A Pipeline Giant Is Helping to Push Texas’s Power Grid to the Brink

On the night after Valentine’s Day in 2021, a unit of the Handley natural gas power plant in Fort Worth, Texas, tripped offline as Winter Storm Uri sank temperatures into the single digits. Handley’s failure added to what was quickly becoming a statewide crisis that would leave millions without electricity, many for days.

There was one small silver lining: The pipeline feeding Handley now held natural gas that the plant couldn’t immediately use. Gas production was plummeting across Texas, and if pipelines lose too much pressure, they stop working entirely. Handley’s extra gas could help the pipeline continue to operate smoothly, staving off further catastrophe.

But after the storm – the costliest in Texas history, killing more than 200 people – Handley’s owner received a bill. Energy Transfer LP, the pipeline’s owner, was charging it for leaving that gas on the pipeline, part of more than $90 million in fees and penalties, according to a previously unreported court filing.

Such charges are supposed to help prevent pipelines from getting over- or under-pressurized. But industry insiders say penalizing customers for leaving gas on a pipeline at a time when the state desperately needed it goes beyond normal business practices. The extra gas “helped ameliorate supply shortages on Energy Transfer’s pipeline and for Texans,” Handley’s owner at the time, Exelon Corp., said in a lawsuit challenging the penalties. The companies agreed to an eight-figure settlement, according to two people familiar with the matter.

Read more from Power Plays, a series about the ways consumers lose on energy bills

In Texas’s beleaguered energy market, the object of intensive political scrutiny since Uri, Energy Transfer stands out for what insiders and customers describe as an especially aggressive – even fearsome – negotiating culture, led by Marshall “Mackie” McCrea, its co-chief executive officer. Regulatory filings as well as interviews with more than two dozen customers, former employees, industry consultants and others portray a company with largely unchecked market power that’s not afraid to use it, particularly since Uri – whether it’s significantly raising rates or imposing penalties that customers call excessively punitive.

Most major natural gas pipelines in the US face strict rules governing what they charge. But this is Texas. Out of the wreckage of Houston-based Enron Corp., Energy Transfer acquired thousands of miles of gas pipelines that never leave the state’s borders – and thus avoid most federal rules. Owners of these “intrastate” pipelines are allowed to profit from penalties like the ones charged to Exelon, rather than send that money back to customers, as required of federally regulated pipelines. They can also raise rates without getting US approval – and Texas regulators typically step in only when a customer complains. State law cloaks pipeline contracts in strict confidentiality, leaving Texans, unlike other Americans, in the dark about a key part of what they pay for energy.

Energy Transfer has long fought to prevent stricter state regulation. Aside from a handful of unsuccessful bills introduced earlier this year, the last time Texas policymakers seriously considered tougher rules was about 17 years ago. At the time, McCrea served on a committee that steered lawmakers away from the prospect, even as he and the firm were under federal investigation for manipulating the natural gas market, records show – a case the company later settled for $30 million without admitting wrongdoing. Since then, McCrea and the company’s billionaire founder, Kelcy Warren, have been among the industry’s biggest donors to Texas politicians who’ve resisted efforts to strengthen oversight.

In a statement, Energy Transfer spokeswoman Vicki Granado said the company doesn’t comment on litigation or commercial contracts “as we consider those confidential agreements between us and our customers.” Regarding Exelon’s case – and others that Bloomberg News asked about for this story – she said: “We followed the terms of the customer contracts, terms that were carefully negotiated, agreed upon and signed by both parties.”

Almost all of the people interviewed for this story spoke on condition of anonymity. Some cited confidentiality provisions; six said they feared Energy Transfer would cut their companies off from its pipelines. At least twice, Energy Transfer has ended or threatened to end gas service for customers that disputed its charges, according to interviews and a complaint to the regulator. “They’re scared to death of the pipelines retaliating against them,” said Obie O’Brien, a former vice president at oil and gas producer Apache Corp. who led a failed push for stricter state oversight of pipelines more than a decade ago.

Texas favors a laissez-faire approach, where the main constraint on pipelines’ market power is supposed to be competition. But several major plants, including Handley, can only get access from one intrastate pipeline when temperatures plunge, leaving them with little to no negotiating power.

Power plants that can serve more than 1.5 million Texas homes are forced to depend on a single intrastate pipeline for the most reliable form of service, according to a Bloomberg News analysis of natural gas delivery-point data, federal power plant disclosures and statewide geospatial records. Of them, six plants – with enough capacity for 960,000 homes – are captive to Energy Transfer’s pipelines, giving the company a more extensive grip on Texas’s strained electrical grid than any of its rivals. Four plants are owned by companies that have alleged improper or punitive behavior by Energy Transfer during or since Winter Storm Uri in February 2021, according to legal records and regulatory filings. In two of those cases, Energy Transfer later reached confidential agreements with the firms.

“It’s authorized monopoly abuse. There’s no other way to get around it,” said Beth Garza, who served for five years as a watchdog for the Electric Reliability Council of Texas, or Ercot, as the state’s grid operator is known. “If there’s only one provider of a key service and there’s no limit on what that provider can charge for their product, that provider is going to profit-maximize by as much as they can get away with,” said Garza, now a senior fellow at the R Street Institute, a free-market think tank in Washington.

The more expensive it is to move gas on a pipeline, the more it costs power plants and local utilities to generate electricity or send that fuel directly to homes and businesses. Eventually, consumers feel that. But because Texas intrastate pipeline contracts aren’t publicly available, it’s impossible to know how their rates and penalties affect what Texans ultimately pay.

There may be a more pressing concern. Five people familiar with power plant operations identified roughly 2,100 megawatts of generating capacity – enough for more than 400,000 Texas homes – that are at risk of shutting down. All those units depend upon Energy Transfer’s intrastate pipelines. The people said there are several reasons why these declining plants could soon be retired, but increasing rates and penalties accelerate the process. Power demand is growing faster in Texas than any other US grid, making even older natural gas plants critical for ensuring the lights stay on when supply is tight.

A yearlong Bloomberg investigation has revealed how energy companies have used their market power to boost profits at consumers’ expense. For example, European power firms cut back on the electricity they offered, only to sell it at higher prices on special side markets where grid operators fill supply holes.

By contrast, after market manipulation resulted in blackouts in California in the early 2000s, the US introduced new rules to block such behavior. But there’s a Texas-shaped hole in the federal government’s ability to oversee the natural gas market.

America’s gas pipelines transport a precious commodity necessary for heat and electricity. Many parts of the country have access to only one or two pipelines, and would-be rivals face a high barrier to entry – pipelines often cost hundreds of millions, if not billions of dollars to build. To protect consumers against firms with natural monopoly power, the federal government keeps a close watch over the pipelines that fall under its jurisdiction.

Where competition is limited, pipelines must prove their rates are based on their costs. They must also publish their operational information on online bulletin boards and disclose what they charge their customers.

For Texas intrastate pipelines, the opposite is true. Companies can charge whatever a power plant or local utility will pay. They disclose their rates to their main state regulator, the Texas Railroad Commission, but that information – including the identities of their customers – is kept from the public.

In a statement, Railroad Commission spokeswoman Patty Ramon stressed that the agency “is bound to follow the statutory authority granted to it by the state legislature.”

Customers who want more options “may choose to invest in adding additional pipeline connections and capacity if they would like to,” she added. “There’s no laws or regulations prohibiting that.”

There’s another key difference between federally regulated interstate pipelines and the intrastate ones that blanket Texas. The main job of a pipeline, historically, is to get gas from one location to another on behalf of its customers. In Texas, the pipelines can also trade gas on their own systems. Several of the biggest operate more like trading firms than traditional pipeline companies, with the bulk of their income often coming from buying and selling gas, not transporting it. That’s the case for three of Energy Transfer’s largest Texas pipelines, according to nine years’ worth of financial documents submitted to the state.

If you run a gas pipeline, you have access to a wealth of operational information that others don’t. Federal regulations try to limit that advantage by requiring firms to maintain a strict firewall between the two sides of the business: Traders don’t talk to pipeline employees and vice versa. The US even requires companies to set up entirely separate affiliates to house their trading desks.

But Texas intrastate pipelines are free from those rules. The people who buy and sell gas talk to operations staff regularly, according to three current and former employees of major firms including Energy Transfer.

It’s not unusual for Railroad Commission officials to defend the industry. Its three commissioners – all Republicans – are elected, and their biggest donors also helm the same companies they regulate. Over almost two decades, Energy Transfer’s two CEOs and Warren have given more than four times what their counterparts at the two other major gas pipeline owners in Texas, Enterprise and Kinder Morgan, contributed combined.

In 2005, state lawmakers directed the Railroad Commission to appoint a study panel to examine whether there was adequate competition and regulation of Texas pipelines. Oil and gas producers were complaining that the playing field simply wasn’t fair. “It is easier to pass a camel through the eye of a needle than it is to obtain full disclosure and accountability of gas-trading practices in Texas,” one wrote to the Railroad Commission at the time.

Mackie McCrea, then Energy Transfer’s president of pipeline activities, was selected as one of the panel’s nine members, five weeks after he made a $20,000 campaign contribution to Elizabeth Ames Jones, the Railroad Commission’s chairman at the time. Jones, who left the commission in 2012 and whose last name is now Coleman, said she received a lot of large donations from fellow San Antonians like McCrea, and that she didn’t remember whether she or another commissioner picked him.

The group published its report a few months later. It recommended strengthening an informal complaint process and making a few other changes. But ultimately, the committee advocated for the Railroad Commission to continue its hands-off approach.

In 2007, with the committee report long forgotten, the Federal Energy Regulatory Commission made public that it had been investigating Energy Transfer for market manipulation that whole time. In the weeks after Hurricane Rita in 2005, the company had sold as much gas as it could in order to drive prices lower at a key natural gas hub called Houston Ship Channel, FERC alleged. The intent was clear, FERC said: Energy Transfer was reaping millions from a financial position that bet on the spread between prices at the hub and elsewhere. Key to the government’s case was a call McCrea had made to one of his traders. “As long as we sell as much as we can sell,” McCrea said over a recorded line, “it ought to push Ship down.”

McCrea and Energy Transfer vehemently denied the charges, and the buildup to a potential civil trial grew tense. McCrea and his traders frequently pretended during depositions that they didn’t know the meaning of basic terms, like “financial analyst,” FERC said. In one legal filing, the agency’s lawyers gave the men nicknames that underscored their frustration. McCrea was labeled “The Witness Who Lets Counsel Speak for Him.” One of his top traders was “The Man in Charge of Trading, but Who Recalls No Trades.”

In 2009, Energy Transfer agreed to settle the charges for $30 million without admitting wrongdoing. “It’s like we were called child molesters, like we were called thieves or crooks, and we didn’t do anything wrong,” Warren, the company’s co-founder, told Forbes that year.

Around the same time, FERC tried to exert more oversight by ordering intrastate pipeline firms to report more of their operational information, such as how much gas was flowing and where. But the Texas Pipeline Association and the Railroad Commission jointly sued – and won. In October 2011, a three-judge panel for the 5th US Circuit Court of Appeals ruled FERC didn’t have the authority to require anything of intrastate pipelines. Texas was free to regulate them as it saw fit.

“ok, are you sitting down?”
An Energy Transfer trader was messaging a counterpart at CPS Energy, San Antonio’s utility. It was the morning of Friday, Feb. 12, 2021, and temperatures were sinking below freezing in pockets of the state. The CPS trader had asked about buying natural gas through the weekend.

The price would be $150 per unit, Energy Transfer’s trader responded, according to a lawsuit CPS later filed, 10 times the price just a day before. The CPS trader asked for “one sec” to confer with bosses. But nine minutes later, Energy Transfer messaged again: The price had gone up 50% more.

Over the coming days, the pipeline company would increase its price to $400 per unit, then $500. When CPS asked for a better deal, Energy Transfer’s trader responded: “No wiggle room.” CPS later sued several oil and gas companies. It sought the largest damages from Energy Transfer, citing what it called “unconscionable” price-gouging during a disaster. Energy Transfer responded that its traders were simply selling at prices dictated by the market. It also said CPS had chosen to accept more risk by neglecting to purchase adequate supply ahead of time. For the last 2 ½ years, with the lawsuit still pending, Energy Transfer hasn’t sold any gas to CPS.

Deals like this made Energy Transfer’s trading profits especially strong. Three of the company’s intrastate pipelines earned a record $2.8 billion in 2021 – representing 93% of their total net operating income for the year – just from selling natural gas, according to financial statements filed with the state. By comparison, global trading giants Mercuria Energy Group Ltd. and Gunvor Group reported 2021 profits of $1.3 billion and $726 million, respectively, for all their trading across commodities.

The sheer amount of money that changed hands in Texas, one of the most opaque corners of the natural gas market, gave rise to calls for a “gas desk” in the months after Uri. The idea was to give Ercot the authority to monitor the natural gas market as it does the power market.

But the proposal ran into staunch opposition from a Railroad Commissioner.

In two closed-door meetings devoted to fixing the grid after Uri, Commissioner Christi Craddick shouted at participants who broached the idea of additional rules for intrastate pipelines, according to four people present. In a particularly heated moment, Craddick appeared especially angry with Nim Kidd, chief of the Texas Division of Energy Management and the chair of an advisory committee tasked with looking for post-Uri fixes, when he raised the gas desk idea, the people said.

Soon afterward, Kidd received a public grilling – from Craddick’s father, who happens to be Texas’s longest serving state lawmaker. During a Sept. 13, 2022, legislative hearing, Representative Tom Craddick, a Midland Republican, expressed frustration with Kidd’s leadership and questioned his agency’s funding. He repeatedly asked whether Kidd personally supported creating a gas desk. Kidd said that he had no position and that the experts should decide.

“My constituents are very heavily involved, and they are not for it,” Craddick responded. “They don’t want the legislature controlling the gas industry.” Texas Monthly reported this year that the Craddicks’ oil and gas well interests earned them about $10 million in 2022. Representatives for Tom and Christi Craddick didn’t respond to repeated requests for comment. A spokesman for the Texas Division of Emergency Management declined to comment.

Since Uri, Energy Transfer has increased what it charges a number of customers more aggressively than other pipeline companies, according to four people familiar with its contracts. But the strict secrecy surrounding Texas intrastate pipeline contracts makes hard data nearly impossible to come by. Glimpses only occasionally trickle into view when a customer raises the issue with regulators or in court.

Last year, Mountain Creek, a power plant in Dallas, warned the state that one of its units could soon shut down over the winter. A key reason? Its pipeline expenses had increased almost 300% since Uri. The plant’s owner, TexGen Power LLC, didn’t disclose the pipeline company, but it was Energy Transfer, according to several people familiar with the situation. Energy Transfer declined to comment.

Pipeline advocates say that the Texas system does more than enough to protect customers, because anyone who feels mistreated can complain to the Railroad Commission, which provides an arbitration process. “If a gas generator does not believe the rate they are offered is reasonable, then that generator can seek regulatory relief at the Railroad Commission,” said Thure Cannon, president of the Texas Pipeline Association.

Over the last 15 years, the Railroad Commission has received 15 formal complaints over rates on major intrastate natural gas pipelines, according to information obtained through an open records request. Four involved Energy Transfer, the most of any one company.

In one, Vistra Corp, a North Texas-based generator, alleged that Energy Transfer tried to impose $21.6 million in penalty charges during Uri “for oversupplying natural gas during a period their systems were threatened by scarcity.”

Charging customers who had excess fuel when much of the state was catastrophically short of it – the same behavior alleged in Exelon’s complaint – is beyond the pale, said Anne Keller, founder and managing director of Midstream Energy Group, which primarily works for industrial customers and oil and gas producers. “It’s not within the spirit of how you should be running the system,” Keller said. “It’s kind of mercenary behavior.”

Vistra complained to the Railroad Commission that after it refused to pay the charges, the firm threatened to stop supplying Vistra’s plants unless it paid up within 10 days.

Vistra later withdrew its complaint, saying it had “agreed to a path forward” with Energy Transfer that would allow Vistra to buy gas on the spot market. The terms of that agreement, including how much of the $21.6 million in charges Vistra ended up paying, remain confidential. Vistra and Energy Transfer declined to comment.

Power plants aren’t the only customers that have complained about rates and penalties. Last year, Brenham, a city in between Austin and Houston with a population just shy of 20,000, told state regulators that its pipeline rate had tripled. Energy Transfer wrote in a state filing that “competition does or did exist” for the city’s business, Brenham said, but that’s not true.

Indeed, a map of pipelines maintained by the state shows Energy Transfer’s pipelines are the only major ones serving Brenham. In its response to the city’s complaint, the company disputed that Brenham’s rates had increased that much and wrote that the city could have bought gas from a third party, which it had done previously before contracting for both gas supply and transportation with Energy Transfer. Still, that gas would have been shipped on Energy Transfer’s pipeline.

Bloomberg reviewed roughly 2,000 filings for Energy Transfer’s three biggest pipelines. All of them included the same line – “competition does or did exist either with another gas utility, another supplier of natural gas, or a supplier of an alternative form of energy” – to demonstrate that the company’s rates are “just and reasonable.”

Ramon, the Railroad Commission spokeswoman, said of that line: “It is presumed to be true until a party rebuts the presumption” in a hearing. Energy Transfer declined to comment on its filings for Brenham or any other pipeline customer. Brenham declined to comment.

In this case too, Energy Transfer reached a confidential settlement, and the company and the city agreed to a new rate.

It remains secret under state law.