ERCOT Offers Alternative Lower Collateral Proposal For REPs Under Uplift Financing Program

ERCOT Remains Opposed To Volumetric Mechanism For Calculating Uplift Financing Charges As Favored By Most REPs

August 23, 2021

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In rebuttal testimony, ERCOT rejected proposals from several retail electric providers to calculate charges to recover costs of the uplift financing program under HB 4492 on a $/MWh basis. ERCOT continues to propose to collect costs via a daily lump sum charged to LSEs based on the load ratio share for the day prior.

ERCOT also said that a lower collateral amount for REPs related to uplift charges may be reasonable and offered an alternative proposal

The costs stem from implementation of 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")

See our prior story for more on REPs' volumetric cost recovery proposals and additional background

While ERCOT's daily lump sum, based upon load ratio share, was proposed in ERCOT's initial testimony, NRG had represented, in its responsive testimony, that ERCOT had indicated during a technical conference that use of a $/MWh fee was, in NRG's words, feasible, potentially indicating room for movement on the issue.

However, ERCOT in rebuttal testimony continues to propose the daily lump sum, based upon load ratio share

"ERCOT proposes to calculate Uplift Charges by first establishing an amount that must be collected each day to satisfy ERCOT’s obligations to the bankruptcy-remote special purpose entity ('SPE'). ERCOT will allocate the amount that needs to be collected for each day among all LSEs that have metered load for that day and have not qualified for an opt-out from the Uplift Charge. The allocation will be based on each LSE’s load ratio share for that day," ERCOT said in rebuttal testimony

ERCOT said that this approach is superior to the REPs' sought $/MWh approach

"ERCOT determined its proposed method for calculating the Uplift Charge will help ensure timely distribution of securitization proceeds, alleviate liquidity issues, and ensure that the structuring and pricing of the debt obligations results in the lowest Uplift Charges. A $/MWh approach would not," ERCOT said

"A $/MWH charge would likely delay the closing of the debt obligations, which would exacerbate both the liquidity issues in the market and the risk of additional market participant defaults, contrary to the legislative intent expressed in PURA § 39.651(b)," ERCOT said

"[I]f ERCOT is required to assess Uplift Charges on a $/MWh basis, credit rating agencies will likely require ERCOT to provide load forecasts specific to those LSEs responsible for the Uplift Charges in order to run stress tests before providing a credit rating for the debt. ERCOT, however, does not have any load forecasts specific to the LSEs that will be paying Uplift Charges, because ERCOT does not know which LSEs will opt out. Therefore, those forecasts would have to be developed," a witness for ERCOT said

"My understanding is that the load for this yet-unknown group of LSEs would need to be forecasted for the proposed life of the debt, which is 30 years. These forecasts would also need to be maintained throughout the life of the debt. Additionally, the credit rating agencies typically require analysis of the accuracy of historical load forecasts for the past five years. ERCOT does not have this historical information," a witness for ERCOT said

ERCOT further said that, "A $/MWh charge would create more volatility and seasonality risk in the collection and transfer of the Uplift Charges, which would likely result in higher Uplift Charges than ERCOT’s proposed methodology."

"First, using a $/MWh fee approach would result in volatility as it relates to amounts collected to service the debt obligation, because collection amounts will depend on load volume. Second, there may be volatility in the $/MWh fee charged year over year, as adjustments must be made to the fee to account for over- or under-collections from one year to another," ERCOT said

"Allocating a fixed amount to load based on load ratio share for a particular day, rather than allocating an annually set fee to each MWh, ensures that the amounts collected by ERCOT each day remain consistent, even if there are subsequent adjustments to load meter data. For example, assume ERCOT allocates and collects $10,000 for a particular day based on load ratio share. If, subsequent to that initial allocation and collection process, ERCOT receives updated meter data that changes entities’ load ratio share for that day—a fairly typical occurrence—ERCOT would not owe back any of the original $10,000 amount it collected to load. Rather, adjustments would just be made among the LSEs that had load for that day, with some owing a greater portion of the $10,000 for that day, and some owing a lesser portion, based on the net change to their load ratio share," ERCOT said

Collateral

As previously reported, several REPs objected to ERCOT's initial proposal that each Counterparty representing a QSE for an LSE shall post collateral equal to four months of the LSE's estimated uplift charges under the program.

ERCOT said in rebuttal testimony that, "Although ERCOT believes that it should be allowed to hold some amount of collateral specific to the Uplift Charge obligation, it is open to reasonable alternative collateral calculations beyond that calculation proposed in ERCOT's opening testimony."

ERCOT said that, "to the extent the Commission does not wish to adopt the original four-month proposal, ERCOT proposes collateral of a minimum of two months estimated Uplift Charge payments. Under this proposal, estimated collateral charges would be updated monthly based on the average of the Uplift Charges for the most recent two months available."

ERCOT said that this level of collateral is appropriate (versus a lower amount) because, among other reasons, it could take up to 21 days to effectuate a mass transition of a REP's end-use accounts, should such REP default and be subject to a mass transition of customers. Further, ERCOT said that there is expected to be a 7-day lag time between the day in which an LSE's activity occurs and when invoices are due for the Uplift Charges based on that activity (this is based on ERCOT's use of initial settlement data to invoice uplift charges). Therefore, ERCOT estimates that it will need to collect collateral for a minimum of one-month's worth of Uplift Charges in order to ensure that it will have funds to cover all Uplift Charges for REPs that may default.

Docket 52322

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