2023-047 Change in ERCOT Credit Policies July 14, 2023 Report No. 2023-047
INFORMAL STAFF REPORT
TO MAYOR AND CITY COUNCIL
SUBJECT:
Change in ERCOT Credit Policies
EXECUTIVE SUMMARY
As a direct result of the short pay and defaults of ERCOT market participants during winter storm
Uri, ERCOT staff recommended to the ERCOT Board of Directors that the practice of granting
unsecured credit to market participants with excellent credit, like Denton Municipal Electric
(DME), be terminated. The default of Brazos Electric Cooperative for $1.2 billion and Rayburn
Electric Cooperative for$800 million,both of whom had been extended a level of unsecured credit,
was cited as the reason for this policy change. It is important to note that the elimination of
unsecured credit to investment grade entities is counter to best practices in the commodity and
energy trading business.
Under the approved credit protocol changes adopted by the ERCOT Board, market participants
can use cash or letters of credit to securitize their credit and collateral obligations. The City's
Finance Department has explored the cost of obtaining and using a bank letter of credit as the
mechanism to meet this requirement as opposed to posting the daily cash margin requirements,
which would require the City to keep funds liquid and not invested. Given current interest rates
for instruments authorized for investment by the City, staff determined it will be more cost
effective to utilize a bank letter of credit. The letter of credit will not exceed DME's ability to
provide payment to the bank or ERCOT if so required. The use of the letter of credit is only to
meet the day-to-day collateral requirements that will become effective on October 1, 2023.
Currently DME has a$40 million unsecured line of credit with ERCOT based upon the A+(S&P)
and A (Fitch) ratings of DME's revenue bonds and the City's credit rating of AA+. On average
DME's use of this credit lien is approximately $15 million but during high priced periods in the
summer and winter, the use of the credit line approaches $30 million. While not anticipated to
happen because of market changes and conservative operations by ERCOT since winter storm Uri,
maximum credit requirements could rise as high as $60 million. These conditions would only
persist for a limited number of days since DME is both a payer to ERCOT for the energy purchased
to serve load(creating the need to post credit to meet payment obligations) and a receiver of funds
from ERCOT associated with the sale of energy by DME from renewable PPA positions and the
Denton Energy Center. However, under ERCOT protocols, accounts payable to ERCOT are due
at least one day prior to amounts receivable from ERCOT. Consequently, these positions do not
offset one another to reduce ERCOT's credit exposure to DME or DME's collateral posting
requirements to ERCOT.
The City issued a request for proposal on July 9, 2023, for ERCOT-qualified banking institutions
for up to $60 million. Finance sought and obtained opinions from its Financial Advisors and Bond
Counsel indicating that such a letter of credit can be legally obtained for the purpose of providing
collateral to meet DME's obligations.
July 14, 2023 Report No. 2023-047
CONCLUSION:
The request for proposal for up to$60 million in qualified letters of credit from ERCOT-accredited
banks will be concluded in late August and brought to City Council for consideration to enter into
the required agreements with the winning bank.
STAFF CONTACT:
Randee Klingele, Treasury Manager