Draft Texas Proposal For Adoption Would Require $1.5 Million Letter Of Credit For Mid-Size Retail Electric Providers, With No Higher Requirement For Large REPs (Applicable To Existing REPs)
Also Raises Minimum Letter Of Credit For Smaller & Start-up REPs
Final Proposal Revises PUC's Process For Suspending REP's Ability To Enroll New Customers
Proposal Includes Changes To Financial, Technical Requirements For REP Certification
April 5, 2023 Email This Story Copyright 2010-21 EnergyChoiceMatters.com
Reporting by Paul Ring • email@example.com
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Texas PUC Staff have filed a draft proposal for adoption (PFA) to modify the retail electric provider certification rules
The draft proposal for adoption would provide that a person already certified as an Option 1 REP would be required to come into compliance with the modified certification rules by March 5, 2024. REPs will need to submit a separate compliance filing; the draft PFA would not allow REPs to rely on its semi-annual or annual report as this compliance report (nor allow a REP to skip a semi-annual or annual report due to the filing of a compliance report)
A change in the complaint response deadline for REPs would take affect sooner (noted below)
Notably, the draft PFA would modify that financial requirement for Option 1 REPs under both 16 TAC § 25.107(f)(1)(A) and § 25.107(f)(1)(B)
With respect to § 25.107(f)(1)(B), the rules governing a REP which uses a letter of credit to show the requisite access to capital, the draft PFA proposal provides for varying levels for the letter of credit, based on REP size. However, the draft PFA would use a two-tiered structure, rather than four tiers as included in a proposal for publication
Specifically, the draft PFA provides that a REP may meet the financial requirement by maintaining an irrevocable stand-by letter of credit with a face value based on the number of electronic service identifiers (ESI IDs) the REP serves.
For a REP with less than 50,000 ESI IDs, the required letter of credit would be $750,000, under the draft PFA. For a REP with 50,000 or more ESI IDs, the required letter of credit would be $1.5 million, under the draft PFA.
For comparison, the proposal for publication included more tiers, with the initial tier (<20,000 ESI IDs) requiring only a $500,000 letter of credit, with the highest tier (>300,000 ESI IDs) requiring a $3 million letter of credit.
Additionally, the draft PFA provides that, for the first 24 months a REP is serving load it must maintain not less than one million dollars in shareholders’ equity
More specifically, the language governing REP financial requirement for certification under the draft PFA are as follows:
(1) Access to capital. A REP must maintain the requirements of subparagraph (A) or (B) of this paragraph on an ongoing basis.
(A) A REP may maintain an executed version of the commission approved standard form irrevocable guaranty agreement.
(i) The guarantor must be:
(I) One or more affiliates of the REP;
(II) A financial institution with an investment-grade credit rating; or
(III) A provider of wholesale power supply for the REP, or one of such power provider’s affiliates, with whom the REP has executed a power purchase agreement.
(ii) The guarantor must have:
(I) An investment-grade credit rating; or
(II) Tangible net worth greater than or equal to $100 million, a minimum current ratio (defined as current assets divided by current liabilities) of 1.0, and a debt to total capitalization ratio not greater than 0.60, where all calculations exclude unrealized gains and losses resulting from valuing to market the power contracts and financial instruments used as supply hedges to serve load.
(B) A REP may maintain an irrevocable stand-by letter of credit with a face value as determined in clause (i) of this subparagraph, based on the number of electronic service identifiers (ESI IDs) the REP serves in the manner prescribed by clauses (ii) and (iii) of this subparagraph. Additionally, for the first 24 months a REP is serving load it must maintain not less than one million dollars in shareholders’ equity in accordance with clauses (iv) and (v) of this subparagraph.
Number of ESI IDs Required Value of
Letter of Credit
< 50,000 $750,000
≥ 50,000 $1,500,000
(ii) The number of ESI IDs includes all customer classes to which a REP provides retail electric service.
(iii) As the number of ESI IDs served by the REP increases, the irrevocable stand-by letter of credit must be adjusted to reflect the required value as determined in clause (i) of this subparagraph. As the number of ESI IDs served by the REP decreases, the irrevocable stand-by letter of credit may be adjusted to reflect the required value as determined in clause (i) of this subparagraph.
(iv) For the first 24 months a REP is serving load, a REP must not make any distribution or other payment to any shareholders, affiliates, or corporate parent’s affiliates if, after giving effect to the distribution or other payment, the REP’s shareholders’ equity is less than one million dollars. Distributions or other payments include dividend distributions, redemptions and repurchases of equity securities, and loans to shareholders or affiliates.
(v) After a REP has continuously served load for 24 months, a prescribed amount of maintained shareholders’ equity is no longer required.
Concerning the financial requirement, the draft PFA's preamble states, "The commission agrees with ARM that a two-tiered structure is appropriate for letters of credit and revises §25.107(f)(1)(B) accordingly. However, in acknowledgement of the concerns raised by other commenters about barriers to entry and the financial burden represented by increasing letter of credit amounts, the commission declines to increase the lowest tier of letter of credit amount to $1 million. The commission instead revises the minimum letter of credit amount to $750,000 for REPs that have enrolled fewer than 50,000 ESI IDs. The second tier is correspondingly revised to require a minimum letter of credit amount of $1.5 million if a REP has enrolled 50,000 ESI IDs or more."
Concerning the financial requirement, the draft PFA's preamble states, "The market exits and defaults among REPs after Winter Storm Uri demonstrated that a $500,000 letter of credit is not always sufficient to cover the defaulting REP’s financial obligations. A higher barrier to entry is appropriate if that barrier is required to ensure that each REP has sufficient financial resources to fulfill its financial obligations. Further, the two-tiered system will ensure that REPs that serve the largest number of customers have
sufficient financial resources to meet their correspondingly greater financial obligations. obligations that correspond to the number of customers they serve."
Regarding another financial issue which arose during the proceeding, the draft PFA allows a REP to use a segregated cash account (among other typical instruments) to hold prepayments. The original proposal for publication would not have allowed the use of a segregated cash account for prepayments (instead allowing only an escrow account or an irrevocable stand-by letter of credit)
Concerning REP certification, the draft PFA provides that in no instance may any of the following persons control the REP or be relied upon to meet the requirements of subsections (d) and (e) of this section (e.g. the basic requirements and technical and managerial requirements):
(A) A person who was a principal of a market participant, at any time within the six months prior to the market participant:
(i) experiencing a mass transition of the REP’s customers under §25.43 of this title;
(ii) having their ERCOT SFA, or similar agreement for an independent organization other than ERCOT terminated; or
(iii) exiting an electricity or gas market with outstanding payment obligations that, at the time of the application or amendment, remain outstanding; or
(B) A person who, by commission order, is prohibited from serving as a principal for any commission-regulated entity.
Compared to the current rules, this draft PFA provision now applies the disqualifying factors to principals at a REP up to 6 months prior to the relevant event, rather than just being a principal at the time of the event.
The draft PFA declines to publish a list of which market participants have experienced one of the triggering events noted above. "It is the responsibility of each REP to inquire into and investigate its employees and contractors for compliance with this section," the draft PFA states
The draft PFA modifies the proposal for publication concerning when REPs must apply for an amended certificate with respect to ownership changes
Under the draft PFA, a REP must file for an amendment when the following occurs: a change in control of the REP including a change in the controlling owner, a corporate restructuring that involves the REP, a transfer of a REP certificate, or a change in the persons that have a minimum of ten percent ownership of the REP or a controlling parent of the REP, but not including a change in the ownership percentages of individual owners.
This narrows the proposal for publications language which had broadly required an amendment for "a change in ownership."
The draft PFA modifies the proposal for publication's provisions concerning the ability of the Commission to suspend a REP's ability to enroll new customers, outside of a revocation
Notably, only the Commission, and not its presiding officer (as had been originally proposed in the proposal for publication), may order the suspension of a REP's ability to enroll new customers, except for the scenario described as follows
The PFA does provide that, "The executive director may suspend a REP’s ability to acquire new customers without prior notice or opportunity for a hearing in the form of a cease and desist order if the executive director determines that providing notice and an opportunity for a hearing is impracticable and that the conduct of the REP meets the criteria for issuing such an order under PURA §15.104(a)(2)."
The draft PFA provides that, "In determining the practicability of providing notice and an opportunity for hearing, the executive director may consider, among other relevant factors, whether immediate action is necessary to ensure the REP is able to provide continuous and reliable service to its current or potential customers, reduce the risk of the REP exposing its current or potential customers to a mass transition event, or otherwise ensure the REP is able to meet its financial obligations. For purposes of determining whether the criteria of PURA §15.104(a)(2) are met, the statutory term continuous and adequate electric service includes continuous and reliable electric service as defined in this section. If the executive director issues a cease and desist order suspending a REP’s ability to acquire new customers without prior notice or opportunity for a hearing, the procedural provisions of §25.54(d)(2) of this title (relating to Cease and Desist Orders) apply."
The draft PFA provides that a REP that has its ability to acquire new customers suspended must cease, within three working days, the solicitation or enrollment of new customers and the applicable independent organization will be directed to report to commission staff, on a weekly basis, any new customers that have been added by the REP.
Notably, the draft PFA states that the term "enrollment" means the act of executing a contract with an applicant for the provision of electric service but does not include renewing the contract of an existing customer.
The draft PFA provides that suspension of the ability to acquire new customers does not impact a REP’s obligation to timely initiate service to a customer that completed enrollment with the REP prior to the effective date of the suspension, even if the scheduled service initiation date falls within the suspension period.
The draft PFA would decline to prohibit a REP’s affiliates from seeking REP certificates or limit all affiliates of a REP from using a maximum of five trade names across all affiliates, as proposed by Octopus Energy
"More investigation would be required to understand the benefits and harms of such a proposal, which is beyond the scope of this rulemaking project," the draft PFA states
The draft PFA would set a deadline of 15 days for REPs to respond to informal customer complaints filed with the PUC (shortened from 21 days). The draft PFA does clarify that REPs still have 21 days to respond to complaints filed directly with the REP by the customer
The 15-day response time for informal complaints filed at the PUC shall take effect September 1, 2023, the draft PFA states