Players in the ERCOT market are grappling with the financial fallout from winter storm Uri, which devastated Texas in February. Many are now familiar with the actions taken by the Texas Public Utility Commission (PUCT) during the weather event, actions taken in an effort to bring and keep as much production online as possible.
Most notably, the commission ordered ERCOT to implement a temporary adjustment to the scarcity pricing mechanism, which is designed to bring real-time prices to the system-wide high supply cap to the maximum. statutory rate of $ 9,000 / MWh at the height of the forced crisis. breakdowns.
Now, more than two months away from the storm, the financial impacts are having serious repercussions on the ERCOT market. Several retail electricity providers have filed for bankruptcy, lawsuits are underway against a wide range of market players and regulators (ERCOT, PUCT, producers, retail electricity providers [REPs], gas utilities, etc.), and countless market players are facing record high bills for a variety of reasons.
These factors include the need to source energy from the market in real time during times of scarcity, to secure high priced gas supplies, to hedge positions when their resources have suffered blackouts or to be exposed. an increase in the default amounts owed to ERCOT. To complicate this, ERCOT did not pay many of those who performed during the storm due to low payout from some market players, which means those who performed might not realize the income associated with that performance soon. In addition, higher prices for electricity and ancillary services have prompted ERCOT to significantly increase the collateral requirements of counterparties. Last month, the PUCT published a order in folder 51812 extension of the deadline for contesting ERCOT invoices related to the winter event from 10 working days (according to the ERCOT protocols in force) to six months. Since that order, the commission has taken no further action to address the settlement bill issues resulting from the storm.
Financial consequences of the winter storm
The high amounts of ERCOT settlement invoices caused some market players to completely default on their financial obligations to the grid operator, resulting in involuntary termination and exit from the market, massive transition of some retail customers and leaving a high amount of “unpaid invoices”. “In anticipation of default, others have voluntarily terminated their registrations with ERCOT, attempting to opt out before materially violating their agreements with market participants for non-payment. Two REP have entered into agreements. payment plans with ERCOT, and others may follow. Non-opt-in entities (NOIEs), like the Brazos and Rayburn County Electric Co-ops, have not met their payment obligations, but continue to do so. operate in ERCOT under the protection and supervision of the bankruptcy court. Currently, ERCOT has reported short payments (i.e. payments due but unpaid) related to the winter weather event totaling $ 2.9 billion ; however, this amount is expected to fluctuate as bills are paid and other amounts are disputed.The plan to settle this debt is a default recovery process in which other market participants pay this debt. balance over time.
ERCOT unveiled on April 14 a plan to set up a default invoicing process. Under the ERCOT protocols, default invoice amounts are capped at a monthly total of $ 2.5 million, which means it could take more than 96 years for ERCOT to recover the full amount under markup. . For now, ERCOT anticipates that only short-term payment amounts owed by market participants who have entered into payment plans with ERCOT will be excluded from the total amount of the default markup. Substantial amounts owed by NOIEs, including cooperatives and municipal utilities, will be included. At present, the amount owed by NOIE constitutes the vast majority of the amount being increased.
ERCOT’s record indicates that it will not issue mark-up bills by default until the current Texas legislative session (ending no earlier than May 31). by recognizing the possibility that a finance bill could be passed to help market participants repay their debt or by allowing ERCOT to immediately securitize the amount in default, so that it can pay those to whom it has payment obligations suffering. Currently, ERCOT plans to issue mark-up bills by default in the summer of 2021, unless the Texas Legislature or PUCT decides otherwise.
Which entities will receive the mark-up invoices by default?
In the absence of any legislation or commission order to the contrary, ERCOT indicated its intention to issue mark-up invoices by default to all entities that were active in the market in the month preceding the month in which the outstanding debts in recovery courses have taken place (the “reference” month), and who are either still active in the ERCOT, or who voluntarily terminated the ERCOT registration after partial payments under recovery have taken place.
As an example, consider short payments from February 2021: each counterparty of qualified programming entities (QSE) or holders of congestion revenue rights accounts (CRRAH) having had an activity in January 2021 can be allocated a share of the unpaid amounts for payment invoices. with payment deadlines in February 2021. Likewise, each QSE or CRRAH counterparty with activity in February 2021 can be allocated a share of short payments for settlement invoices with payment deadlines in March 2021. This means that new market participants (that is, those who have no market activity during the reference month) will not receive mark-up invoices by default for the short-term month. Additionally, it means stocks during the winter storm are unlikely to impact a market participant’s uplift share.
In addition, an entity that voluntarily terminates its ERCOT registration after the date of a short compensation event will remain liable for its entire share of unrecovered liability for unpaid short payment amounts (share of the default increase ratio). ) after its termination. In the event of voluntary termination, ERCOT will require the terminating entity to provide a financial guarantee in the amount of its entire share of the default mark-up rate, up to its maximum total potential exposure (TPE). As most of these outgoing entities do because they lack sufficient financial resources to continue operating, one would expect that a number of them would not be able to publish this guarantee assessment. .
This plan also does not take into consideration the time value of money as an existing market participant would, in practice, have to pay their full 90+ raise allowance to exit the market. . It appears that this is designed to keep market participants going until after the legislative session.
How are the default markup amounts calculated?
Each entity’s default uplift ratio share will be based on the entity’s share of activity in the ERCOT market in the month prior to the month in which the short-term payments in collection occurred. The calculation is based on the pro-rata share of MWh that the QSEs or CRRAHs allocated to this counterparty, contributed to the maximum share of the counterparty’s activity ratio in MWh in the month preceding the month in which the short payments in progress recovery have taken place. It does not account for any dollars associated with MWh activity, which means that the ratio is currently skewed in favor of CRRAHs, although their MWh activity is not associated with large dollar amounts. A description of the calculation can be found in the ERCOT 9.19.1 protocol.
Currently, ERCOT has estimated the default uplift shares for February short-term payments by market segment. A recent contract notice confirms that the reports on the individual shares of the counterparties have been published on the portal of the management information system. The notice further informs counterparties that they are required to maintain financial security or an unsecured credit limit of an amount equal to or greater than its total potential exposure (TPE). The potential increase component of the TPE analysis plans to include a year’s worth of expected default increase invoices ($ 30 million). ERCOT adjusts the potential increase component of TPE in two equal amounts of $ 15 million, the first was on April 29, the second will be on May 17.
Further review of the default markup billing process is underway in NPRR1074.
–Alaina Zermeno is a lawyer in the Austin, Texas office of Husch Blackwell LLP and a member of the firm Energy and natural resources industry team. Chris Reeder is an Austin-based partner with Husch Blackwell LLP, and co-leads the Energy regulation practice. Maria Faconti is an Austin-based partner with Husch Blackwell, where she provides regulatory advice to energy development and renewable energy clients.