ERCOT market participants are grappling with the resulting financial fallout from winter storm Uri, which devastated Texas in February. Many are now familiar with actions the Texas Public Utility Commission (PUCT) took during the weather event, moves made with the intent to bring and maintain as much generation online as possible.
Most notable, the commission ordered ERCOT to implement a temporary adjustment to the scarcity pricing mechanism, which is designed to result in real-time prices reaching the system-wide high offer cap at the statutory maximum of $9,000/MWh during the height of the forced outages.
Now, more than two months removed from the storm, the financial impacts are having serious repercussions across the ERCOT market. Several retail electric providers have filed for bankruptcy, lawsuits are underway against a wide swath of market participants and regulators (ERCOT, the PUCT, generators, retail electric providers [REPs], gas utilities, etc.), and countless market participants are faced with paying record-high bills for a range of reasons.
Those factors include the need to procure energy in the real-time market during scarcity conditions, to obtain high-priced gas supplies, to cover positions when their resources incurred outages, or exposure to uplift of default amounts owed to ERCOT. Complicating that, ERCOT has failed to pay many who did perform during the storm due to the short payment of some market participants, which means those who performed may not soon realize revenue associated with that performance. Additionally, the higher prices for power and ancillary services prompted ERCOT to substantially increase counterparty collateral requirements. Last month, the PUCT issued an order in Docket 51812 extending the deadline to dispute ERCOT invoices related to the winter event from 10 business days (under the current ERCOT protocols) to six months. Since this order, the commission has taken no additional action to address issues related to settlement invoices resulting from the storm.
Winter Storm Financial Aftermath
The high ERCOT settlement invoice amounts have caused some market participants to default entirely on their financial obligations to the grid manager, leading to involuntary termination and exit from the market, mass transition of some retail customers, and leaving a high amount of “unpaid bills.” In anticipation of defaulting, others have voluntarily terminated their registrations with ERCOT, attempting to exit before materially breaching their market participant agreements for nonpayment. Two REPs have entered into payment plans with ERCOT, and others may follow. Non-opt-in entities (NOIEs), like the Brazos and Rayburn County electric cooperatives, have failed to satisfy their payment obligations but continue to operate in ERCOT under bankruptcy court protection and supervision. Currently, ERCOT has reported short payments (i.e., payments due but unpaid) related to the winter weather event totaling $2.9 billion; however, this amount is expected to fluctuate some as bills are paid and other amounts are disputed. The plan to satisfy this debt is a default uplift process wherein other market participants pay this balance over time.
ERCOT on April 14 unveiled a plan to implement a default invoice process. Under the ERCOT protocols, default invoice amounts are capped at a monthly total of $2.5 million, meaning it could take more than 96 years for ERCOT to recover the full amount being uplifted. For now, ERCOT anticipates that only the short payment amounts due from market participants that have entered into payment plans with ERCOT will be excluded from the total default uplift amount. The substantial amounts owed by NOIEs, including cooperatives and municipal utilities, will be included. At this time, the amount owed by the NOIEs make up the vast majority of the amount being uplifted.
ERCOT’s filing indicates that it will not issue default uplift invoices until after the current Texas Legislative session (ending no sooner than May 31). acknowledging the possibility that a financing bill may pass to assist market participants in paying down their debt or allowing ERCOT to securitize the default amount immediately, so it can pay those to whom it has outstanding payment obligations. Currently, ERCOT anticipates issuing default uplift invoices sometime in summer 2021, unless the Texas Legislature or the PUCT directs it otherwise.
Which Entities Will Receive Default Uplift Invoices?
Absent legislation or a commission order to the contrary, ERCOT indicated it intends to issue default uplift invoices to all entities that were active in the market in the month before the month in which the short payments being recovered occurred (the “reference” month), and that are either still active in the ERCOT, or that voluntarily terminated ERCOT registration after the short payments being recovered occurred.
As an example, consider short payments from February 2021: each counterparty of qualified scheduling entities (QSEs), or congestion revenue rights account holders (CRRAHs) that had activity in January 2021 may be allocated a share of the short-paid amounts for settlement invoices with payment due dates in February 2021. Similarly, each counterparty of QSEs or CRRAHs with activity in February 2021 may be allocated a share of the short pays for settlement invoices with payment due dates in March 2021. This means that new market participants (i.e., those with no market activity in the reference month) will not receive default uplift invoices for the short-paid month. Additionally, this means that actions during the winter storm likely will not have an impact on any market participant’s share of the uplift.
Additionally, an entity that voluntarily terminates its ERCOT registration after the date of a short pay event will remain responsible for its entire unrecovered share of responsibility for the outstanding short payment amounts (default uplift ratio share) following its termination. Upon a voluntary termination, ERCOT will require the terminating entity to provide financial security in the amount of their entire default uplift ratio share, up to its maximum total potential exposure (TPE). As most of these exiting entities are doing so because they lack adequate financial resources to continue operating, one could expect a number of them will not be able to post this collateral assessment.
This plan also does not take into consideration the time value of money in that an existing market participant is expected to, in practice, pay its entire 90+ year uplift allocation to exit the market. It appears this is designed to keep market participants in the market until after the legislative session.
How Are Default Uplift Amounts Calculated?
Each entity’s default uplift ratio share will be based on the entity’s share of activity in the ERCOT market in the month before the month in which the short payments being recovered occurred. The calculation is based on the pro-rata share of MWhs that the QSEs or CRRAHs assigned to that counterparty, contributed to the counterparty’s maximum MWh activity ratio share in the month before the month in which the short pays being collected occurred. It does not account for any dollars associated with the MWh activity, which means the ratio is currently skewed toward CRRAHs despite their MWh activity not being associated with large dollar amounts. A description of the calculation may be found in ERCOT Protocol 9.19.1.
Currently, ERCOT has estimated default uplift shares for February short pays by market segment. A recent market notice confirms that individual counterparty share reports have been posted to the management information system portal. The notice additionally advises counterparties that they are required to maintain financial security or an unsecured credit limit at an amount equaling or exceeding its total potential exposure (TPE). The potential uplift component of the TPE analysis contemplates including one year’s worth of expected default uplift invoices ($30 million). ERCOT is adjusting the potential uplift component of TPE in two equal $15 million amounts, the first occurred on April 29, the second will occur on May 17.
Additional consideration of the default uplift invoicing process is ongoing in NPRR1074.
—Alaina Zermeno is an attorney in Husch Blackwell LLP’s Austin, Texas office and is a member of the firm’s Energy & Natural Resources industry team. Chris Reeder is an Austin-based partner with Husch Blackwell LLP, and co-leads the firm’s Energy Regulation practice. Maria Faconti is an Austin-based partner with Husch Blackwell, where she provides regulatory guidance to energy and renewable development clients.