BILL ANALYSIS

C.S.S.B. 2012

By: Schwertner

State Affairs

Committee Report (Substituted)

BACKGROUND AND PURPOSE

The 87th Texas Legislature enacted S.B. 3, which contained provisions directing the Public Utility Commission of Texas (PUC) to develop and procure new ancillary or reliability services to improve the reliability of the electric grid. Accordingly, the PUC, in conjunction with its consultant, evaluated the wholesale market design of the ERCOT power region and proposed several key changes. Based on these findings, the PUC recently adopted the performance credit mechanism (PCM) to pay generators to be available during times of peak demand. In response to this proposal, the PUC received a number of comments from industry stakeholders expressing concern over certain aspects of the PCM, including potential costs and the lack of clarity surrounding its implementation. C.S.S.B. 2012 seeks to establish guardrails for the program to address these concerns.

CRIMINAL JUSTICE IMPACT

It is the committee's opinion that this bill does not expressly create a criminal offense, increase the punishment for an existing criminal offense or category of offenses, or change the eligibility of a person for community supervision, parole, or mandatory supervision.

RULEMAKING AUTHORITY

It is the committee's opinion that rulemaking authority is expressly granted to the Public Utility Commission of Texas in SECTION 1 of this bill.

ANALYSIS

C.S.S.B. 2012 amends the Utilities Code to prohibit the Public Utility Commission of Texas (PUC) from requiring retail customers or load-serving entities in the ERCOT power region to purchase credits designed to support a required reserve margin or other capacity or reliability requirement until ERCOT and the wholesale electric market monitor complete an updated assessment on the cost to and effects on the ERCOT market of the proposed reliability program and ERCOT begins implementing real time co-optimization of energy and ancillary services in the ERCOT wholesale market. The bill requires the updated assessment to include the following:

·         an evaluation of the cost of new entry and the effects of the proposed reliability program on consumer costs and the competitive retail market;

·         a compilation of detailed information regarding cost offsets realized through a reduction in costs in the energy and ancillary services markets and use of reliability unit commitments;

·         a set of metrics to measure the effects of the proposed reliability program on system reliability;

·         an evaluation of the cost to retain existing dispatchable resources in the ERCOT power region;

·         an evaluation of the planned timeline for implementation of real time co-optimization for energy and ancillary services in the ERCOT power region; and

·         anticipated market and reliability effects of new and updated ancillary service products.

C.S.S.B. 2012 prohibits the PUC from implementing such a reliability program unless the PUC by rule establishes the essential features of the program, including requirements to meet the reliability needs of the power region, and the program does the following:

·         requires ERCOT to procure the credits centrally in a manner designed to prevent market manipulation by affiliated generation and retail companies;

·         limits participation in the program to dispatchable resources with the specific attributes necessary to meet operational needs of the ERCOT power region;

·         ensures that a generator cannot receive credits that exceed the amount of generation bid into the forward market by that generator;

·         ensures that an electric generating unit can receive a credit only for being available to perform in real time during the tightest intervals of low supply and high demand on the grid, as defined by the PUC on a seasonal basis;

·         establishes a penalty structure, resulting in a net benefit to load, for generators that bid into the forward market but do not meet the full obligation;

·         provides the wholesale electric market monitor with the authority and resources necessary to investigate potential instances of market manipulation by any means, including by financial or physical actions;

·         ensures that the net cost imposed on the ERCOT market for the credits does not exceed $500 million annually;

·         ensures that any program reliability standard reasonably balances the incremental reliability benefits to customers against the incremental costs of the program based on an evaluation by the wholesale electric market monitor;

·         establishes a single ERCOT-wide clearing price for the program and does not differentiate payments or credit values based on locational constraints;

·         does not assign costs, credit, or collateral for the program in a manner that provides a cost advantage to load-serving entities who own, or whose affiliates own, generation facilities;

·         requires sufficient secured collateral so that other market participants do not bear the risk of non-performance or non-payment;

·         ensures that the cost of all credits paid to dispatchable resources is allocated to loads based on an hourly load ratio share; and

·         removes any market changes implemented as a bridge solution for the program not later than the first anniversary of the date the program was implemented.

C.S.S.B. 2012 prohibits the PUC and ERCOT from adopting a market rule for the ERCOT power region associated with the implementation of a reliability program that provides a cost advantage to load-serving entities who own, or whose affiliates own, generation facilities. The bill requires the wholesale electric market monitor to do the following biennially:

·         evaluate the incremental reliability benefits of the program for consumers compared to the costs to consumers of the program and the costs in the energy and ancillary services markets; and

·         report the results of each evaluation to the legislature.

EFFECTIVE DATE

On passage, or, if the bill does not receive the necessary vote, September 1, 2023.

COMPARISON OF SENATE ENGROSSED AND SUBSTITUTE

While C.S.S.B. 2012 may differ from the engrossed in minor or nonsubstantive ways, the following summarizes the substantial differences between the engrossed and committee substitute versions of the bill.

The substitute omits the following provisions that appeared in the engrossed:

·         provisions relating to voluntary mitigation plans entered into under the Public Utility Regulatory Act;

·         provisions expanding ERCOT's duties to include allocating the cost of providing ancillary services and reliability services on a semiannual basis among dispatchable generation facilities, non-dispatchable generation facilities, and load serving entities in proportion to their contribution to unreliability during the highest net load hours in the preceding six months;

·         provisions establishing a grid reliability legislative oversight committee; and

·         provisions requiring each retail electric provider that offers electricity for sale to submit a retail sales report.

While both the engrossed and the substitute set out provisions regulating a potential PUC reliability program in the ERCOT power market, specific requirements applicable to the program differ. The substitute includes a requirement absent from the engrossed for ERCOT and the wholesale electric market monitor, before such a program may be implemented, to complete an updated assessment for the cost to and effects on the ERCOT market of the proposed program. Accordingly, the substitute includes a provision absent from the engrossed setting out the required contents of the assessment.

The substitute includes a requirement absent from the engrossed for the PUC, for any reliability program that is implemented, to establish by rule the program's essential features, including requirements to meet the reliability needs of the ERCOT power region. With respect to the required components of a reliability program, the substitute does the following:

·         includes the following as required program components, which were not in the engrossed:

o   requiring ERCOT to procure the credits centrally in a manner designed to prevent market manipulation by affiliated generation and retail companies;

o   ensuring that an electric generating unit can receive a credit only for being available to perform in real time during the tightest intervals of low supply and high demand on the grid, as defined by the commission on a seasonal basis;

o   providing the wholesale electric market monitor with the authority and resources necessary to investigate potential instances of market manipulation by any means, including by financial or physical actions;

o   ensuring that any program reliability standard reasonably balances the incremental reliability benefits to customers against the incremental costs of the program based on an evaluation by the wholesale electric market monitor;

o   establishing a single ERCOT-wide clearing price for the program and does not differentiate payments or credit values based on locational constraints;

o   ensuring that the cost of all credits paid to dispatchable resources is allocated to loads based on an hourly load ratio share; and

o   removing any market changes implemented as a bridge solution for the program not later than the first anniversary of the date the program was implemented;

·         omits the following as required program components, which were included in the engrossed:

o   assigning the cost of credits to generation facilities and load-serving entities in accordance with Chapter 426 (S.B. 3), Acts of the 87th Legislature, Regular Session, 2021;

o   ensuring that all elements of the program are initially implemented on a single starting date;

o   ensuring that generators who receive credits may not self-arrange credit exchanges with any affiliated competitive retail electric providers; and

o   ensuring that the wholesale electric market monitor has the authority and necessary resources to investigate potential instances of market manipulation by program participants, including financial and physical actions, and recommend penalties to the commission;

·         revises the provision from the engrossed capping the annual cost to the ERCOT market of the credits under the program at $500 million to make that $500 million cap applicable only on a net cost basis;

·         replaces the requirement from the engrossed for program credits to be available only for dispatchable generation, excluding load resources and electric energy storage, with a requirement that the program limit participation to dispatchable resources with the specific attributes necessary to meet operational needs of the ERCOT power region;

·         revises the requirement from the engrossed regarding the adoption of secured financial credit and collateral requirements for the program to ensure that other market participants do not bear the risk of non-performance or non-payment by limiting the provision only to secured collateral requirements and specifying that the collateral must be sufficient to ensure that no other market participants bear that risk; and

·         regarding penalties, replaces the requirement from the engrossed for the program to include appropriate penalties for a failure to perform during a reliability event caused by factors within the reasonable control of the generator, including a requirement for a generator to buy back credits that the generator sold but for which the generator did not provide the required capacity, with a requirement for the program to have an established penalty structure, resulting in a net benefit to load, for generators that bid into the forward market but do not meet the full obligation.

The substitute omits provisions from the engrossed that, as follows:

·         specified that the bill does not require the PUC to adopt a reliability program requiring an entity to purchase capacity credits;

·         required the PUC and ERCOT to consider comments and recommendations from a technical advisory committee established under ERCOT bylaws that includes market participants when adopting and implementing a reliability program; and

·         in a temporary provision expiring September 1, 2029, required the PUC, if adopting a reliability program, to require the wholesale electric market monitor to submit a report on the costs and benefits of continuing the program.

The substitute includes a provision absent from the engrossed prohibiting the PUC and ERCOT from adopting a market rule for the ERCOT power region associated with the implementation of a reliability program that provides a cost advantage to load-serving entities who own, or whose affiliates own, generation facilities. In addition, the substitute includes a requirement for the wholesale electric market monitor to conduct a biennial evaluation of the incremental reliability benefits of a reliability program for consumers compared to the costs of the program to consumers and the costs in the energy and ancillary services market and to report the results of each evaluation to the legislature.

The substitute changes the bill's effective date to provide for its possible immediate effect, contingent on receiving the requisite constitutional vote, whereas the engrossed provided only for the bill to take effect September 1, 2023, with no possibility for immediate effect.