Texas Adopts Grid Weatherization & Securitization Measures

In mid-February 2021, Winter Storm Uri brought historic weather conditions and multiple days of record-low temperatures to the Midwest and Texas.  This historic event contributed to failures in the natural gas supply chain and at generating facilities, ultimately leading to significant interruptions of power supply in the Electric Reliability Council of Texas (“ERCOT”) power region.¹  Power outages persisted for several days and the fallout became a top priority of the 87th Texas Legislature.  Legislators filed over 180 winter storm-focused bills this regular session, which ended May 31, 2021.  Governor Greg Abbott, however, signed a much smaller number into law, and some observers are already calling for a special session to address additional reforms.  For now, the natural gas and utility/power industries are facing two sets of new laws that will impact the bottom line:  (i) weatherization of the natural gas supply chain, generation facilities, and electric transmission and distribution facilities; and (ii) securitization measures to address extraordinary costs incurred by various ERCOT market participants because of Winter Storm Uri.²

Weatherization:

S.B. 3 (effective June 8, 2021)³ is the omnibus Uri-related bill coming out of the session.  Among many other provisions that will affect the electricity utility industry in Texas, S.B. 3 requires the Railroad Commission of Texas (“RRC”), in collaboration with the Public Utility Commission of Texas (“PUCT”), to designate natural gas supply chain facilities that are “critical” and require operators of such facilities to implement measures to prepare to operate during a weather emergency. Utilities, however, maintain their discretion to prioritize power delivery and restoration as circumstances require.  The RRC must report un-remedied violations of these provisions to the Texas Attorney General.  The RRC must also adopt a rule requiring an operator of a gas supply chain facility that experiences repeated or major weather-related forced interruptions of production to retain a third party to assess the operator’s weatherization plans and submit the assessment to the RRC.  The penalty for a violation of these provisions can be up to $1 million for each offense, and the RRC is required to establish a classification system for assessing violations based on their seriousness and other factors.  

S.B. 3 also contains weather emergency preparedness provisions applicable to municipally owned utilities, electric cooperatives, power generation companies, and exempt wholesale generators selling power in ERCOT.   The bill requires the PUCT to implement rules similar to those required of the RRC, so that each of the entities providing electric generation service must implement measures to prepare its generation assets to provide adequate electric generation service during a weather emergency according to reliability standards that the PUCT will adopt.  ERCOT has been tasked with inspecting generation assets for compliance with those standards and reporting violations to the PUCT.  As with gas supply chain facility operators, generation assets that experience repeated or major weather-related forced interruptions of service, must retain a third party to assess the provider’s weatherization plans and submit the assessment to  the PUCT and ERCOT.   The PUCT must impose an administrative penalty on any entity that violates the rules implementing these provisions of the bill.  Notably absent from S.B. 3 is a provision that would have mandated wind and solar generators to purchase ancillary services to shore up the intermittency of their output.

Yet another section of S.B. 3 requires that each electric cooperative, municipally owned utility, and TDU providing transmission service in the ERCOT power region must implement measures to prepare the cooperative’s or utility’s facilities to maintain service quality and reliability during a weather emergency according to standards adopted by the PUCT.   Again, ERCOT has been tasked with inspecting the facilities for compliance with the reliability standards and reporting to the PUCT any violations that are not timely remedied, and the PUCT must then impose administrative penalties. 

S.B. 3 also creates the Texas Electricity Supply Chain Security and Mapping Committee tasked with, among other things, establishing best practices to prepare facilities that provide electric service and natural gas service in the electricity supply chain to maintain service in an extreme weather event.   These best practices will be included in a report submitted by the committee to the Governor, the legislature, and the Texas Energy Reliability Council, along with recommended oversight and compliance standards.

As the PUCT and the RRC implement these changes, participation by industry stakeholders will be critical.  Administrative rulemakings are already underway. Currently, it is unclear how onerous the new weatherization/reliability standards will be, how long an entity will have to remedy alleged violations, or how steep the penalties may be for specific violations.  During the June 3, 2021 PUCT open meeting, PUCT staff set forth an initial timeline for its rulemakings.  Thus far, the PUCT has opened Project No. 51840, Rulemaking Establishing Electric Weatherization Standards, which has a planned July 1, 2021 release of a strawman rule and a projected August 26, 2021 publication of a proposed rule.  The PUCT has also opened Project No. 51888, Review of Critical Load Standards and Processes, although it has not released a timeline and it is unclear how the PUCT and the RRC will “collaborate” on these rules as required by S.B. 3.

Securitization:

H.B. 4492 (effective June 16, 2021)⁴ allows the use of securitization to cover two categories of costs:  the approximately $800 million that ERCOT is owed from defaults by market participants on payments owed during the storm; and the “uplift balance” consisting of approximately $2.1 billion in ancillary service charges and reliability deployment price adders imposed during that period.  For the first category, the financing is to come from the state’s economic stabilization or “rainy day” fund balance and is to be repaid by ERCOT market participants through default charges established by the PUCT.  For the second category, ERCOT is authorized to finance the uplift balance on behalf of market participants through debt obligations. 

S.B. 1580 (effective June 18, 2021)⁵ provides for the use of securitization by electric cooperatives to finance “extraordinary costs” incurred due to the winter storm.  The extraordinary costs include costs incurred by an electric cooperative for power and energy purchased during the storm in excess of what would have been paid for the same amount of power and energy at the average rate paid in January 2021.  Extraordinary costs also include costs and expenses incurred by electric cooperatives to generate and transmit power and energy during the storm, including fuel costs, operations and maintenance expenses, overtime costs, and more, as well as any charges imposed on the electric cooperative or its power supplier by the applicable independent system operator (i.e., ERCOT) or regional transmission organization for costs relating to the period of the storm.  The bill also instructs the PUCT to require all market participants to pay or make provisions for the full and prompt payment of amounts owed to ERCOT, calculated according to the ERCOT protocols in effect during the winter event, in order to continue to qualify as a market participant.  Brazos Electric Cooperative, now in bankruptcy, unsuccessfully petitioned Governor Abbott to veto this bill and H.B. 4492.  It cited the financial burdens the legislation would place on Brazos customers and the possibility that it may be unable to satisfy the terms of S.B. 1580 and have to exit the ERCOT market.

H.B. 1520 (effective June 16, 2021)⁶ allows the securitization of excess costs incurred by certain gas utilities due to the winter storm.  To accomplish this securitization, the bill provides for the creation of an issuing financing entity that will issue customer rate relief bonds to be approved by the RRC, and the obligation to repay the bonds sits with the issuing financing entity.

¹ The power regions overseen by Southwest Power Pool and the Midcontinent Independent System Operator also experienced power supply interruptions.

² Other significant Uri-related bills that have or will become law address ERCOT and PUCT reform, among other topics:  S.B. 2 (changing ERCOT governance requirements); S.B. 2154 (increasing the number of PUCT commissioners from three to five); S.B. 1281 (providing that electric utilities are not required to amend certificates of convenience and necessity for certain transmission lines connecting to load-serving and generation substations and requiring ERCOT’s biennial assessment of reliability in extreme weather); H.B. 2483 (authorizing a transmission and distribution utility (“TDU”) to lease/operate facilities providing temporary emergency energy to aid in restoring power during natural disasters); S.B. 415 (authorizing TDUs to contract with power generation companies for electric energy from energy storage facilities); H.B. 2730 (adding requirements for landowner’s bill of rights and other requirements relating to eminent domain authority); H.B. 3648 (requiring adoption of agency rules to establish a process to designate natural gas facilities and entities associated with providing natural gas as critical customers/critical gas suppliers during emergencies requiring load shed); and S.B. 2116 (prohibiting agreements with certain foreign-owned companies in connection with critical infrastructure).  

³ Tex. S.B. 3, 87th Leg., R.S. (2021).

⁴ Tex. H.B. 4492, 87th Leg., R.S. (2021).

⁵ Tex. S.B. 1580, 87th Leg., R.S. (2021).

⁶ Tex. H.B. 1520, 87th Leg., R.S. (2021).