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Texas regulators mull netting utilities' storm costs to affiliates' revenues

Highlights

$2.1 billion debt obligation at issue

Lawmakers divided over bill's language

PUC staff, IMM favor netting costs, revenues

Texas regulators may discuss Aug. 19 the question of how to handle the securitization of extraordinary costs related to the deadly mid-February winter storm – in particular whether to offset costs charged to load-serving entities against corresponding revenues to those LSEs' affiliated power suppliers.

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Lawmakers, regulatory staffers and stakeholders differ over whether a debt obligation order to finance Electric Reliability Council of Texas uplift balances for costs related to the deadly mid-February winter storm should be used to pay companies with affiliates that received windfall revenues from the storm.

On Aug. 16, a letter from Lieutenant Governor Dan Patrick was filed in the Public Utility Commission of Texas Project. No. 52322, ERCOT's application for an order authorizing securitization of up to $2.1 billion in Reliability Deployment Price Adder and ancillary service costs incurred during the mid-February winter storm.

The project is on the PUC's Aug. 19 meeting agenda.

Legislative intents argued

In his letter to the commissioners, Patrick contends that financing proceeds for excess RDPA and AS costs during the storm incurred by ERCOT load-serving entities should be offset by RDPA and AS revenues received by such LSEs' affiliated resource entities.

Texas lawmakers in their regular session directed the PUC to manage the securitization of this debt in House Bill 4492 in order to mitigate the risk of defaults by ERCOT market participants, which could incur further uplift costs.

"The Senate would not have passed a bill giving taxpayer dollars to companies that profited during the storm," Patrick said. "House Bill 4492 had no reason to exist other than to provide relief for ERCOT market participants who were adversely affected by exorbitant ancillary service prices and help alleviate charges that would be passed on to customers."

An Aug. 10 joint letter from 20 state senators advocates a similar interpretation.

Patrick's letter contradicts an Aug. 2 letter by the bill's house sponsor, state Representative Chris Paddie, who states, "The legislation is clear that each load-serving entity is to provide documentation of its own exposure to the uplift costs. ... It does not contemplate or authorize any 'netting' between companies."

These filings join more than a dozen others addressing the issue, advocating either side.

For example, the PUC's own staff filing states on Aug. 4 that HB 4492, in the context of existing law, "does contemplate offsetting the amounts for reliability deployment price adder charges and ancillary service costs in excess of the commission's system-wide offer cap (collectively, Extraordinary Costs) with payments received for those same services."

In the state senate's debate of the bill, Senator Kelly Hancock, the bill's senate sponsor, "unequivocally confirmed that the $2.1 billion reflects the net amount of ancillary services costs and RDPA charges that are owed to ERCOT and eligible to be financed" using the relevant pre-existing law.

"To be consistent, the Commission should determine the exposure of the market participants that will receive financing on a net basis," the PUC staff said. "otherwise, there is a substantial risk that the amount of exposure documented by ... [LSEs] will exceed the $2.1 billion."

ERCOT has estimated the applicable RDPA and AS charges in excess of the offer cap for the emergency totals about $3.4 billion.

Stakeholder differences

However, other stakeholders have advocated no consideration offsetting of payments to LSE affiliates that received RDPA and AS extraordinary charges during the storm.

For example, Texas' largest generation fleet owner, Luminant, has sister companies in TXU Energy Retail, Ambit Texas and others that filed a briefing in opposition to netting extraordinary charges to LSEs against relevant RDPA and AS revenues for resource entities.

"The only question is whether 'a municipally owned utility, an electric cooperative or a retail electric provider' was 'subjected to' uplift balance costs – not whether the LSE 'received [amounts] [sic] in excess of the commission's system-wide offer cap' and certainly not whether the parent of or an affiliate of an LSE experienced related or unrelated financial impacts," the TXU filing states.

However, Carrie Bivens, Potomac Economics vice president and head of ERCOT's independent market monitoring office, in an Aug. 16 filing also advocates for offsetting LSEs' extraordinary costs with RDPA and AS revenues received by those LSEs' affiliated companies.

"Because of the extraordinary nature of the February market event, RDPA charges were uplifted to LSEs ... to provide make-whole payments to generators for energy that was not needed or produced," Bivens said. "There is no financial hedge that an LSE can use to avoid these RDPA charges. However, if an LSE is part of a larger corporate structure that includes affiliated Resources that received these payments, the larger corporate entity will only be 'exposed' to the remaining balance, if any. Therefore, the appropriate policy outcome is to net the charges and payments. Similarly, revenues for AS over the [systemwide offer cap] represent a windfall for affiliated Resources, as such prices exceeded any submitted offer and any potential real-time clearing prices for energy."