Relief for Financial Transmission Rights Trading Funds in Texas

Thoughtware Alert Published: Jan 21, 2022
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In October 2021, Public Utility Commission of Texas (PUCT) had issued an order re: Docket No. 52321, Application of Electric Reliability Council of Texas, Inc. for a Debt Obligation Order Pursuant to Chapter 39, Subchapter M, of the Public Utility Regulatory Act, and Electric Reliability Council of Texas (ERCOT) market participants, including investment funds that trade financial transmission rights or auction revenue rights, have received relief. 

February 2021 was a bitterly cold month. Winter storm Uri hit the U.S. and Mexico but released most of its vengeance on Texas. In Dallas-Fort Worth alone, 139 consecutive hours were at or below freezing temperature, which resulted in a state of emergency declaration. Millions of homes and businesses suffered outages of electricity and water, causing a whopping $90 billion in damages, and more than 200 people lost their lives. 

In Texas, the electricity grid is managed by ERCOT, which is regulated by PUCT. ERCOT acts as the central counterparty for all electricity transactions settled in the region—that is, ERCOT is the sole buyer from each seller and also the sole seller for each buyer. Essentially, ERCOT makes no profit but instead acts as a clearinghouse. ERCOT was allowed to recalibrate the price of wholesale electricity consistent with the actual electricity scarcity with a maximum cap of $9,000 per megawatt-hour (MWh). No one expected it would ever be priced to that, but during the Uri storm, because the demand for power far exceeded the supply for several days, the real-time electricity rate was indeed priced at $9,000 per MWh and remained there for more than 30 hours (for reference, the average residential electricity rate in December 2021 was $0.114 per kilowatt-hour, or $114 per MWh). As ERCOT services more than 26 million Texas customers, the price left many commercial ratepayers with extremely high electricity bills and led to several notable corporate bankruptcies and defaults of payments to ERCOT. The defaults in turn caused ERCOT’s inability to fully pay certain wholesale market participants who were due payments from ERCOT. 

In July 2021, ERCOT filed an application to PUCT seeking approval to finance a default balance in the amount up to $800 million (Uplift Charge). On October 14, 2021, PUCT issued its order to approve, among other items, 1) the $800 million default balance; 2) the assessment of the default charges to all wholesale market participants; 3) authorization of the issuance of Subchapter M bonds in an aggregate amount of up to $800 million for the payment of the default balance; and 4) the financing or securitization of the default charge.

In accordance with ERCOT’s existing protocols, wholesale market participants have the financial responsibility for the payment of all settlement charges, including default charges, regardless if the obligated participant made its payment. It is necessary and important to decide how the Uplift Charge shall be allocated to all market participants. In this order, PUCT approves that “ERCOT will allocate default charges (to eligible market participants) based on volume of activity in the market in the most recent months for which final settlement data is available on a rolling basis, rather than based on settlement data in the month prior to the month in which the default occurred.” This means that instead of the Uplift Charge being calculated and allocated based on the market participants’ activities in the month of these defaults (February 2021) as a one-time charge, ERCOT will now amortize the settlement based on the prospective monthly volumes of the market participants, up to 30 years. The order also included other items such as mandatory and option true-up of default charges.

This order is effective upon issuance.

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