United States: A Legislative Session In Review: Taking A Look At Key Energy Bills That Did (and Did Not) Pass During The 87th Regular Session

After Winter Storm Uri devastated the ERCOT grid, calls for industry reform rang out across the state of Texas. For the past few months, public hearings and floor debates have considered wide-ranging proposals to harden the ERCOT system against extreme weather events and address the financial consequences of the storm. The Legislature considered numerous bills dealing with issues such as energy and ancillary services repricing, market rules and price formation, generation weatherization, ERCOT and Texas Public Utility Commission ("PUCT") reform, debt securitization, and the appropriate role and accountability of renewable resources in securing reliability of the grid. Below we provide an overview of the most significant energy legislation proposed during the recent Texas legislative session, both related and unrelated to Winter Storm Uri fallout. The Legislature passed bills that will affect all segments of the Texas energy economy, which collectively will prompt significant change in the years ahead. We have described bills that "passed" as those that have been enrolled or have already been signed into law by the Governor (Bills that have an asterisk in this article have been signed by the Governor.). We note that the veto period extends for 20 days post-session, which ended May 31^st , so as of this writing it remains possible the Governor may veto some of these bills, though we have no indication he intends to do so. We will update this post after the veto period expires to note any such vetoes.

Energy Bills that Passed:

SB 3*: An omnibus bill addressing various issues falling largely within PUCT and Railroad Commission ("RRC") jurisdiction, with some provisions also amending the Water Code. Key provisions include, but are not limited to:

• Resource Weatherization
  • Requires generation resource and transmission service weatherization according to reliability standards adopted by the PUCT. Notably, the bill includes no funding mechanism to reimburse owners for this new cost, and separate bills that were intended to provide a funding mechanism outside of utility ratemaking proceedings (HB 2000 and HB 2275) did not pass.
  • Requires ERCOT to inspect facilities to ensure compliance.
  • Provides for penalties of up to $1,000,000 per day, per violation, of the weatherization provisions of the Utilities Code, and of the Natural Resources Code.
  • Requires weatherization of certain "critical" gas supply chain facilities according to rules adopted by the RRC and provides penalties for noncompliance.
  • Requires the RRC to inspect gas supply chain facilities for compliance with weatherization measures implemented by RRC rules and requires the RRC to report violations to the Attorney General that are not cured within a reasonable time. The Attorney General shall initiate a suit to recover a penalty for the violations.

• Creation of Texas Electricity Supply Chain Security and Mapping Committee
  • Requires the PUCT and RRC to collaborate to designate and map out critical gas supply chain facilities for periods of emergency, to designate priority electricity service needs during extreme weather events and to designate sources in the supply chain necessary for operating critical infrastructure.

• Ancillary Services
  • Requires the PUCT to ensure that ERCOT establishes requirements to meet the reliability needs of the power region and that it procures ancillary or reliability services on a competitive basis to ensure appropriate reliability during extreme heat and extreme cold weather conditions and during times of low non-dispatchable power production.
  • The enrolled version of the bill appears to reflect feedback from stakeholders during public hearings regarding language pertaining to ancillary service commitments and the role of renewable resources.
  • While a prior version of the bill would have mandated the PUCT to require intermittent generation resources to purchase ancillary services and replacement power "sufficient to manage net load variability," the final version requires the PUCT to review ancillary services to make sure they will continue to meet the needs in ERCOT and evaluate if additional services are needed to ensure reliability.

• Emergency Pricing Program
  • Requires the PUCT to establish an emergency pricing program to take effect if the high system-wide offer cap has been in effect for 12 hours in a 24-hour period after initially reaching the high system-wide offer cap.
  • Must include an ancillary services cap and may not allow an emergency pricing program cap to exceed any non-emergency high system-wide offer cap.
  • Must allow generators to be reimbursed for reasonable, verifiable operating costs that exceed the emergency cap.

• Additional Provisions:
  • Requires notification to electric customers of a transmission service provider's involuntary load shedding procedures, establishes the Texas Energy Reliability Council, requires creation of a power outage alert system, and provides for the registration of distributed generation on a local level.

HB 4492: Provides securitization for competitive market participants of certain default charges and "uplift" amounts related to reliability deployment price adder and exceptional ancillary service costs arising from the winter storm event.

• Financing of "Default" Amounts
  • Provides for an $800 million credit line by the Comptroller from the economic stabilization fund balance. ERCOT may use this resource to fund its "default balance," to be repaid by ERCOT market participants through default charges established by the PUCT. ERCOT will assess such charges over a period of 30 years or less.
  • The "default balance" includes an amount of money up to $800 million including: (1) amounts owed to ERCOT by competitive market participants from the period of emergency (the period beginning 12:01 a.m., February 12, 2021, and ending 11:59 p.m., February 20, 2021), that would otherwise be uplifted to other wholesale market participants (i.e., competitive market participant short-pay defaults); (2) congestion revenue rights ("CRR") auction receipts used by ERCOT to temporarily reduce short-pay amounts related to the period of emergency; and (3) reasonable costs incurred to implement a debt obligation order consistent with this financing.
  • Notably, ERCOT had previously filed a memo with the PUCT in Project No. 51812 stating that the amount of CRR revenues which ERCOT redirected (pursuant to PUCT approval) to mitigate ERCOT's own short-payments to market participants to whom it owed obligations after the storm was about $800 million.
  • "Default charges" imposed by ERCOT to reimburse the Comptroller's funding on the default balance are non-bypassable-ERCOT must assess them to all market participants (not just LSEs), including those who are in default but still participating in the wholesale ERCOT market. This requirement appears to apply to competitive and non-opt-in entities alike.
  • If a market participant is in default for failure to pay its obligations to ERCOT, or failure to provide for full and prompt payment, HB 4492 prohibits the PUCT from allowing the market participant to continue as a market participant "for any reason."

• Financing of "Uplift" Amounts
  • Enables ERCOT to finance an "uplift balance" on behalf of wholesale market participants through the issuance of debt obligations as approved by the PUCT.
  • "Uplift balance" includes an amount of money up to $2.1 billion, representing the amount that ERCOT previously uplifted to load-serving entities ("LSEs") on a load ratio share basis during the period of emergency for reliability deployment price adder charges and ancillary services costs in excess of the PUCT's system-wide offer cap. It excludes those amounts to be securitized under HB 1580 (electric cooperative securitization bill).
  • The term does not include amounts that were part of prevailing settlement point prices during the period of emergency.
  • The process for issuance of debt obligations relating to "uplift" amounts is not entirely clear from the bill, except that ERCOT is required to file an application with the PUCT to establish a debt financing mechanism for the payment of the uplift balance (which the PUCT may only issue after making certain findings), and the PUCT is permitted to contract with another (unspecified) state agency with expertise in public financing to establish a debt financing mechanism.
  • The debt will be repaid over a period of not more than 30 years by ERCOT assessing uplift charges to all LSEs on a load ratio share basis, which may be converted to a kWh charge.
  • Uplift charges are non-bypassable, except that certain LSEs and transmission-voltage customers served by a REP may opt out of paying uplift charges if they pay in full all invoices owed for usage during the period of the emergency.
  • A PUCT-issued debt obligation order must include a requirement that any LSE receiving proceeds from this process that exceed its actual exposure to uplift charges during the period of emergency must notify ERCOT and remit the excess.
  • ERCOT offsets to specific uplift charges will require LSEs to adjust customer invoices accordingly, including by providing a refund for any offset charges previously paid.
• Senate Committee Concessions
  • The terms of HB 4492 were heavily debated between the House and Senate, with the bill narrowly emerging from a conference committee in time to meet the session deadline. Notably, the Senate attempted to include the following provisions, which did not survive the conference committee:
    • Subchapter O. Winter Storm Uri Ratepayer Assistance - allowing the PUCT to contract with the Comptroller to establish a debt financing mechanism for the financing of bill payment assistance grants and allowing the PUCT to collaborate with the Comptroller to provide one-time bill payment assistance grants to residential retail customers of municipally-owned utilities, electric cooperatives, and REPs within ERCOT who received service during Winter Storm Uri; and
    • Sec. 39.160. Information Disclosure Required for Participation in Financing - as a qualification for receiving financing under the bill, market participants would be required to submit to the Attorney General all documents, e-mails, or text messages relating to financial security transactions used to hedge or offset the cost of fuel or energy in February 2021; and all documents, e-mails, or text messages relating to qualified cost information for February 2021.

SB 1580: Allows the board of an electric cooperative to securitize via a financing order "extraordinary costs and expenses" incurred due to the winter storm during the period beginning 12:00 a.m., February 12, 2021, and ending at 11:59 p.m., February 20, 2021.

• "Extraordinary costs and expenses" include:
  • Costs incurred for purchase of energy during the emergency in excess of what would have been paid at the average rate for cooperative energy purchased during January 2021;
  • Costs incurred to generate and transmit during the emergency that would not otherwise have been incurred but for the storm (i.e. fuel, O&M, overtime, etc.); and
  • Charges passed on by an RTO/ISO (ERCOT) resulting from defaults by other market participants for costs related to the emergency.
• Requires cooperatives that owe ERCOT for operations during the above time-frame to "use all means necessary to securitize the amount owed."
• Securitized "charges" shall be collected and allocated among customers in a manner provided by the financing order and are non-bypassable.
• As in HB 4494, SB 1580 also provides that if a market participant fails to pay its outstanding obligations to ERCOT, or fails to provide for full and prompt payment, the PUCT is prohibited from allowing ERCOT to accept the defaulting market participant's loads or generation for scheduling in the ERCOT power region, or allow the defaulting market participant to be a market participant in the ERCOT power region for any purpose, until all amounts owed by the market participant as calculated under the protocols are paid in full.[1] It remains to be seen how the Commission and ERCOT would effectively implement a prohibition as described by the securitization bills. For instance, if an entire electric cooperative was prohibited from having load scheduled with ERCOT, there is no immediate solution for ensuring the cooperative's customers would remain energized. Transmission constraints alone beg the question of how these provisions could be meaningfully enforced.
• Provides that a financing order shall remain in effect and unabated, notwithstanding the bankruptcy of an electric cooperative, its successors, or assigns.
• Since being sent to the Governor, Brazos Electric Cooperative ("Brazos") (the largest obligor to ERCOT) has filed a letter on behalf of itself and several cooperatives requesting veto of SB 1580 and HB 4492. They cite concerns with being required to pay default charges associated with competitive market participants' short-payments, the punitive provisions of both bills excluding participation in ERCOT for failure to pay, and a possible jurisdictional dispute that might arise between Brazos's federal bankruptcy proceeding and the state's regulatory authority.

SB 2*: Changes requirements of ERCOT board membership and implementation of ERCOT rules.

• Requires that ERCOT rules, Protocols, bylaws, and enforcement actions taken under delegated PUCT authority be approved by PUCT prior to taking effect.
• Requires Texas residency of board members.
• Changes ERCOT board structure and eligibility from the current 16 members elected by different segments of the market to either ex officio or one of eight members selected by a three-member selection committee appointed by the Governor, Lieutenant Governor, and Speaker of the Texas House of Representatives.
• Considerable public testimony on this bill and other similar bills expressed concern over the ERCOT board being comprised of political appointees rather than by market representatives - particularly given that ERCOT reports to the PUCT, which is also a board of political appointees.

SB 2154: Increases the number of PUCT commissioner appointments from three to five and amends criteria and parameters for qualification.

• Commissioners must be Texas residents.
• At least two commissioners must be well informed and qualified in the field of public utilities and utility regulation.
• We note that both current PUCT commissioners were appointed under the "well-informed" standard. As such, the additional three commissioners who have yet to be appointed will not be required to meet this standard or even have industry knowledge (though they must have at least five years of experience in the administration of business or government or as a practicing attorney, certified public accountant, or professional engineer).

SB 398: Provides for sales and leasing of distributed renewable generation resources.

• Practically speaking, this bill reduces legal barriers preventing a person from generating electricity on their own property
• Requires certain disclosures by a seller or lessor of a purchase, lease, or power purchase agreement with a residential or small commercial customer for operation of a distributed renewable generation resource.
• Prohibits cities from prohibiting or restricting installation of solar generation by a residential or small commercial customer, subject to a property owner's association restrictions relative to the Property Code, and subject to reliability, power quality, or distribution safety guidelines of various entities.
• Describes the circumstances under which distributed generation of grocers may be deployed and sold as back-up generation in ERCOT to areas that have not implemented customer choice.

HB 3648: Requires the RRC and the PUCT to adopt rules and establish a process of designating certain natural gas facilities and entities associated with providing natural gas in Texas as critical customers or critical gas suppliers during energy emergencies.

• The PUCT's rules must provide prioritization for load-shed purposes during an energy emergency for the facilities designated as "critical" and must provide discretion to an electric utility, municipally-owned utility ("MOU"), or electric cooperative to prioritize power delivery and restoration among the "critical" facilities and entities as circumstances require.

SB 415: Allows a transmission and distribution utility ("TDU") with prior PUCT approval to enter into an agreement with a power generation company that owns an energy storage facility, for the sole purpose of obtaining reliability services in circumstances where construction of traditional distribution facilities is not cost effective. This was a stakeholder negotiated bill, representing a compromise among the affected interests.

• Expressly does not grant the PUCT authority to authorize TDU ownership of a storage facility. SB 415 does not impact the existing ability of electric cooperatives or MOUs to own or operate energy storage facilities as set forth in the Public Utility Regulatory Act ("PURA") Section 35.152(d).
• The TDU would be required to solicit proposals prior to entering into such an agreement.
• In establishing a TDU's rates, the PUCT would be required to review the storage contract, and the TDU has the burden of proving the costs of the contract are reasonable and necessary.
• The amount of storage capacity per contract may not exceed 100 MWs, and the PUCT must establish by rule the maximum amount of storage capacity allotted to each TDU.
• The bill appears not to apply to non-opt-in entities, as it does not expressly include them in the bill language, and as "transmission and distribution utility" is otherwise defined in PURA as excluding MOUs and electric cooperatives.

HB 17: Prohibits Texas cities from banning any particular type or source of energy to be delivered to the end-use customers as a fuel source for new construction and utility.

• Prohibits the imposition of additional charges or differential charges on a development or building permit applicant for utility infrastructure that encourages connection to a utility service based on the type or source of energy to be delivered to the end-use customer, or discourages the installation of facilities for utility service based on the type or source of end-use energy.
• This bill has been characterized by many as an attempt to prevent the banning of natural gas-based energy in favor of renewable energy.

HB 16: Prohibits retail electric providers, aggregators, and brokers from offering wholesale indexed products to residential and small commercial customers.

• "Wholesale indexed products" are retail electric products in which the price a customer pays for electricity includes a direct pass-through of real-time settlement point prices determined by ERCOT.
• Allows enrollment in wholesale indexed products by customers other than residential and small commercial if specific disclosures are provided.
• Includes additional notice requirements regarding the expiration of fixed-price residential rate contracts.
• Requires REPs to roll a fixed-rate residential customer onto a default renewal product if the customer fails to renew their contract or switches to a new provider before the expiration of their current contract term. The default renewal product must be a month-to-month product in which the price the customer pays may vary between billing cycles and must be based on clear terms designed to be easily understood by the average customer. Customers on default renewal products must be able to cancel at any time without a fee.

SB 760: Imposes mandatory language in solar lease agreements regarding removal of generation facilities and restoration of the property upon decommissioning.

• Requires lease agreements for the operation of a solar facility to include an agreement that the lessee is responsible for removing the solar facilities from the lessor/land owner's property, and that lessee will clean/clear/remove each solar device, transformer, substation, foundation, buried cable, overhead power or communications line and will fill each resulting hole to certain specifications.
• If requested by the landowner, lessee must agree to clear/clean/remove each road constructed by lessee on the property and remove all rocks of a certain size excavated during the removal process.
• Agreements must include evidence of financial assurance to secure performance of decommissioning obligations.
• This bill applies only to solar lease agreements entered into after the effective date of the law, which will be September 1, 2021 if signed by the Governor.

SB 713: Amended to roll the PUCT into the current Sunset cycle for review.

Notable Energy Bills that Did Not Pass:

SB 2142: Attempted price correction bill that was introduced and passed by the Senate in one day that would have essentially reversed the PUCT orders setting real-time prices at the $9,000 high system-wide offer cap during the Winter Storm Uri energy emergency.

• Requires the PUCT to order ERCOT to "correct" the prices of wholesale power and ancillary services sold during the period beginning 9:00 am February 19, 2021 and ending 9:00 am February 19, 2021, to reflect the prices of the wholesale power and ancillary services that would have been paid during that period, absent any action of ERCOT or the PUCT to raise prices.
• Despite swift movement in the Senate, the bill died in the House after being referred to the House State Affairs Committee.

SB 1282: Reallocates some costs arising from interconnection of certain electric generating and energy storage facilities with the ERCOT transmission system to the interconnecting generators/ storage facilities.

• Requires the PUCT to establish a "reasonable allowance" for capital costs associated with interconnecting generation and storage resources within ERCOT.
• Any costs exceeding the allowance would be allocated to the generator or storage resource.

SB 2227: Creates the Texas Electric Securitization Corporation to allow ERCOT to fund extraordinary ancillary service and reliability deployment price adder charges that were uplifted on a load ratio share basis and added to the cost of energy used to supply end-use customers.

• Would have included securitization of reliability deployment price adders included in the cost of energy used to supply end-use customers during the period beginning 12:01 a.m., February 18, 2021, and ending 9 a.m., February 19, 2021.
• This was not implemented in the REP securitization measures that passed in HB 4492

HB 2000: Creates the Energy Efficiency, Natural Gas Conservation, and Water Conservation Loan Program, through which State Utilities Reliability Fund ("SURF") monies could be used as loans for improvements that increase the energy efficiency of and promote conservation of natural gas and water by residences and businesses that are not newly constructed.

• Allows provision of financial assistance from the SURF for a water, electric, or natural gas utility project or for a broadband provider.
• Also creates the State Utilities Reliability Revenue Fund ("SURRF") to provide financial assistance for projects that enhance the reliability and resiliency of water, electric, natural gas, broadband, and power generation infrastructure in Texas, including projects that enhance the ability of infrastructure to withstand periods of high demand and projects to weatherize infrastructure.
• This bill would have provided an avenue for generators to fund the new weatherization requirements implemented by SB 3.

HB 2275: Creates the Critical Infrastructure Relief fund to provide grants to MOUs, cooperatives, TDUs, and investor-owned utilities for weatherizing grid infrastructure.

HB 4242: Extends the property tax abatement chapter in the Texas Tax Code (Ch. 313) to December 31, 2024.

Governor Abbott has said publicly that he plans to call two special sessions, with one in September or October on redistricting and COVID-19 funds. The other will come before, to address Senate Bill 7 (a voting bill), a bail bill, and other issues that have yet to be announced. Lt. Governor Patrick has previously called for a special session to provide direct customer relief for residential end-use customers after the winter storm energy crisis. It remains to be seen if the Governor will add additional energy-related matters to a special session.