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Texas PUC Staff Says Bill For Reimbursement Financing Program For Costs Above ERCOT Price Cap Contemplates Netting, Cites Floor Remarks From Senate Sponsor

Most Gentailers Oppose Netting; Independent REPs (& OPUC) Support Netting

Calpine Says Any Proceeds Should First Be Allocated To Any Customers Exposed To Such Prices (With Mandated Pass-Through), Regardless Of LSE's Position; With Proceeds To LSEs Themselves Relegated To Second Priority

August 5, 2021

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Copyright 2010-21
Reporting by Paul Ring •

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Staff of the Texas PUC filed comments with the Commission concluding that HB 4492 -- which creates a program to finance Reliability Deployment Price Adder ("RDPA") charges and Ancillary Service costs above the Commission's system-wide offer cap for the period beginning 12:01 a.m., February 12, 2021, and ending 11:59 p.m., February 20, 2021 (known as "uplift") -- contemplates determining exposure on a net basis inclusive of affiliated entities, a view shared by OPUC and independent REPs, while most gentailers argued that netting is not permitted under the statute.

As previously reported (see details here), the PUC has sought briefing on whether the bill requires offsetting the amounts paid in excess of the Commission's system-wide offer cap by amounts received in excess of the Commission's system-wide offer cap, and, if not, does this offset include amounts received by entities affiliated with the entity that made such payments. Key to this question is the phrase in the statute, "exposed to the costs included in the uplift."

As previously reported by, Texas Representative Chris Paddie sent a letter to the Texas PUC stating his opinion that HB 4492 does not authorize any "netting" of an LSE's costs under the program against any affiliate or other company

However, Staff concluded that, "Taken together, the provisions of Subchapter N form a clear and unambiguous statutory scheme that is designed to preserve the viability of the ERCOT market as a whole by buttressing market participants that incurred Extraordinary Costs financially and preventing them from exiting the market. One of the stated purposes of financing the uplift balance in the manner provided in Subchapter N is to alleviate liquidity issues and reduce the risk of additional defaults in the ERCOT wholesale market by allowing wholesale market participants to repay Extraordinary Costs over a longer period of time. In addition, the Legislature expressly found that Subchapter N serves the public purpose of stabilizing the ERCOT wholesale electricity market. Moving further into Subchapter N, PURA § 39.653(a) allows for financing if the Commission finds 'that such financing will support the financial integrity of the wholesale market and is necessary to protect the public interest, considering the impacts on both wholesale market participants and retail customers.' Finally, PURA § 39.653(e) makes it very clear that proceeds from the financing in excess of the amount of a load-serving entity's Extraordinary Costs must be remitted to ERCOT and credited against the uplift balance."

Staff said, "Having established the context in which the term exposed is used, the next step is to consider the word itself. The definition of exposure includes 'the fact or condition of being exposed: such as ... the condition of being at risk of financial loss.' This definition of exposure conforms with the purposes of Subchapter N -- reducing risk of additional defaults and stabilizing the wholesale market. Viewed in terms of a market participant that was both charged payments and received payments that included ancillary service costs in excess of the Commission' s system-wide offer cap, or one that was charged payments and received payments based on the RDPA -- either on a standalone basis or through an affiliate -- it is likely that such a market participant is at less risk of financial loss than a market participant that was only charged in either of these cases. In fact, the market participant may be at no risk at all. Consequently, applying the plain and ordinary meaning of exposure leads to the conclusion that the Commission must look at both sides of the equation and determine exposure on a net basis."

Staff said that the legislative history of House Bill 4492 further bolsters the conclusion that exposure to extraordinary costs should be calculated on a net basis.

Staff said that, during debate on the Senate floor, Senator Kelly Hancock, the Senate sponsor, laid out Amendment No. 1 to House Bill 4492. "That amendment included much of the language ultimately included the version of House Bill 4492 that was signed by the governor and described above. Senator Campbell and Senator Hancock engaged in the following exchange related to how the $2.1 billion cap on the amount that can be financed through a debt obligation order was calculated," Staff said:

CAMPBELL: "A question has come up about the 2.1 billion cap, where did the cap, setting that cap, where did it come from? And before you answer that part, would you include, does this include netting? We're getting that -- "

HANCOCK: "Yes. "

CAMPBELL: "It does include netting. "

HANCOCK: "Another good question. And so, what we've done with that 2.1 is on ancillary and adder charges there are amounts that you owe and there are amounts that certain participants in that market get paid. If you're a retail electric provider, you know, it's a little bit different. But what we did is we took those participants that both got received funds and those that owed funds into that marketplace and we netted that out and that's really where we came to the 2.l which is simply in that ancillary and adder provision. And so it is a net amount, it's not the gross of what was total, totally owed in that provision, but it was what was owed and what was paid in the net amount."

Staff said, "Senator Hancock unequivocally confirmed that the $2.1 billion reflects the net amount of ancillary services costs and RDPA charges that are owed to ERCOT and are eligible to be financed using Subchapter N. To be consistent, the Commission should determine the exposure of the market participants that will receive financing on a net basis. Otherwise, there is a substantial risk that the amount of exposure documented by Load Serving Entity (LSEs) will exceed the $2.1 billion. In that event, the Commission will be required to devise a method for prorating and possibly prioritizing the remittance of the financing proceeds to market participants. If that becomes necessary, priority should be given to those LSEs who have the greatest exposure, i.e., are at the greatest risk financially because they did not receive, either on a standalone basis or through an affiliate, any offsetting payments."

Staff said, "Even if the Commission is not convinced that Staff's argument conclusively explains the meaning and legislative intent of Subchapter N, the Commission is still empowered to determine a reasonable interpretation of the phrase 'exposed to the costs.' The Legislature gave the Commission discretion to 'provide the process for remitting the proceeds of financing.' The purpose and mandate of PURA § 39.653 is to support the 'financial integrity of the wholesale market' and 'protect the public interest.' In order to serve that purpose, a Debt Obligation Order under Subchapter N must look at the market participants as a whole as well as the whole energy market. Nothing in Subchapter N prohibits the Commission from distributing financing proceeds according to affiliate relationships, and doing so would protect the public interest."

Staff proposed that the definition of affiliated for purposes of netting, shall be, "closely associated with another typically in a dependent or subordinate position."

In separately filed comments, the Coalition of Competitive Retail Electric Providers as well as the joint filing REPs of Just Energy, APG&E, and Southern Federal Power said that netting is required under the law. OPUC likewise supports netting.

In separately filed comments, TXU, Exelon Generation Company, Gexa Energy, Engie Resources LLC, Calpine, and Shell Energy North America (US) LP said that netting is not authorized under the statute or otherwise opposed netting. Several of these companies explicitly supported Rep. Paddie's previously reported letter

Engie said that netting would result in disparate treatment of retail customers

"Retail customers will ultimately be the beneficiary of the financing proceeds and subject to the financing charges. If all retail customers are to be subjected to their load ratio share of the gross financing charges, it only makes sense that they should also be able to include their charges for consumption in the financing. Stated another way, it would be discriminatory for customers to not be eligible to receive financing proceeds for the charges that they incurred, while having to pay their load ratio share of the amount of financing charges incurred by other market participants," Engie said

"Requiring netting would also be anticompetitive as it would subject certain retail electric providers to paying financing charges without allowing them the same benefit of financing as allowed other retail electric providers," Engie said

Opponents of netting also argued that netting would be discriminatory to certain LSEs and would impermissibly pierce the corporate veil

Calpine also notably said that, "The Commission should ... ensure that financing proceeds first go to LSEs that have customers who were exposed to Ancillary Service charges above $9,000, as well as to other Uplift Balance charges that were passed through to their retail customers during the period of emergency. The Commission should require that any financing proceeds awarded to LSEs on this basis be passed through to these customers through refunds. As to those customers who have not yet paid their invoices in full, the LSE should be required to offset any financing proceed payments from ERCOT against the customers' remaining unpaid balances. Only after these customers are made whole should LSEs be eligible to receive financing proceeds to manage their own settlement positions."

"In other words, the financial position of a retail customer's LSE should have no bearing on whether that customer is entitled to receive a refund from the proceeds from the securitization. The most important consideration is whether that particular customer - was exposed to RDPA charges and ancillary service costs above the SWOC," Calpine said

"Calpine ... urges the Commission not to net LSE Uplift Balance exposure against corporate affiliate RDPA and ancillary service payments above the SWOC until all retail customers who have made payments related to the Uplift Balance have been fully refunded for the amounts that were passed through to them. Only after this has been achieved should what remains of the $2.1 billion in Uplift Balance proceeds, be allocated on a 'by Uplift Exposure' basis for first, for LSEs to pay costs that would otherwise be passed through to retail customers (but have not yet been paid) and, second, to pay any other obligations related to RDPA and ancillary service costs above the Commission's system-wide offer cap incurred by such LSE," Calpine said

NRG said that PURA Chapter 39 Subchapter N does not include specific guidance for whether or how to offset or "net" eligible amounts charged to LSEs with amounts paid to the same LSE or its affiliates, and made observations regarding three approaches: Corporate Affiliate Netting; QSE Affiliate Netting; No Netting

Docket 52322

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