Exelon, Others Allege That Texas PUC's Orders Setting Prices At $9,000 Exceeded Commission's Authority, Adopted Under "Unlawful" Process

Texas REP Says PUC Should Assign Any Market Uplift To Generators

March 12, 2021

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Reporting by Paul Ring • ring@energychoicematters.com

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Exelon Generation Company, LLC (Exelon) moved for rehearing of the Texas PUC's orders from February 15 and 16, 2021 which had the effect of setting ERCOT energy market prices at $9,000 per MWh during the winter weather event

Separately, Pattern Energy Group LP and various wind generators filed a separate motion for reconsideration of such orders, raising several of the same allegations as Exelon

Separately, Texpo Power LP filed further comments with the PUC, calling market certainty concerns raised by opponents of re-pricing, "insincere," given the PUC's action to disrupt existing market rules and prices through administrative order.

Texpo, as further discussed below, also proposed that the PUC allow to generators short-pay uplifts, and the costs of the ancillary services in excess of the HCAP, as Texpo described generation as the, "market participant segment that failed during the outages."

In its motion, Exelon stated, "The Orders are particularly noteworthy because they imposed $9,000/MWh prices whenever ERCOT was directing firm load shed, despite the fact that ERCOT had previously considered and rejected having firm load shed act as a trigger for scarcity pricing."

Exelon said, "Exelon respectfully challenges the notion that granting this request amounts to 'repricing.' The Commission’s Orders themselves replaced the market clearing prices set by ERCOT protocols that were approved by the ERCOT Board and filed with the Commission. They were the rules of the road, upon which market participants relied, and the Commission diverged from them. Resettlement is the appropriate remedy when the prices published by the grid operator do not follow the ERCOT protocols or some other type of correction is needed. Here, for the reasons described below, Section I of the Commission’s Order and was [sic] not valid and should not have supplanted the market rules, which were working as designed. Exelon agrees that market participants require certainty of, and adherence to, market rules. However, in all the talk about the importance of price certainty and concern for the impact on hedges that were taken on in reliance of the $9,000/MWh prices, there is little recognition of the impact that the Commission’s abrupt decision had on the hedges (including bilateral sales) that the market participants already had in place. Certainly, suppliers could not have anticipated when pricing those contracts that the Commission would step in and unilaterally establish prices at $9,000/MWh for four straight days during and [sic] event (i.e., firm load shed) that was expressly omitted from the scarcity pricing in the ERCOT protocols."

Exelon said, "the HCAP [under the PUC's orders] pricing has also created enormous windfalls for others, who are now vigorously advocating for 'price certainty.'"

Similarly Pattern Energy Group LP and other aligned wind generators alleged that, "The Commission’s decisions on February 15 and 16 are examples of regulatory uncertainty. Although repricing may be considered a market disruption, the Commission did not have the authority to grant exceptions to its rules and the ERCOT protocols and unilaterally impose drastic market changes under these circumstances—changes that had ten- to eleven-figure consequences to the state. Ad hoc repricing makes it difficult for market participants to model or prepare for future events."

Exelon said, "The appropriate solution in light of the many procedural deficiencies outlined below, is for the Commission to restore the prices that resulted from the ERCOT scarcity pricing protocols in effect as of February 15. In order to ensure that market participants that detrimentally relied upon the Commission’s Orders are made-whole for the costs or losses that they could not recover under such pricing the Commission should establish a proceeding allowing for make-whole payments."

Exelon said, "The Orders and the process under which they were issued do not fit squarely within any known procedure of the Commission — be it rulemaking, emergency rulemaking or contested case review. Therefore, in an abundance of caution, Exelon files this motion for rehearing within 25 days of the date of the Orders to preserve its right to judicial review under APA § 2001.146. Exelon further requests that even if the Commission declines to reconsider the substantive decision discussed herein, it reissue the Orders to clarify under what legal authority if [sic] has purportedly acted."

Exelon alleged, "The Commission’s Orders are unprecedented. They change the ERCOT scarcity pricing protocols and impose entirely new pricing on market participants without any opportunity for public comment, hearing, or presentation of evidence or argument ... Section I of the Orders violates the intent of PURA § 39.001; it was issued through an unlawful procedure in excess of the Commission’s statutory authority; it does not substantially comply with the Administrative Procedure Act; it violates affected parties’ due process rights by obscuring the path to judicial review; and the decision reached is not reasonably supported by substantial evidence."

Exelon alleged, "In administratively pricing the entire ERCOT wholesale power market at $9,000/MWh, the Commission violated PURA § 39.001(a) by disrupting the operation of the ERCOT protocols, which are designed to arrive at market prices through the 'normal forces of competition.' The Commission also contravened PURA § 39.001(c)’s prohibition on 'mak[ing] rules or issu[ing] orders regulating . . . prices' and has restricted competition in further violation of that section. It has also violated PURA § 39.001(d) by using 'regulatory methods' rather than competitive ones to settle power transactions within the wholesale market. While the Commission has previously adopted rules that impose some limits on the forces of competition, such as the system-wide offer caps provided in 16 Tex. Admin. Code § 25.505(g), those rules merely limit, rather than completely supplant the operation of the competitive market as a method for determining electricity prices. Nor was the decision to administratively price the market authorized by any other provision of PURA, as it was not a necessary or reasoned response to the emergency capacity shortage, as further explained below."

Exelon alleged, "Section I of the Orders was issued through an unlawful procedure that exceeds the Commission’s statutory authority because ... it revised the ERCOT scarcity pricing protocols, which have the force of agency rules, and determined the legal rights of market participants without complying with either rulemaking or contested case procedures. As such, Section I of the Orders is unlawful, exceeds the Commission’s statutory authority, and should be rescinded by the Commission on that basis."

Exelon alleged, "The ERCOT Protocols have the force and effect of administrative rules adopted by a state agency. As such, the Orders may properly be characterized as effecting amendments to existing administrative rules. The existing ERCOT Protocols determine a market price at each of thousands of pricing nodes across the ERCOT grid by calculating in real time the available generation, load and physical transmission constraints applicable to each nodal location, as adjusted with reserve price adders. Section I of the Orders amended these rules by administratively setting the market price for electricity at $9,000 per MWh across every pricing node whenever ERCOT-directed firm load shed was occurring during the EEA3 event."

Exelon alleged, "The Commission must adopt any new administrative rules, as well as amendments to existing rules, pursuant to the rulemaking processes set forth in the APA and the Commission’s Procedural Rules. The Commission may initiate a rulemaking on its own motion by publishing notice of the proposed rule in accordance with the APA, which requires that public notice be provided at least 30 days prior to adopting the proposed rule and that the proposed rule be filed with the Secretary of State for publication in the Texas Register. The Commission must afford all interested persons a reasonable opportunity to submit data, views and arguments in the form of written comments on the rule, and must grant a public hearing if requested by 25 persons, a governmental subdivision or agency, or an association with at least 25 members."

Exelon alleged, "A rule is voidable unless a state agency adopts it in substantial compliance with the procedures described above. The ERCOT Protocol changes directed by the Commission’s Orders do not meet this substantial compliance standard. Market participants received no notice of the proposed rule revision and had no opportunity to submit written comments or participate in a public hearing on its adoption."

Exelon alleged, "The categories of reliability deployments in the compromise proposal (eliminating firm load shed) were approved by the ERCOT Board, filed with the Commission, and became part of the ERCOT Protocols. On Monday, February 15, the Commission, with no notice or opportunity to comment, abruptly reversed this decision and imposed a condition that had been specifically considered and rejected in the process of developing the Protocols. As a result, the rule change directed by the Orders was not adopted in substantial compliance with the Administrative Procedure Act."

Exelon alleged, "The Commission can bypass the prior notice and comment requirements of APA §§ 2001.023 and 2001.029 by adopting an emergency rule pursuant to APA § 2001.034 and 16 Tex. Admin. Code § 22.283, which require only that (1) the rule’s preamble include a finding that 'an imminent peril to the public health, safety, or welfare, or a requirement of state or federal law, requires adoption of a rule on fewer than 30 days’ notice' and stating a reason for that finding, and (2) the emergency rule and written reasons for its adoption be provided to the office of the Secretary of State for publication in the Texas Register. However, Section I of the Orders did not contain the required finding to support the adoption of an emergency rule, and there has been no publication thereof in the Texas Register."

Exelon alleged, "Moreover, these failures were not mere technical defects or oversight in drafting; it is clear that the rule change effected by Section I of the Orders was not required to prevent any peril to public health, safety or welfare. Put another way, there was no nexus between the Commission’s action and the peril at hand. Scarcity pricing is, at best, an indirect method of incentivizing an increase in electric generation supply or a decrease in demand for electricity. Because generators can be forced offline by severe weather, and demand for electricity is largely inelastic, scarcity pricing works best as a long-term method to incentivize the construction of new generation, and not as an emergency tool during weather-driven shortages. Importantly, ERCOT already has the ability to keep all available generation online during an emergency by using the RUC process. The RUC process permits ERCOT to forcibly dispatch generation resources that are physically capable of generating but otherwise would not, if those resources are needed to meet ERCOT’s forecasted load. Resources that have been dispatched through RUC can obtain a 'make-whole' payment from ERCOT if their startup and operating costs exceed the market revenues they receive for their generation. This means that pricing adjustments are not necessary to cause generators to stay online during an emergency shortage, and any natural gas or other marginal costs of generating during a RUC order are recoverable under the existing ERCOT Protocols. Further, to the extent that the RUC make-whole process is insufficient to compensate parties for certain extraordinary costs during the winter storm (e.g., bilateral costs), a rulemaking or contested case process could be developed to address such costs," Exelon alleged

Exelon alleged, "Section I of the Orders themselves also indicates that their purpose was not to stabilize the grid or end emergency load shed, but to engineer financial outcomes that differ from the outcomes dictated by the ERCOT Protocols. The February 15 and 16 Orders refer to 'significant market anomalies' and indicate that certain prices were 'inconsistent with the fundamental design of the ERCOT market,' but in no way indicate how re-pricing the market at $9,000/MWh would help mitigate or avoid any imminent peril to public health, safety or welfare. Thus, while firm load shed during the week of February 14 undoubtedly posed an imminent risk to public safety, the Commission’s Orders did not impact the immediate capacity crisis. Instead, the Orders changed the financial rules under which market participants operate and did so without any public input, magnifying the effect of losses and windfalls across all of ERCOT. As such, the Orders neither complied with the finding and notice requirements of the emergency rulemaking process, nor do they offer a reasoned justification for emergency action. As such, the Commission decision to replace the scarcity pricing rules failed to substantially comply with APA § 2001.034, making that Section of the Orders voidable."

Exelon alleged, "The Governor’s February 12 emergency proclamation permitted the suspension of 'any regulatory statute prescribing the procedures for conduct of state business or any order or rule of a state agency that would in any way prevent, hinder, or delay necessary action in coping with this disaster,' but only provided for such a suspension 'upon written approval of the Office of the Governor.' While the February 15 and 16 Orders refer to the Governor’s proclamation, the Commission did not indicate that it had either requested or obtained written approval of the Governor to suspend the normal operation of the Administrative Procedure Act before issuing its Orders and fundamentally altering the scarcity pricing provisions of the ERCOT Protocols. Thus, it is clear that the Governor’s proclamation does not grant the Commission any additional authority or affect any analysis as to whether the Commission adopted new ERCOT Protocols in substantial compliance with the APA, or whether it acted in violation of PURA or the APA or otherwise in excess of its authority when it issued the Orders."

Texpo Comments

Separately, Texpo Power LP d/b/a Texpo Energy filed supplemental comments in response to opposition to re-pricing from certain generation owners, and alleged that the Commission's pricing order was, "effectively a prohibited ex post facto law," due to deadlines for hedging

Texpo alleged, "The Commission’s February 15th and 16th Orders instantly raised energy prices to the high offer cap of $9,000 per MWh during the February 2021 Winter Weather Event (the 'Artificial HCAP Order'), thereby gifting one of the largest 'windfalls' onto the state’s 'big three' power generators in the history of deregulation—to the detriment of just about everyone else. The timing requirements imposed by the ERCOT Protocols ... demonstrate why the Order resulted in an unexpected retroactively imposed windfall (to certain market participants) that must be mitigated by clarifying the Order and likewise ordering ERCOT to correct its implementation of the Order."

Texpo alleged, "To manage daily exposure to ERCOT’s real time balancing energy markets, market participants must enter bids and hedges into the day ahead market by 10AM the morning BEFORE the day at issue. Accordingly, the Commission’s issuance of the Artificial HCAP Order in the middle of an outage -- in a relative vacuum and without advance notice so that market participants could adjust hedges based on the new market rules imposed by the Order -- was effectively a prohibited ex post facto law."

Texpo alleged, "When the Commission passed its Order to immediately raise balancing energy prices to $9000/MWh, market participants had already submitted their DAM bids and hedged their retail and wholesale energy and ancillary service positions for portions of the time covered by the Order. Bids in the day ahead market bids were due BEFORE 10:00AM the morning prior -- there was no way for market participants (including power generation companies) to go back and revise or resubmit their day ahead market schedules submitted on Feb 13 and 14. Accordingly, to avoid serving as an ex post facto law, the Commission would have needed to give the market at least 48 to 120 hours prior notice before the Order was to take effect. This did not happen. When the Order passed, it was literally impossible for market participants to retroactively go back in time to adjust and mitigate the Order’s consequences. The PUC’s enactment was thus ex post facto and should be dealt with in a means other than allocating the effects of it onto market participants who had nothing to do with the underlying problem or outages in the first place."

Texpo alleged, "The Protocol’s market timing rules demonstrate why the Artificial HCAP Order must be clarified so that the impacts are mitigated. None of the entities who stand to benefit most from the high prices could have anticipated the windfall bestowed by the Order, thus, it will not disrupt the market to remedy the unintended consequences of the Order by ensuring it is implemented correctly. Doing so might make such unexpected retroactively imposed windfall 'a little less enormous' but it will not disrupt the market."

Texpo alleged, "In addition to Day Ahead Market deadlines under the ERCOT Nodal Protocols, described above, load serving entities and retail energy providers must hedge exposure to the day ahead and week ahead markets (including ancillary services such as RRS and Non-Spin Reserve) by refining forecasts to their load and then buying wholesale power and day ahead ancillary services in the bilateral markets several days and weeks before the days at issue. These decisions are based on the information and market rules then prevailing, so that bilateral counterparties, in turn, have time to submit and confirm commensurate schedules to ERCOT’s day ahead and real time markets. To have any real effect, and to give market participants sufficient notice to plan and to make submissions in compliance with the ERCOT Protocols, the Commission should have never issued the Artificial HCAP Order in the middle of the outage. Even one month’s prior notice, before its effective date, would have been insufficient. Yet, the complaints of the parties arguing against resettlement boil down to a claim that they must now be entitled to rely on such retroactively imposed windfalls. Those claims are insincere. If the market participants (now opposing the IMM and who received windfalls) truly desired that market participants be able to firmly rely on the market rules and prices in the interest of planning and market stability, then those parties would likewise push for the reversal of the Artificial HCAP Order itself, given it severely disrupted all the bids and transactions done by market participants before the Order’s retroactive enactment. In other words, the Artificial HCAP Order, itself, does exactly what those arguing against resettlement (and the IMM’s recommendations) would have the Commission believe if the Order is allowed to stand. Without proper notice, the Artificial HCAP Order disrupted the market and retroactively affected market participant decisions. The large generators arguing against the IMM’s recommendations want to have their cake and eat it too."

Texpo alleged, "The IMM’s recommendations must be implemented to restore clarity and order to the markets, notwithstanding the generators’ efforts to make their unexpected huge windfalls a little less enormous. As it stands, ERCOT seeks to allocate billions of dollars of short payments (from entities such as Brazos, Entrust and Rayburn) onto solely retail electric providers (and their residential, small business, industrial and governmental electricity customers) on a pro rata basis, despite the other retail electricity providers, including Texpo, having nothing to do with the short payments of those market participants. Where does anyone believe this money will come from? One way or another, Texpo will protect its customers. However, one cannot deny that some of these increased costs imposed on retail electric providers generally will eventually make their way to the end users of electricity. Companies cannot perform magic; they must generate cash inflows equal to outflows or they go bankrupt. Moreover, once half (or most) of the retail energy providers are driven out of the market, competitive pressures on the large 'gen-tailers' (Reliant and TXU) to keep prices lows sic] will decrease. These consolidated companies are believed to now control and hold well over half of Texas’s retail energy market, with their market share growing quickly due to the new customers they are acquiring as POLRs."

Texpo alleged, "We urge that policy makers not be fooled by the well-lawyered 'gen-tailers:' [sic] contrary to what they may have the Commission believe, market prices will not benefit from a scenario where TXU and Reliant are the only two remaining retail energy providers, and that will be the most likely outcome if the Commission continues its present course. Substantially fewer REPs competing with each other means higher prices for everyone in the long term. Same with customers being moved to the POLR (primarily TXU and Reliant) and paying higher POLR prices via any mass customer transfer process; again, more customers on the POLR means higher prices for those customers too. Yet this is preventable."

Texpo alleged, "Why not allocate (as ERCOT says, 'uplift') all short payments related to the Weather Event to the market participant segment that failed during the outages. Generators do already have the ability to (a) weatherize their facilities; (b) weatherize (or cause to be weatherized) their local critical incoming gas lines for low winter temperatures, as generators do in the northeast at far lower temperatures than Texas; and (c) install back up generation to their own generation facilities for emergencies. Generators did already have notice that a power outage would likewise affect their own generation facilities and thus the need for backup. Indeed, some of the generators’ latest arguments, attempting to blame power outages for further power outages, are canard. If any party could procure back-up generation for a generation plant, it is a generation plant itself! During the storm, thousands of resilient Texan residential retail customers figured out how to install back-up power generators at their residences to support critical power needs when the power went out. Does anyone really believe some of the generators now claiming they could not have figured out how to do the same? Moreover, generators do already have the ability to construct dual fuel capable generation facilities as an additional back-up plan in case natural gas becomes scarce."

Texpo alleged, "Generators right now have the wrong incentives. All market participants who even arguably failed to weatherize plants or important infrastructure (or failed to install back up generation to support their own critical infrastructure) should, now and in the future, bear the brunt of such price spikes, also including bearing the brunt all short-pay uplifts and including the costs of the ancillary services in excess of the HCAP, along with remaining amounts to be born via state and federal disaster relief aid. Only then can the State be sure that this won’t happen again."

In summation, Texpo alleged that the PUC's order, "was a government imposed re-regulation of the markets during the Weather Event. Such Order halted, by government action, the forces of supply and demand. Such Order took from the people, and gave to 'the big three' generators. It was effectively an (unwisely and retroactively imposed) government taking of immense proportions. The Commission and ERCOT contributed to the problem. It is not too late for the state government (and the Commission) to step in and do the right thing to mitigate the fall out. In terms of certain generators complaining about the resulting slight reductions to their enormous retroactively imposed windfalls, enough is enough."

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