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Texas Retail Providers Warn Proposed PUCT Rules On Letters Of Credit Could Increase Costs
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The Texas Retail Electric Provider Coalition cautioned the Texas PUC that certain changes proposed for letters of credit (LOC) to be used for REP certification purposes may result in fewer financial institutions being willing to offer LOCs, decreasing competition for LOCs and increasing costs to obtain and maintain an LOC
The REP Coalition solicited feedback from several financial institutions regarding the LOC as proposed in an update to the REP certification rules (see details on the proposed rules here)
Among other things, the proposed rules implement electronic LOCs, with the requirement to file an LOC electronically previously adopted in another rule
Based on redlines and other feedback from such financial institutions to the REPs (included in the REP Coalition's comments on an anonymized basis), "the Texas REP Coalition is concerned that the pool of financial institutions willing to accept the LOC as proposed with the requirements proposed may not be as inclusive as it could be and will negatively impact a REP’s ability to obtain LOCs at competitive rates."
The REP Coalition said, "The range of edits indicate that a draw on an LOC executed via email is not yet a standard industry practice. It also appears that fully electronic LOCs are not yet industry standard."
"The Texas REP Coalition appreciates the difficulty in striking the right balance between establishing efficient procedures related to drawing on, amending, and cancelling LOCs and ensuring that these procedures do not compromise the integrity of an LOC, which is a secured financial instrument. As proposed, the Texas REP Coalition believes the Commission’s standard form irrevocable stand-by LOC is still a work-in-progress and respectfully requests the opportunity to continue to work with Commission Staff to refine the language before final adoption," the REP Coalition said
The Texas REP Coalition further proposed that the rule should allow for the submission of an LOC that "substantially complies" with the standard form LOC adopted by the Commission, with substantial compliance meaning that the LOC must satisfy all requirements in 16 TAC § 25.107(f)(4)(F)(ii), while allowing some variation in other wording and provisions
Allowing LOCs which substantially comply with the PUC's standard form LOC is appropriate, the Texas REP Coalition said, given the amount of proposed redlines that financial institutions have provided concerning the new standard form LOC
"Including this [substantially complies] language in the rule makes it clear that the Commission will accept an LOC that contains all substantive elements of the standard form LOC but varies in some respects to meet the requirements of an individual financial institution. For example, several of the sample redlines included in Attachment A struck references to one of the proposed exhibits to the standard form LOC because it does not adhere to the standard processes or forms developed by the bank. Allowing substantial rather than strict compliance also builds in flexibility to incorporate evolving technology that may bring opportunities for effective and efficient process of LOCs that cannot be presently contemplated," the Texas REP Coalition said
The Texas REP Coalition also recommended that the Commission continue to accept a physical original LOC in its current form, in addition to any electronic copy of an LOC (including a scanned PDF of a physical original) filed via the PUC's online Interchange
The Texas REP Coalition, citing ERCOT's LOC process, said that financial institutions may impose a requirement that the entity entitled to draw on the LOC must possess the physical LOC even where LOC submission is done electronically. Thus, the REP Coalition said, the PUC should allow REPs to provide a physical original LOC in addition to an electronic filing, so that these financial institutions are not removed as viable sources for an LOC
The Texas REP Coalition reported that, "ERCOT estimates that about 70-80% of LOCs are submitted physically, which implies that even if a financial institution will accept a demand to draw on an LOC that is presented via email, the financial institution may also require that the physical original LOC is maintained by ERCOT to reduce the risk of fraudulent draw attempts."
"[T]he Texas REP Coalition respectfully urges the Commission to revisit the decision to eliminate physical filing of LOCs, and, at a minimum, to allow REPs to continue to file physical original LOCs with the Commission in addition to filing an electronic copy (such as a scanned PDF)," the Texas REP Coalition said
Concerning LOC compliance, the REP Coalition noted that, as previously reported under a prior rulemaking, a REP must replace each physical LOC on file with the Texas PUC with an LOC filed electronically no later than March 5, 2027.
The REP Coalition also noted that the current proposed changes to the LOC rules would include revisions to the PUC's standard form LOC for REPs.
Accordingly, the REP Coalition noted the potential for the existing March 5, 2027 electronic LOC obligation deadline, and the potential new obligations from the current LOC rulemaking, to be in disharmony, thus raising compliance costs
The REP Coalition said, "If changes to 16 TAC § 25.107 and the standard form LOC are effective before March 5, 2027, it is not clear whether this deadline will become a deadline for REPs to submit a wholly new original electronic LOC that conforms with the new standard form irrevocable stand-by LOC that is approved in this rulemaking. The Texas REP Coalition recommends against such an interpretation and supports an alternative approach that takes into account the significant financial implications of switching out an LOC for the sole purpose of complying with regulatory changes that do not affect the validity of an existing LOC."
The REP Coalition said, "Specifically, the Texas REP Coalition recommends that the March 5, 2027 deadline should be the deadline for a REP with a physical LOC on file to file an electronic copy of that LOC (such as a scanned PDF) in Project No. 37919. It is important to note that the current LOCs on file comply with the existing requirement that an LOC automatically renew. Thus, every LOC on file maintains its effectiveness. March 5, 2027 should not be the deadline to submit an entirely new LOC, which would unnecessarily increase the cost of REPs to provide service to customers in Texas."
The REP Coalition said, "One factor affecting the cost would be that under this approach, a REP must maintain two LOCs that serve the same regulatory purpose for an unknown period of time. Using a REP that serves over 50,000 ESIIDs as an example, the REP would already have posted $1.5 million in collateral for the LOC on file with the Commission in Project No. 37919 to satisfy the access to capital requirements in 16 TAC § 25.107(f)(1)(B). The capital supporting the LOC comes off the REP’s books and is removed from working capital. To replace that LOC and maintain continuous compliance with the access to capital requirements while the REP is waiting for the cancellation of the first LOC, the same REP would need to post an additional $1.5 million in collateral to secure a second LOC in the new format. The REP would then have to maintain both LOCs until the original LOC on file with the Commission is returned to the financial institution that issued it and cancelled. If the REP also had a $100,000 LOC on file to protect customer deposits, the REP would have to use the same process for that LOC. In addition to posting double the collateral, the REP would also have to pay two sets of any fees charged by the financial institution in connection with an LOC. Depending on the amount of the LOC, these fees can more than $4,000 per day in the aggregate for a REP with a large market share, plus origination fees."
Addressing other aspects of the REP certification rulemaking, the Texas REP Coalition recommended that the PUC add surety bonds to the methods available to satisfy both (1) the rule's requirements related to access to capital and (2) the rule's requirements related to customer deposits and/or prepayments.
As previously reported, the proposed rule would update the definition of the term "affiliate" as used in the REP certification rules
The proposed rule would define affiliate to mean, "any company that is related by common control with another company. Any company in the immediate corporate family or a company in the direct or indirect chain of corporate ownership up to the ultimate parent company is an affiliate unless the context indicates otherwise."
The REP Coalition expressed concern that the proposed definition of affiliate uses vague terms such as "common control" and "immediate corporate family."
The REP Coalition proposes to revise the existing rule's definition of affiliate to replace current references to "public utility" with the term "retail electric provider", and to additionally define an affiliate as also including, "any person who is required to hold a power generation company registration or retail electric provider certificate issued by the commission or is a registered market participant with ERCOT and shares the same ultimate parent company as a retail electric provider."
The REP Coalition's definition of affiliate would specifically be:
(A) a person who directly or indirectly owns or holds at least 5.0% of the voting securities of a retail electric provider;
(B) a person in a chain of successive ownership of at least 5.0% of the voting securities of a retail electric provider;
(C) a corporation that has at least 5.0% of its voting securities owned or controlled, directly or indirectly, by a retail electric provider;
(D) a corporation that has at least 5.0% of its voting securities owned or controlled, directly or indirectly, by:
(i) a person who directly or indirectly owns or controls at least 5.0% of the voting securities of a retail electric provider; or
(ii) a person in a chain of successive ownership of at least 5.0% of the voting securities of a retail electric provider;
(E) a person who is an officer or director of a retail electric provider or of a corporation in a chain of successive ownership of at least 5.0% of the voting securities of a retail electric provider; or
(F) any person who is required to hold a power generation company registration or retail electric provider certificate issued by the commission or is a registered market participant with ERCOT and shares the same ultimate parent company as a retail electric provider.
Project 59288
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May 26, 2026
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Copyright 2026 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com
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