87th LegislatureEnergyState SenateBill Proposal Would Give Power Companies With Blackout Debt Access to Premium Priced Government Loans

Some of Texas' power companies amassed large debts during the February winter storm as electricity prices skyrocketed.
April 12, 2021
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The Texas legislature is knee-deep in proposals to reform the state’s electricity supply system after the February winter storm that knocked the lights out. The next big issue at hand is “securitization” — a method of lessening the financial blow absorbed by many companies, public and private, during the storm.

Coming after the repricing fight in which Lt. Governor Dan Patrick lobbied for electricity prices to be adjusted on the front end of the transactions made during the blackouts, securitization centers on the back-end financial consequences of the pricing that ballooned to $9,000 per megawatt-hour for multiple days.

Sen. Kelly Hancock (R-North Richland Hills) has filed legislation to create a line of credit from which companies can borrow to pay off exorbitant, unexpected bills such as those derived from the winter storm.

The state’s largest electric cooperative, Brazos Electric Power Cooperative, filed bankruptcy at the beginning of March after it couldn’t pay $1.8 billion in fees from the trades on the Electric Reliability Council of Texas (ERCOT) grid. This reform, Hancock told The Texan, is aimed directly at a situation like that.

Hancock’s legislation, separated out into three categories — natural gas, cooperatives, and for other outfits like Retail Electric Providers (REPs) — creates a non-profit corporation called the Texas Electric Securitization Corporation (TESC).

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From the TESC, entities in dire financial straits from the February winter storm can obtain loans at higher-than-market interest rates where they otherwise couldn’t out in the market.

“This is the application of simple business practices I use every day,” Hancock stated, “and using them to provide a solution to the problems caused by the blackouts.”

According to Hancock, currently there are two options when Texas’ electric providers find themselves saddled with insurmountable debt payments: either the entity can obtain a private loan or it files for bankruptcy and the amount owed is never paid back in full.

Co-ops such as Brazos do not bring in much by the way of profits. To pay off its $1.8 billion owed, Brazos would need some sort of loan. But in awarding such a loan, the prospective private financier would likey take on far more risk than most are willing to shoulder. “Risk” here means the chances that the loanee cannot pay off the loan.

Co-ops are designed to provide service to areas that are already difficult to achieve much of any return-on-investment. And that’s during normal times, let alone when entities are incurring costs hundreds, sometimes thousands of times higher than they can normally expect.

Should Hancock’s legislation pass, outfits will have another option. Interest rates are low right now and are even lower for governments with good credit ratings. As of Monday, the current U.S. Treasury 10-year government bond interest rate is about 1.7 percent.

With the TESC, government bonds would be obtained to pay off an entity’s principal — i.e. the total amount owed — and it would then have to pay off that total plus whatever interest rate agreed to.

Within Hancock’s legislation is a requirement that the TESC-negotiated interest rate be 2 percent above the market rate at that time. For example, if the going interest rate on the open market is 4 percent, a TESC loan doled out to a prospective borrower like Brazos must be 6 percent. The purpose of that is to incentivize private loans to be explored first before seeking the government bond.

“We’ve got to be above market rates because I never want the government to take the place of the market,” Hancock added.

TESC would be the “financier of last resort,” as Hancock put it in a phone interview. “It provides another backstop to avoid as many bankruptcies as possible.”

Hancock said that one company told him that, with this TESC tool, they could pay off their $11 million hole in 10 years.

And in the above scenario at the current government interest rate, the TESC would net 4.7 percent interest which, according to Hancock, could then be used toward other costs on the ERCOT market like ancillary service costs or other proposed routes. In that example, the TESC would benefit from a $660,000 net gain from interest.

Just as the costs currently facing power companies will eventually trickle down to ratepayers, this potential windfall could also trickle down, creating downward pressure on prices consumers pay.

That is where Hancock’s support for this proposal crescendos. Rather than ratepayers one way or the other getting saddled with higher back-end costs to offset the front-end debt, Hancock says this path allows ratepayers and taxpayers to make it out in the green.

During the blackouts, some companies emerged rather unscathed due to prudent hedging practices that others neglected. Those who neglected were generally ones who found themselves in a financial hole out of which it’s difficult to climb.

Some criticize this proposal as a bailout, but Hancock rejects that framing. “It’s really the opposite of a bailout because it’s saying we’ll work with you but you’re going to pay us a premium for using our cash.”

The most famous bailout this century is the automobile industry bailouts of the latter aughts. Taxpayers wound up shorted $10.2 billion from their original roughly $80 billion “investment.”

But when coupled with the bank bailouts that occurred around the same time, taxpayers netted about $15 billion on the whole. Then, as now, companies that did not safeguard against unforeseen circumstances wound up struggling mightily.

“I don’t want to force good customers that made good decisions to pay the expenses of those who made poor ones.” This reform would place the full brunt of the cost, and the responsibility of repaying it, on the loanees rather than “socializing” it across the whole industry.

And about those entities that made poor financial decisions, Hancock stressed the need for them to learn from the prescient entities to avoid a similar situation down the road.

One of Hancock’s bills was heard in committee last week and another will yet be heard, while the third has already made it through committee.

The House has its own version filed by Rep. Chris Paddie (R-Marshall) and what eventually comes out of the legislative process remains to be seen.

The financial repercussions of February’s storm continue to fester long after the physical repercussions have mostly subsided.

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Brad Johnson

Brad Johnson

Brad Johnson is an Ohio native who graduated from the University of Cincinnati in 2017. He is an avid sports fan who most enjoys watching his favorite teams continue their title drought throughout his cognizant lifetime. In his free time, you may find Brad quoting Monty Python productions and trying to calculate the airspeed velocity of an unladen swallow.