribution companies because they cannot pass the burden of high cost electricity on the consumer so this has been the fundamental problem which stems really from the Enron days and it is a part of trying to produce a market which doesn't exist and therefore instead of coming back to the fundamental issue that you want a stable regulated electricity system you have to consider the system as a whole not in its parts and create an artificial market but you know we can leave this talk out for the time being the essential issue is that if you look at Texas you again see the failure of the so-called market driven regularly the market driven system for electricity generation and consumption and I think the biggest lesson to learn from this is electricity is a necessity and if you do not consider the stability of the grid then you are not going to really be able to service the people and if Texas has shown that even with abundance of resources without proper regulation the markets will fail I think that's a clear warning to the rest of us that we have to look at the electricity sector again and how we look at it has to stem from what we are Ambedkar had proposed that essentially electricity is something that the state has to provide to its people it's a necessity it's not a luxury and I think that's even more important today than it ever was and the fact that you are trying to convert it to commodity which can be something that people can play with and make money even you've neither produce or general or consume electricity I think that approach of market driven electricity system is I think in crisis with what has happened in Texas it's also interesting this is what the United States pushes everywhere but apart from Texas and Texas is an extreme example because the republicans have controlled the state for a very long time rest of the United States this did not work after California so they took a step back but nevertheless they have been preaching this to the rest of the world I think that's what we also yeah go ahead we can also say that for example if there's an argument that in India we have the other end of the problem where we have surplus capacity now because so many new generators have come in and a lot of this is because generation was delicensed and you know anybody could put up a power plant and sell it but you have at the same time so many non-performing assets that these have become now with public sector banks because this was again the hubris of the market that you know at a time when there was shortage everybody thought that they did not need contracts to be able to sell their power and then you know the demand has not increased as expected and so now you have all of these this capacity lying around where there is no offtake of power so even in a situation of surplus you have that situation today being created but because you thought that it was a commodity that could be bought and sold and I think it's a it's an important point that you make that it is a necessity and it's also important I think to understand that it's not like any other commodity it's not like buying and selling soap it's not like even like telecom that there has been a attempt to draw that parallel very often that the telecom sector was deregulated of course we now know what's happening with the telecom sector as well but nevertheless there is a very different sector here it requires lines it requires infrastructure and I think we go back to what you said earlier that electricity follows the laws of nature not the laws of the market