State Agencies and Electric and Gas Industries Respond to Winter Storm Uri With Market Reform Efforts and Securitization Implementation

by Taylor P. Denison

As reported in our April issue of The Lone Star Current,1 Winter Storm Uri, which hit the state February 15 through February 19, 2021 and left millions of Texans without power during single-digit temperatures, turned the electric industry on its head. The devastating event prompted the 87th Texas Legislature to pass a significant package of bills in an effort to address reliability and weatherization issues, which we reported on in our July issue of The Lone Star Current.2 The Public Utility Commission of Texas (“PUC”), the Railroad Commission of Texas (“RRC”), the Electric Reliability Council of Texas (“ERCOT”), and the electric and gas industries as a whole are now working to implement the sweeping changes passed by the Legislature and signed into law by Governor Abbott.

The first of these sweeping changes relates to the membership of the PUC. In response to Senate Bill (“SB”) 2154, which increased the number of PUC Commissioners from three to five, Governor Abbott has appointed a new slate of Commissioners. In the wake of Winter Storm Uri, all three existing PUC Commissioners resigned. Since that time, Governor Abbott has appointed four new Commissioners—Chairman Peter Lake (appointed on April 12), Commissioner Will McAdams (appointed on April 1), Commissioner Lori Cobos (appointed on June 17), and Commissioner Jimmy Glotfelty (appointed on August 6). There remains one vacant PUC Commissioner position.

The new board has wasted no time implementing market redesign changes required by the Texas Legislature. The Commissioners have initiated a number of new rulemakings and are hosting regular “work sessions” designed to focus on different aspects of redesigning the ERCOT market, inviting panels of leading industry experts to come speak at each session. PUC Staff has opened various new rulemaking projects and has published a rulemaking calendar in Project No. 51715, providing insight about the rulemaking and implementation process the agency will undertake to address the recently enacted legislation.

In the broadest proposed rulemaking, Project No. 52373, Review of Wholesale Electric Market Design, the PUC has outlined its plan to issue a series of “Commissioner Guidance” memos, which include requests for comments on a variety of topics related to the overall restructuring of the ERCOT market design. Following each set of “Commissioner Guidance” is a deadline for stakeholder comments related to that specific request for comments. To date, the PUC has issued three sets of “Commissioner Guidance” and received a large number of stakeholder comments in response to each one. The PUC plans to issue its “Market Design Draft Plan” by October 21, 2021, with the final Market Design Plan issued by December 19, 2021.

In the only completed rulemaking to date, Project No. 51871, Review of the ERCOT Scarcity Pricing Mechanism, the PUC adopted amendments to 16 Texas Administrative Code (“TAC”) § 25.505, relating to reporting requirements and the scarcity pricing mechanism in the ERCOT power region, with changes to the proposed text as published in the May 21, 2021 issue of the Texas Register (46 TexReg 3227). These amendments modify the value of the low system-wide offer cap (“LCAP”) by eliminating a provision that ties the value of the LCAP to the natural gas price index and replaces it with a provision that ensures resource entities are able to recover their actual marginal costs when the LCAP is in effect.

For Project No. 51830, Review of Certain Retail Electric Customer Protection Rules, the PUC proposes amendments to existing 16 TAC §§ 25.43, 25.471, 25.475, 25,479, and 25.498, and also proposes new 16 TAC § 25.499, relating to Acknowledgement of Risk Requirements for Certain Commercial Contracts. These proposed rules will implement an amendment to Texas Utilities Code § 17.003(d-1)(c) enacted by the Texas Legislature requiring electric utilities and retail electric providers to periodically provide to customers information concerning load shed, type of customers and procedure to be considered for critical care or critical load, and reducing electricity use at times when involuntary load shed events may be implemented. These proposed rules will also prohibit the offering of wholesale indexed products to residential or small commercial customers and require customers other than residential or small commercial customers to sign an acknowledgment of risk prior to enrolling in any indexed products or products that contain a separate assessment for ancillary service charges. The amendments will also pass additional, related customer protections.

With regard to weatherization, in Project No. 51840, Rulemaking to Establish Weatherization Standards, the PUC proposes new 16 TAC § 25.55, relating to weather emergency preparedness, to implement weather emergency preparedness measures for generation entities and transmission service providers in the ERCOT power region, as required by SB 3. Proposed 16 TAC § 25.55 represents the first of two phases in the PUC’s development of robust weather emergency preparedness reliability standards. The PUC said the primary objective of phase one is implementing weather emergency preparedness reliability standards to ensure that the electric industry is prepared to provide continuous reliable electric service throughout this upcoming winter season and to comply with the statutory deadline for the adoption of weather emergency preparedness reliability standards set forth in SB 3. Further, the proposal requires a notarized attestation from the highest-ranking representative, official, or official with binding authority over each entity attesting to the completion of all required activities. The PUC will develop phase two of the weather emergency preparedness reliability standards in a future project, which will consist of a more comprehensive, year-round set of weather emergency preparedness reliability standards that will be informed by a robust weather study that is currently being conducted by ERCOT in consultation with the Office of the Texas State Climatologist.

In Project No. 52312, Review of Administrative Penalty Authority, the PUC proposes amendments to existing 16 TAC § 22.246, relating to Administrative Penalties, and 16 TAC § 25.8, relating to a Classification System for Violations of Statutes, Rules, and Orders Applicable to Electric Service Providers. These proposed rules will implement an amendment to the Public Utility Regulatory Act (“PURA”) § 15.023(b-1) enacted by the 87th Texas Legislature that establishes an administrative penalty not to exceed $1,000,000 for violations of PURA § 35.0021 or § 38.075, each relating to Weather Emergency Preparedness.

The PUC requested comments from stakeholders in Project No. 52287, Power Outage Alert Criteria, regarding provisions of SB 3 that directed the PUC to participate in a multiagency effort to develop a power outage alert system to be activated when the power supply in the state may be inadequate to meet demand. The legislation directed the PUC to adopt criteria for the content, activation, and termination of the alert system. In its request for comments, PUC Staff said the power outage alert system “could represent a critical component of the state’s ability to respond to future power emergencies,” and accordingly, PUC Staff welcomed “other insights and contributions on how to design this system.”

In Project No. 52345, Critical Natural Gas Facilities and Entities, the PUC proposes amendments to existing 16 TAC § 25.52, relating to Reliability and Continuity of Service. These proposed amendments will implement changes made to PURA § 38.072(a) and (b) enacted by the 87th Texas Legislature, adding end stage renal disease facilities to the list of health facilities prioritized during system restoration following an extended power outage. These amendments will also implement PURA § 38.074 by requiring a critical natural gas facility to provide critical customer information to the utility from which it receives electric delivery service and requiring the utility to incorporate this information into its load-shed and restoration planning.

The PUC seeks to amend 16 TAC § 25.505 to adjust the high system-wide offer cap (“HCAP”) from $9,000 per mega-watt/hour (“MWh”) to $4,500 per MWh in Project No. 52631, Review of 25.505. In addition, the PUC requested comments from stakeholders related to any consequences the HCAP change could have relating to the value of lost load, which is set at the HCAP when the HCAP is in effect. PUC Staff has identified other topics for future rulemakings, which include Project No. 51888, Review of Critical Load Standards and Processes; Project No. 51841, Review of 16 TAC § 25.53 Relating to Electric Service Emergency Operations Plans; and Project No. 52301, ERCOT Governance and Related Issues, among others.

In parallel with the multitude of PUC rulemakings, RRC Staff has proposed new rules to implement energy reliability reforms included in House Bill (“HB”) 3648 and SB 3. Filed by Staff on September 10, 2021, the proposed rules specify the criteria and processes by which Texas natural gas facilities are to receive energy emergency critical designations. Under HB 3648, the RRC is to collaborate with the PUC to designate certain natural gas facilities as critical during energy emergencies. SB 3 includes reform measures to identify gas units critical for the state’s energy grid, and requirements for the weatherization of such units. The proposed rules would implement Section 4 of SB 3 as well as Section 1 of HB 3648 by specifying various criteria and processes by which natural gas facilities receive critical customer or critical gas supplier designations. If designated as critical under the new rules, a natural gas facility’s operator must directly provide “Critical Customer Information” to relevant electric entities, which can include electric utilities, municipal-owned utilities and electric cooperatives. The proposed new rules require an operator of a natural gas facility designated as critical to acknowledge the facility’s critical status by filing a new form with the RRC. However, the proposed rules allow for exemptions if operators certify that their facilities are not prepared to operate during a weather emergency. The rules create a new $1,000 penalty for operators that fail to file appropriate forms relating to critical unit designation, and a new $2,500 penalty for failure to provide critical customer information. The agency estimates that 6,200 operators will be required to comply with the proposed new rule and amendments.

In addition to the above-listed rulemakings at both the PUC and RRC, securitization cases have been opened and are ongoing at both agencies. Back in June, Governor Abbott signed legislation authorizing the use of securitized debt to recover some expenses incurred by ERCOT and ERCOT market participants during Winter Storm Uri. The law, HB 4492, identified two specific categories of expenses—“Default Balance” expenses, which HB 4492 defined as money owed to ERCOT because of financial defaults by market participants, and “Uplift Balance” expenses, which HB 4492 defined as ancillary service charges and reliability deployment price adders imposed in excess of the system-wide offer cap (“SWOC”). On July 16, 2021, ERCOT made two filings with the PUC relating to both the Default Balance provisions and the Uplift Balance provisions of HB 4492. These filings can be found on the PUC interchange in Docket Nos. 52321 and 52322, respectively.

Under its Default Balance filing, ERCOT seeks a PUC order to finance up to $800 million. ERCOT proposes to recover the Default Balance by assessing non-bypassable default charges on Qualified Scheduling Entities (“QSEs”) and Congestion Revenue Right (“CRR”) Account Holders. ERCOT proposes to allocate default charges on a monthly basis and base the allocation on the QSE’s or CRR account holder’s volume of activity in the market during the most recent month for which final settlement data is available. Further, ERCOT proposes to allocate default charges to existing wholesale market participants, including QSEs and CRR account holders that are in payment breach with ERCOT but still participate in the market, as well as market participants who enter the ERCOT wholesale market after the issuance of the Debt Obligation Order. The PUC held a hearing on ERCOT’s Default Balance filing on August 23, 2021, and issued a Draft Order on October 8, 2021.

For its Uplift Balance filing, ERCOT seeks authorization to obtain financing of an amount of up to $2.1 billion. ERCOT also seeks reasonable costs to implement the related Debt Obligation Order. Eligible costs for financing include documented Reliability Deployment Price Adder (“RDPA”) charges and Ancillary Service costs above the PUC’s SWOC during the Winter Storm Uri emergency period. The PUC has also opened a third related docket, Docket No. 52364, in which load-serving entities will provide documentation of exposure and opt out from the Uplift Balance (and associated recovery). Entities eligible to make a one-time opt-out election include municipally-owned utilities, electric cooperatives, river authorities, some transmission voltage customers, and some retail electric providers. ERCOT proposes to disburse the proceeds of the Uplift Balance financing by issuing an invoice for payment to each QSE that represents an LSE that the PUC deems eligible to receive such proceeds. To recover the Uplift Charge, ERCOT proposes to allocate a non-bypassable charge to QSEs on a daily basis. The PUC held a hearing on ERCOT’s Uplift Balance filing on August 24 and August 25, 2021. Following the hearing, the parties reached a partial settlement, which was filed on September 20, 2021 and was considered at a specially-called open meeting on September 30, 2021. Minutes before the Commissioners took up the docket, they received a letter from Lieutenant Governor Dan Patrick in opposition to the proposed settlement agreement. However, the Commissioners proceeded to approve the settlement agreement. Commission Counsel issued a Draft Order on October 8, 2021. The statutory deadline for the PUC to issue Final Orders in both dockets is October 14, 2021.

On the gas side, 11 local distribution gas utilities have filed with the RRC for approval of $3.6 billion in extraordinary gas costs related to Winter Storm Uri in response to HB 1520, which authorized utilities to seek securitization of these costs. Under these applications, the utilities seek securitization in order to be reimbursed for the costs incurred during the storm. The securitized amount for all the utilities will be combined and collected (with interest) and charged to customers for the next several years—possibly decades. During the storm, gas prices rose from
$3 per million British Thermal Units (MMBtu) to approximately $400 per MMBtu. This resulted in a massive jump in gas expenses incurred by the utilities. Atmos Energy, the state’s largest gas utility, is seeking more than $2 billion through the securitization process. CenterPoint Energy and Texas Gas Service, the state’s second and third largest gas utilities, are seeking $1.1 billion and $290 million, respectively. The remaining eight utilities are seeking anywhere from $69 million to $285,000. Under HB 1520, the RRC has 150 days to review the requested securitization amounts and determine how much may be collected from customers. This is the first such proceeding ever considered at the RRC.

As these rulemaking projects, market reform efforts, and securitization implementations proceed at the PUC, RRC, and ERCOT, we will continue to provide updates and analysis of the impacts to utilities and customers across the state.

1 See “Historic Winter Storm Prompts Widespread Outages,” by Taylor Denison, Chris Brewster, and R.A. (“Jake”) Dyer.
2 See “A Regular Session like no Other – Recap of the Regular Session of the 87th Texas Legislature,” by Ty Embrey.

Taylor Denison is an Associate in the Firm’s Energy and Utility Practice Group. If you would like more information about this article or have questions related to these or other matters, please contact Taylor at 512.322.5874 or tdenison@lglawfirm.com.