BILL ANALYSIS

 

 

Senate Research Center	C.S.H.B. 4492
87R27885 JXC-F	By: Paddie (Hancock)
	Business & Commerce
	5/20/2021
	Committee Report (Substituted)

 

 

 

AUTHOR'S / SPONSOR'S STATEMENT OF INTENT

 

C.S.H.B. 4492 is intended to provide financial stability and liquidity to the ERCOT market. The total amount of default invoices at ERCOT to date is approximately $2.9 billion dollars. The electric cooperative securitization bill, S.B. 1580, that the Business and Commerce Committee passed to create a financial tool to allow electric cooperatives to pay their own short-paid invoices over a longer period of time, covers nearly $2.4 billion of the accumulated shortpays at ERCOT, though there still remains a substantial balance of shortpays to ERCOT from entities exiting the competitive market and leaving unpaid invoices at ERCOT. The standard financial mechanism to pay market participants that are owed does not allow for repayment to those market participants quickly enough to maintain a healthy market.    

 

C.S.H.B. 4492 directs the comptroller to create a separately managed account or other investment vehicle to invest up to $800 million of the economic stabilization fund balance in the form of a loan to ERCOT. The payment is limited to paying for default charges that would not otherwise be paid, and are found to be in the public interest to preserve the integrity of the wholesale market.

 

The interest rate charged on the debt obligations must be the rate determined by the Municipal Market Data Municipal Electric Index, plus 2.5 percent, which is an investment grade return on ESF funds.

 

The bill ensures that this funding may only apply to the default balances from competitive market participants that exit the market and default on obligations, leaving ERCOT with the negative balance�or to repay ERCOT, which has already used cash balances it collects for congestion revenue rights to pay some default invoices and keep the market working. The funding in C.S.H.B. 4492 WILL NOT apply to electric cooperatives, which have their own financing vehicle in H.B. 1580.

 

The bill language ensures that this is a last-resort financing mechanism that only applies to balances that the Public Utility Commission of Texas finds to be necessary to preserve the integrity of the wholesale market and benefit the public interest.

 

C.S.H.B. 4492 amends current law relating to financing costs associated with electric markets.

 

RULEMAKING AUTHORITY

 

This bill does not expressly grant any additional rulemaking authority to a state officer, institution, or agency.

 

SECTION BY SECTION ANALYSIS

 

SECTION 1. Amends Section 404.0241, Government Code, by adding Subsections (b-1), (b-2), and (b-3), as follows:

 

(b-1) Requires the Comptroller of Public Accounts of the State of Texas (comptroller), notwithstanding any other law, directly or indirectly through a separately managed account or other investment vehicle, to invest not more than $800 million of the economic stabilization fund balance in debt obligations issued under Subchapter M, Chapter 39 (Restructuring of Electric Utility Industry), Utilities Code, by the independent organization certified under Section 39.151 (Essential Organizations), Utilities Code, for the ERCOT power region. Requires that the interest rate charged in connection with the debt obligations be calculated by adding the rate determined by the Municipal Market Data Municipal Electric Index, as published by Refinitiv TM3, based on the independent organization's credit rating, plus 2.5 percent. Prohibits the term of the debt obligations from exceeding 20 years.

 

(b-2) Prohibits a person from bringing a civil action against this state, the Texas Treasury Safekeeping Trust Company, or an employee, independent contractor, or official of this state, including the comptroller, for any claim, including breach of fiduciary duty or violation of any constitutional, statutory, or regulatory requirement, in connection with any action, inaction, decision, divestment, investment, report, or other determination made or taken in connection with Subsection (b-1).

 

(b-3) Provides that a person who brings an action described by Subsection (b-2) is liable to the defendant for the defendant's costs and attorney's fees resulting from the action.

 

SECTION 2. Amends Section 39.002, Utilities Code, as follows:

 

Sec. 39.002. APPLICABILITY. Provides that Chapter 39, other than certain sections, including Section 39.151, 39.159, and Subchapter M, does not apply to a municipally owned utility or an electric cooperative.

 

SECTION 3. Amends Section 39.151, Utilities Code, by adding Subsection (j-1), as follows:

 

(j-1) Prohibits the independent system operator in the Electric Reliability Council of Texas (ERCOT) power region, notwithstanding Subsection (j) (relating to requiring certain electric providers to follow requirements set forth by the independent system operator in ERCOT), from reducing payments to or uplifting short-paid amounts to a municipally owned utility that becomes subject to the jurisdiction of that independent system operator on or after May 29, 2021, and before December 30, 2021, related to a default on a payment obligation by a market participant that occurred before May 29, 2021.

 

SECTION 4. Amends Subchapter D, Chapter 39, Utilities Code, by adding Section 39.159, as follows:

 

Sec. 39.159. AMOUNTS OWED TO INDEPENDENT ORGANIZATION BY MARKET PARTICIPANTS. (a) Requires the Public Utility Commission of Texas (PUC) to require that all market participants pay or make provision for the full and prompt payment to the independent organization certified under Section 39.151 for the ERCOT power region to fully satisfy all amounts owed to the independent organization, calculated solely according to the protocols of the independent organization in effect during the period of emergency and subject to the jurisdiction of the PUC, to qualify, or to continue to qualify, as a market participant in the ERCOT power region.

 

(b) Requires the independent organization to report to the PUC that a market participant is in default for the failure to pay all amounts owed to the independent organization as calculated in this section. Prohibits the PUC from allowing the defaulting market participant to continue to be a market participant in the ERCOT power region for any purpose or allowing the independent organization to accept the defaulting market participant's loads or generation for scheduling in the ERCOT power region until all amounts owed to the independent organization by the market participant as calculated in this section are paid in full.

 

(c) Requires the PUC and the independent organization to pursue collection in full of amounts owed to the independent organization by any market participant to reduce the costs that would otherwise be borne by other market participants or their customers.

 

SECTION 5. Amends Chapter 39, Utilities Code, by adding Subchapter M, as follows:

 

SUBCHAPTER M. WINTER STORM URI FINANCING

 

Sec. 39.601. PURPOSE. (a) Provides that the purpose of this subchapter is to address substantial balances that resulted from Winter Storm Uri, that were not paid by competitive wholesale market participants in the ERCOT power region, and that would otherwise be uplifted to the wholesale market by:

 

(1) enabling the independent organization certified under Section 39.151 for the ERCOT power region to finance the payment of the balances with debt obligations; and

 

(2) authorizing the PUC to contract with another state agency to finance the payment of the balances with debt obligations.

 

(b) Provides that financing the payment of the balances in the manner provided by this subchapter will allow wholesale market participants that are owed money to be paid in a more timely manner while allowing the balances to be repaid over time and provide for the replenishment of financial revenue auction receipts used by the independent organization to reduce the Winter Storm Uri-related amounts short-paid to the wholesale market participants.

 

(c) Provides that the legislature finds that the financing authorized by this subchapter serves the public purpose of preserving the integrity of the electricity market in the ERCOT power region.

 

Sec. 39.602. DEFINITIONS. Defines "default balance," "default charges," "independent organization," and "period of emergency."

 

Sec. 39.603. DEBT OBLIGATION ORDER. (a) Authorizes the PUC, on application by the independent organization, to adopt an order authorizing the independent organization to issue debt obligations to finance default balances on the PUC finding that the debt obligations are needed to preserve the integrity of the wholesale market and the public interest, after considering:

 

(1) replenishment of financial revenue auction receipts used by the independent organization to reduce amounts short-paid to wholesale market participants;

 

(2) the interests of wholesale market participants that are owed balances; and

 

(3) the potential effects of uplifting those balances to the wholesale market without a financing vehicle.

 

(b) Requires that the order state the default balance to be financed and the period over which the default charges are required to be assessed to repay the debt obligations, which is prohibited from exceeding 20 years.

 

(c) Requires that the order include an adjustment mechanism requiring the independent organization to adjust default charges to refund, over the remaining period of the default charges, any payments made by a competitive load-serving entity toward unpaid obligations from the period of emergency that were included in the financed default balance.

 

(d) Requires the independent organization to collect from and allocate among wholesale market participants the default charges using the same allocated pro rata share methodology under which the charges would otherwise be uplifted under the protocols in effect on March 1, 2021. Provides that the rate associated with the default charges is required to be assessed on all wholesale market participants and is authorized to be based on updated transaction data to prevent market participants from engaging in behavior designed to avoid the default charges.

 

(e) Requires the independent organization, not later than the 30th day after the date the independent organization receives a default charge payment from a wholesale market participant, to remit the payment to the comptroller toward repayment of debt obligations in which the comptroller made an investment under Section 404.0241(b-1), Government Code, if applicable.

 

(f) Prohibits default charges, notwithstanding another provision of this subchapter, from being collected from or allocated to a market participant that:

 

(1) otherwise would be subject to a default charge solely as a result of acting as a central counterparty clearinghouse in wholesale market transactions in the ERCOT power region; and

 

(2) is regulated as a derivatives clearing organization, as defined by the Commodity Exchange Act (7 U.S.C. Section 1a).

 

(g) Requires the PUC, not later than the 90th day after the date the independent organization files an application for the order under Subsection (a), to issue an order described by Subsection (a) or an order denying the application.

 

(h) Provides that an order described by Subsection (a) or (g) is not subject to rehearing by the PUC. Authorizes the order to be reviewed by appeal by a party to the proceeding to a Travis County district court filed not later than the 15th day after the date the order is signed by the PUC. Authorizes the judgment of the district court to be reviewed only by a direct appeal to the Supreme Court of Texas (supreme court) that is filed not later than the 15th day after the date of the entry of judgment. Requires that all appeals be heard and determined by the district court and the supreme court as expeditiously as possible with lawful precedence over other matters. Requires that review on appeal be based solely on the record before the PUC and briefs to the court and be limited to whether the order conforms to the constitution and laws of this state and the United States and is within the authority of the PUC under this chapter.

 

(i) Provides that a debt obligation issued under this section is a nonrecourse debt secured solely by the default charges explicitly assessed to repay the obligation. Provides that the independent organization's obligations authorized under this section do not create personal liability for the independent organization.

 

Sec. 39.604. COMMISSION AUTHORIZED BONDS. (a) Authorizes the independent organization to request that the PUC contract with another state agency under this section to issue bonds to finance the payment of a default balance. Provides that this section does not apply to a default balance securitized under Subchapter D, Chapter 41 (Electric Cooperatives and Competition).

 

(b) Requires the PUC to contract with another state agency with expertise in public finance for the purpose of issuing bonds under this subchapter.

 

(c) Provides that, except as otherwise specifically provided by this section, the provisions of Subtitle B (Electric Utilities) that address the PUC's issuance of a financing order under other provisions of this subtitle also apply to the PUC's issuance of a financing order under this section.

 

(d) Requires the contracted state agency and any issuer to be a party to the PUC's proceedings that address the issuance of a financing order along with the independent organization.

 

(e) Requires that a financing order issued under this section, in addition to the other applicable requirements of this subtitle:

 

(1) require the sale, assignment, or other transfer to the contracted state agency of default charges created by the financing order and, following that sale, assignment, or transfer, require that default charges paid under any financing order be created, assessed, and collected as the property of the contracted state agency, subject to subsequent sale, assignment, or transfer by the contracted state agency as authorized under this subchapter;

 

(2) authorize:

 

(A) the issuance of bonds by the contracted state agency secured by a pledge of default charge revenue, and the application of the proceeds of those bonds, net of issuance costs, to the independent organization; or

 

(B) the acquisition of default charge revenue from the independent organization by the contracted state agency, financed by a loan by an issuer to the contracted state agency of the proceeds of bonds, net of issuance costs, or by the acquisition by an issuer from the contracted state agency of the default charge revenue and in each case the pledge of the revenue to the repayment of the loan or bonds, as applicable; and

 

(3) authorize the independent organization to serve as collection agent to collect the default charges and transfer the collected default charges to the contracted state agency or the issuer, as appropriate.

 

(f) Requires the contracted state agency, after issuance of the financing order, to arrange for the issuance of bonds as specified in the financing order by the contracted state agency or another issuer selected by the contracted state agency and approved by the PUC.

 

(g) Provides that bonds issued pursuant to a financing order under this section are secured only by the default charge revenue and any other funds pledged under the bond documents. Provides that no assets of the state or the independent organization are subject to claims by the holders of the bonds. Provides that, following assignment of the default charge revenue, the independent organization does not have any beneficial interest or claim of right in the revenue.

 

(h) Severability clause.

 

Sec. 39.605. DEFAULT CHARGES NONBYPASSABLE. Requires that an order issued under Section 39.603 or 39.604 include terms ensuring that the imposition and collection of default charges authorized in the order is required to be nonbypassable.

 

Sec. 39.606. TRUE-UP. Requires that an order issued under Section 39.603 or 39.604 include a mechanism requiring that default charges be reviewed and adjusted at least annually, not later than the 45th day after the anniversary date of the issuance of the order, to correct over-collections or under-collections of the preceding 12 months and to ensure the expected recovery of amounts sufficient to timely provide all payments of debt service.

 

Sec. 39.607. TAX EXEMPTION. Provides that the transfer and receipt of default charges are exempt from state and local sales and use, franchise, and gross receipts taxes.

 

SECTION 6. Makes application of Sections 404.0241(b-2) and (b-3), Government Code, as added by this Act, prospective.

 

SECTION 7. Effective date: upon passage or September 1, 2021.