87th LegislatureEnergyState HouseState SenateLt. Governor, House Chairman Renew Conflict Over the Power Grid

Confronting the financial aftermath of the February blackouts is proving to be the more disagreeable of the issues surrounding the winter storm's fallout.
August 18, 2021
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After the winter storm departed and power was restored, the focus of many in Texas turned to the financial fallout in addition to diagnosing the causes of the days-long blackouts that brought the state to heel.

Throughout this financial fight, the House and Senate have often been juxtaposed. That contention was renewed this month with Lt. Governor Dan Patrick and a bevy of senators on one side, and Rep. Chris Paddie (R-Marshall) on the other.

Because of a judgment call made by the Public Utility Commission (PUC) during the winter storm, electricity prices on the Electric Reliability Council of Texas (ERCOT) market remained cranked up to the $9,000 per megawatt-hour (MWh) max for 32 hours longer than requisite emergency conditions lasted.

Some companies whose generation tripped offline had to fulfill their commitments by purchasing ancillary service generation — a break-in-case-of-emergency option — which reached even greater heights than the wholesale price.

The Independent Market Monitor (IMM) pegged the price tag from this “overcharge” at $2.1 billion that, without some sort of intervention, would be “uplifted” to the entire industry and ultimately consumers. That gross amount is essentially debt incurred either by generators whose generation tripped offline but were obligated to provide power or retail providers whose negotiated generation dissipated.

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Both then had to purchase electricity on the scarcity-priced wholesale market.

Rather than “reprice” the market during that period and claw back money that already had exchanged hands, which Patrick fought tooth-and-nail for but the House dismissed, the legislature’s remedy was something called “securitization.”

Put simply, securitization is a ten-dollar word for an above-market rate loan supplied by the government to an indebted entity — in this case, electricity generators and retailers.

In theory, the loans will allow the companies under financial water to repay the debts over an extended period and the government will be repaid with interest.

Among the other options is for the debtors to declare bankruptcy, as Texas’ largest electricity cooperative did in early March, and leave their constituents holding the bag.

But another issue with which policymakers must contend is setting the bar of qualification for awarding of these securitization loans.

Some electricity companies had hedged their prices which allowed them to avoid the volatile wholesale scarcity prices that caught the eye of many. “Hedging” is the process of negotiating a future price for supply of some commodity that protects against wild swings of price caused by unforeseen factors.

Other companies also made great profits during the winter storm — namely those selling electricity on the wholesale market while the prices were at the max.

This issue especially pertains to companies that have subsidiaries throughout the power industry’s subsections — companies at varying stages from wellhead to outlet were affected differently during the blackouts.

Where one subsidiary operating on the back end of an electricity transaction may have lost substantial figures, its sibling subsidiary on the front end could have profited greatly. The question is, should a parent company or its subsidiary that lost profits be eligible for the securitization loan if on balance it emerged in the green?

The PUC began the process of rule-setting this month for the application of these securitization funds — asking stakeholders to weigh in on whether these the hedges or the corporation’s portfolio as a whole should influence the decision of for whom to approve the loans.

Paddie, chair of the House State Affairs Committee and the lower chamber’s chief envoy on the power grid issue, applied his input earlier this month.

“As I stated on the House floor,” Paddie’s letter to the PUC reads, aiming to elucidate the bill’s legislative intent, “the overall $2.1 billion cap must ‘be applied to all load serving entities on a load-proportionate and equitable basis.’”

He added, “Each load-serving entity must be treated without discrimination, including without regard to whether it might or might not have an affiliate whose exposure was different.”

A group of 19 senators countered Paddie’s assertion, stating that, “[T]he Senate’s legislative intent, stipulates that netting is required to ensure the overall monetary situation for each company and its affiliates is considered and any securitized funds are only utilized to prevent unnecessary uplift charges due to defaults.”

Patrick echoed his senate colleagues, saying, “If it was [Chairman Paddie’s] intent to give taxpayer dollars to companies that profited during the storm instead of to those who were actually exposed to extraordinary costs and damages, l can confidently say that was not the understanding or intent of the Texas Senate when it passed HB 4492.”

Carrie Bivens, an economist with the state’s IMM, Potomac Economics, said in her testimony, “Such requests should be aggregated so that the requested financing amount nets among affiliated entities.”

“If the total financing requested by all applicants exceeds the $2.1 billion cap on the amount eligible to be financed, then each [entity] that applies should receive a prorated portion of the financing proceeds based on its pass-through amount and that percentage of the total pass-through amounts.”

In short, Bivens shares the Senate’s opinion that the judgement process should account for the entire financial portfolio of a corporate entity rather than just their subsidiaries that lost money.

The PUC is set to consider the issue in its initial hearing on Thursday and may decide to take action.

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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.