Texas PUC Staff Recommend Final Order That Would Decline To Allow Use Of Surety Bonds For Retail Provider Financial Assurance At This Time

Staff of the Texas PUC have filed a recommended proposal for adoption that would adopt changes for letters of credit (LOC) to be used for REP certification purposes, and which would make other changes to the REP certificate rules at 16 Texas Administrative Code (TAC) §25.107

Most notably, Staff recommends that the use of additional financial assurance instruments, such as surety bonds, not be adopted at this time

Staff's proposed preamble states, "The commission agrees that allowing surety bonds as an alternative form of financial assurance may provide more compliance flexibility for REPs. However, additional scrutiny, with the benefit of public feedback, on potential drawbacks and on the necessary details that must be included in a standard template to avoid performance loopholes, is required. Accordingly, the commission declines to permit surety bonds as a form of financial assurance at this time."

As first reported by EnergyChoiceMatters.com, the Texas Retail Electric Provider Coalition had during the rulemaking 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 (details here)

Staff's draft preamble states that the recommended proposal for adoption, "makes extensive revisions to the template language as recommended by REP Coalition in comments and informed by extensive outreach to third-party financial institutions conducted by commission staff."

Staff's draft preamble states, "The commission generally agrees with REP Coalition that fully electronic ILOCs [irrevocable LOCs] are not yet standard industry practice. However, the commission disagrees that this shift will result in a meaningfully reduced pool of available financial institutions. Since §22.71 [prior rule requiring electronic LOCs] was adopted, the commission has worked with a number of financial institutions to effectuate electronic-only filing, draws, and cancellations. This historical experience combined with continued outreach efforts to financial institutions by commission staff and the significant revisions that have been made to the rule and template support the conclusion that REPs will continue to have access to a wide pool of financial institutions under the adopted rule."

One area in which Staff does not recommend full adoption of the REP Coalition's proposals concerns allowing the use of an LOC that "substantially complies" with the standard form LOC

The Texas REP Coalition had 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

The REP Coalition had said, "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".

Staff's draft proposal for adoption would not adopt the REP Coalition's broad request concerning the use of an LOC that "substantially complies" with the standard form LOC, but would allow substantial rather than strict compliance for certain exhibits, which was a specific example that REPs had raised as benefiting from substantial rather than strict compliance

Specifically, Staff proposed that, "The commission declines to modify the rule to only require substantial compliance with the ILOC [irrevocable LOC] template as requested by the REP Coalition. A REP or financial institution may not deviate from the body text of the template commission-prescribed form for ILOCs to ensure the commission may draw on the ILOC without issue and maintain uniform practices for handling ILOCs."

However, Staff also said that, "the [proposed] adopted rule allows for substantial compliance for specific exhibits where action on an ILOC may be taken by the commission, REP, or financial institution on behalf of the REP (i.e., amendments, cancellations, and non-renewals). The commission revises the relevant provisions for additional clarity regarding 'substantial compliance.'"

Additionally, the REP Coalition had expressed concern with the original proposal that would have required, for an LOC, the signature of an executive officer of the issuing bank

Staff agreed with this concern and recommends that the final rule require, for an ILOC, a signature from a representative of the issuing bank with the authority to issue an ILOC, rather than requiring that such signature must be from an executive officer

Staff further addressed these concerns, explaining that, in the proposed final rule, "the commission substantively rewrites §25.107(f)(4)(F)(iv) to broaden what may be considered other means of authentication by adding new §25.107(f)(4)(F)(iv)(I)-(III) which identify a non-exhaustive list of what constitutes 'other means of authentication.' Specifically, such means may include: a written statement from the issuing financial institution verifying the authenticity of the ILOC; documentation from the issuing financial institution identifying the persons authorized to sign the irrevocable stand-by ILOC on behalf of the financial institution (e.g., a certificate of incumbency); or a sworn affidavit signed by a principal or executive officer of the REP attesting to the authenticity of the ILOC (which may take the form of Attachment C-2C from the REP Certification Form). Additionally, commission staff will communicate with the REP and the applicable financial institution to verify an ILOC if necessary. This provides additional flexibility by not limiting the means by which the commission or an issuing financial institution can verify a ILOC for filing purposes as well as for draws and terminations. The commission also revises §25.107(f)(4)(F)(iii)(II) by adding a parenthetical clarifying that the date an ILOC is signed by the financial institution is the date of issuance."

The draft proposal for adoption also clarifies and sets separate compliance deadlines for (1) the filing an electronic LOC under a prior rule, and (2) the filing a revised LOC to conform to the changes required under the instant proposed final rule (§25.107)

Staff proposes that, beginning on the effective date of the proposed final rule, any new ILOC executed for purposes of compliance with §25.107 must use the updated Commission template established under the instant rulemaking, and must be filed electronically in Project No. 37919.

In terms of the content of the ILOC, existing ILOCs may continue to use the prior template until August 15, 2027, and may be maintained or amended using that template until that date, Staff proposes

However, per a prior rule, by March 5, 2027, any REP relying on an existing physical ILOC must ensure that its current ILOC has been electronically filed in Project No. 37919 in accordance with separate rule §22.71. A REP is not required to transition to the new ILOC template by March 5, 2027, Staff proposes

A REP relying on a physical ILOC that has been previously scanned and filed is in compliance with the March 5 deadline, Staff proposes

"By August 15, 2027, all existing ILOCs must be re-issued or amended to conform to the updated commission template. Accordingly, March 5, 2027 serves as the deadline for electronic filing of existing ILOCs, while August 15, 2027 serves as the deadline for transition of all existing ILOCs to the updated template," Staff proposes

The Texas REP Coalition had also recommended that the PUC 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

In response, Staff's draft preamble states, "The commission does appreciate that some financial institutions, which are not regulated by the commission, both prefer to deliver the original ILOC to the beneficiary and are not comfortable -- or accustomed to -- the commission’s interchange. To provide comfort to such financial institutions, the commission modifies the ILOC template to include a new e-mail address that financial institutions can use to deliver electronic ILOCs to the commission. However, to comply with the commission’s filing rules, the ILOC will not be considered submitted until it is also properly submitted to the commission’s interchange by the REP. These revisions best satisfy the concerns of financial institutions and the commission until the commission is able to further modernize it’s document submission practices and interfaces."

Staff's draft would also revise the definition for the term "affiliate" as used in the REP certification rules

Under Staff's recommendation, the definition for affiliate would state: "In contexts where the term refers to an affiliate of the REP or an affiliate of an applicant, any subsidiaries or sister companies of the REP or applicant that are registered or certificated with the commission or are registered with ERCOT as a market participant; and any company in the chain of corporate ownership of the REP or applicant up to the ultimate corporate parent company. In contexts where the term refers to an affiliate of the ultimate parent company of a REP or applicant, the term means any company with common control or beneficial ownership (i.e., direct or indirect ownership of at least 5.0% of voting securities) of the ultimate parent company. A principal may be an affiliate".

Project 59288