Koch Business Practices Artificially Boost Energy Prices, Hurting Consumers

Last week, Koch Industries came out in support of a proposal under consideration by the Public Utility Commission of Texas that would artificially inflate the cost of electricity during times of greater demand. While claiming that the change is needed to increase grid reliability, the true motivation for the proposal is clear: power prices are at 14-year lows, keeping electricity generators from pocketing stronger profits.

The Houston Chronicle’s “Fuel Fix” blog notes that, “Texas already has healthy power reserves, so the additional market would pass on more costs to consumers.” Furthermore, the Electric Reliability Council of Texas noted that the change is both unnecessary and would increase costs for consumers. The proposal seeks to haunt Texans with the specter of an extremely unlikely grid-collapse as a distraction from the true motive of the proposition–to inflate costs and drive profits.

The Kochs have a long history of employing business practices that artificially inflate energy prices and pass the costs onto consumers. The Colonial Pipeline, which acts as the primary fuel-line to the Atlantic Coast, is owned in-part by Koch industries. Capacity issues on the pipeline, unaddressed by Colonial, led to the emergence of a secondary market to purchase access to the pipeline, driving up costs for diesel and gasoline customers.

The Kochs’ advocacy for additional PUC regulations betrays the superficiality of their calls for less government intervention into markets and support of economic libertarianism. As noted by Chris Brewer of the Texas Coalition for Affordable Power, “The power companies argue in favor of the free market when prices are high, but they want government intervention when their profits are depressed.”

Koch Industries Supported Efforts To Artificially Inflate Prices

Koch Industries Supported Efforts To Artificially Inflate The Wholesale Price Of Power During Peak Times In Texas. According to Fuel Fix, “The Texas utility commission is weighing whether to artificially inflate wholesale power prices at times of greater electricity demand in order to improve grid reliability and promote future growth. […] The issue focuses primarily on the grid’s two-year-old operating reserve demand curve, or ORDC, which was created to increase the value of electricity on the hottest or coldest days when the possibility of rotating outages increase. […] The ORDC change is supported by power and natural gas companies like NRG Energy, Calpine, Royal Dutch Shell, Luminant, SunEdison and Koch Industries. The opponents include the cities of Austin, San Antonio and other municipalities; a group of retail electricity providers, including Direct Energy; the Texas Industrial Energy Consumers coalition; and the ERCOT staff.” [Fuel Fix, 4/14/16]

Colonial Pipeline Congestion Raised Gas Prices

Colonial Pipeline’s Congested Pipeline And Secondary Markets For Space On The Their System Drove Up Costs For Wholesale Diesel And Gasoline Buyers. According to Reuters, “Executives from Colonial Pipeline, which runs the main fuel artery for the U.S. Atlantic Coast, will be questioned by customers and regulators on Wednesday after worsening congestion spawned secondary markets for space on the system, driving up costs for wholesale diesel and gasoline buyers. Refiners, retailers and trading houses have jockeyed to move barrels in an increasingly competitive race for space on the line since a 300,000 barrel per day expansion between 2011 and 2013 failed to ease traffic as shippers increased on the 2.5 million bpd system. Customers including Costco Wholesale Corp complain that so-called line space trading adds business costs, prompting a rare hearing at the Federal Energy Regulatory Commission. […] Competition is so tough that so-called line space – a spot market – has sold for 15 cents or more per gallon. That means the person who buys half of another’s 100,000 barrels of allotted space spends $314,999 on top of Colonial’s per-barrel rate to move fuels. That could amount to millions of dollars a year in extra costs. Even costlier is a more long-term secondary market that sprung from Colonial’s perpetual crowding: shipper history transfers that allow newer players a way to access space allocated to bigger players.” [Reuters, 3/8/16]

Colonial Pipeline Operated “At Full Volumes For Roughly Four Years” And Shippers Traded “History” For Access To The Pipelines. According to Argus, “The [Colonial] pipeline has operated at full volumes for roughly four years, but Colonial has no public plans to further expand the system. Shippers have instead fought to preserve their limited space on the system or use quirks in how volumes on the pipeline are allocated to wring valuable access out of the system. Trades called line space have emerged as access along the Colonial pipeline system shrank. The trades mark the difference in value between barrels produced on the US Gulf coast and delivered by Colonial to east coast markets. A company’s history of shipping across the system largely determines its access to this hotly contested pipeline system, and whether a company pays or collects that difference in value. […] Shippers have been participating in the secondary market for several years, sources said, though it has been getting more attention recently. Platts began officially assessing space on Lines 1, 2 and 3 Monday. ” [Argus, 4/12/16]

American University Adjunct Law Professor Elisabeth Myers: Colonial Pipeline May Not “Participate In Or Profit From … Shipper-To-Shipper-Trading” But “They Do In Fact Have Skin In The Game Because This Is What’s Making Scarcity Of Capacity On Their System Workable For Shipper.” According to Reuters, “Although Colonial does not participate in or profit from such shipper-to-shipper trading, Elisabeth Myers, an adjunct law professor at American University, said the company benefits from the efficiency. ‘They do in fact have skin in the game because this is what’s making scarcity of capacity on their system workable for shippers,’ she said. Colonial countered that it does not benefit from that and aims to provide a fair system.” [Reuters, 3/8/16]

Colonial Pipeline “Is In No Rush” To Expand The Pipeline Even Though It Admitted It Would Help With Congestion And Reduce Dependency On The Secondary Market. According to Reuters, “Ahead of the hearing, Colonial CFO Doudna said it was quietly shopping a multibillion-dollar expansion proposal to shippers. Doudna conceded an expansion would help because newer shippers could get space without paying others for it. An expansion would take three to five years. The privately-held carrier, owned in part by affiliates of Koch Industries [KCHIN.UL], Royal Dutch Shell, KKR & Co LP, is in no rush, he said. ‘We need to find the right project at the right price with the right commitments,’ he said.” [Reuters, 3/8/16]