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2021-075 Winter Storm Uri PUCT Settlement AgreementSeptember 17, 2021 Report No. 2021-075       INFORMAL STAFF REPORT TO MAYOR AND CITY COUNCIL SUBJECT: Winter Storm Uri – Securitization Legislation. PUCT Settlement Agreement EXECUTIVE SUMMARY: Denton Municipal Electric has elected to “Opt-Out” of participating in securitization financing of eligible cost during Winter Storm Uri as this action is in the best interest of DME customers and avoids potential increases in ERCOT administrative costs associated with repayment of the securitized funds. The sale of $141.9 million in Utility Revenue Bonds on August 26th by the City of Denton provides long-term funding of the costs of Winter Storm Uri at an interest rate of 2.95% which is expected to be considerably less than the cost of debt under the proposed securitization. Opting out of the securitization also provides regulatory certainty to DME.   DISCUSSION:  During Winter Storm Uri, Load Serving Entities (LSEs) in the ERCOT market were faced with astronomically high-priced energy and ancillary services for a five-day period. Several market participants were unable to pay ERCOT for these costs because, as is the case with most LSEs, their contracts with their customers were fixed price or their customers failed to pay their bills (Griddy). LSE’s, including DME, were forced to buy energy at $9,000/MWh plus the cost of ancillary services at prices as high as $24,000/MWh, yet our revenues from our customers, based upon tariff rates, were $110/MWh ($0.11/kwh). Estimated defaults and short pays to ERCOT by market participants, including LSEs is estimated at $3.2 billion. During the 87th Texas Legislature, several bills were passed to provide a source of low interest loans (“Securitization”) to help defaulting and short-paying LSEs to provide the needed funding to abate uplifted revenue shortfalls that ERCOT experienced. For DME, the uplift that we are currently assessed is $6.9 million1. Legislative Action Two pieces of legislation were passed and signed by Governor Abbott to address these defaults and short pays. SB 1580, referred to as the Cooperative Securitization Bill, provides a source of liquidity to the cooperatives including the two largest short-paying cooperatives, Brazos Generation and Transmission Cooperative and Rayburn Cooperative who collectively represent $2.8 billion of the short-pay and defaulting market participants. The authority granted by this legislation is directly to the Cooperatives and does not require any action by the Public Utility Commission of Texas (PUCT). DME staff and outside counsel have no information on whether the cooperatives will seek financing through this new granted authority. To the extent they do                                                              1 City of Denton’s lawsuit against ERCOT for prevent the assessment of these uplift costs was dismissed by Travis  County judge and ERCOT required payment of this amount.  DME has paid these “uplifted” amounts.  September 17, 2021 Report No. 2021-075       access these funds, DME anticipates receiving as much as $6 million of the current amount it is owed by ERCOT associated with these two entities. HB 4492 is the other securitization bill that was passed by the legislature. This legislation authorizes ERCOT to access $800 million of securitization funds to cover market participant defaults and amounts used by ERCOT from the congestion accounts of market participants, including DME, to ameliorate short pays to generators, including DME. A second tranche of securitization funds in the amount of $2.1 billion was also authorized under the HB 4492 to provide a source of liquidity to LSEs to remedy costs paid for ancillary services above the $9000/MWH hour energy cap and for “Reliability Price Adders” during the storm. These reliability price adders are calculated values that each LSE must pay to ERCOT for standby capacity during periods of scarcity. However, since load was being curtailed and all available capacity was being deployed, the reliability price adders’ additional costs paid to ERCOT by LSEs, were not paid to generators. Thus, the Legislature determined that both the ancillary services costs above the $9000/MWh cap price and the reliability price adders are eligible for securitization and have directed the PUCT to draft regulations to enable the financing of uplift balances. A provision that the MOU market segment was able to get into HB4492 permits MOUs, Cooperatives and loads served at the transmission voltage level to “opt-out” of this $2.1 billion tranche of securitization. The opt-out provision allows those eligible LSE’s that have paid ERCOT for all costs associated with Winter Storm Uri, including the uplifted amounts, to make a one-time election to not participate in the securitization funds. If Denton opts out, we will have no access to any of the $2.1 billion in securitization funding but will not be assessed any charges associated with the cost of the securitization, including any ERCOT administrative fees. PUCT Actions DME has intervened in the two PUCT Dockets related to the rule making pursuant to HB 4492 in an effort to preserve out rights to comment on these rules and to participate in any contested hearings and subsequent settlement agreement. The two dockets are: 1. PUC Docket No. 52321 – Application of the Electric Reliability Council of Texas, Inc. for a Debt Obligation Order Under PURA Chapter 39, Subchapter M, and for a Good Cause Exception. This proceeding deals with the $800 million in authorized securitization associated with the default of Retail Energy Providers or “REPs” who defaulted during Winter Storm URI and the funds that ERCOT borrowed from the Congestion Revenue Rights funds. All market participants, including DME, will share in the cost of this securitization over the next 30 years. The debt, interest and program expenses associated with this action will be assessed to DME and all other market participants in the form of a non-by passable charge per Kilowatt hour. For clarification, September 17, 2021 Report No. 2021-075       this $800 million in securitization funding, DME (or any market participant) can’t opt out. 2. PUC Docket No. 52322-Application of the Electric Reliability Council of Texas, Inc. for a Debt Obligation Order to Finance Uplift Balances Under PURA Chapter 39, Subchapter N, for an Order Initiating a Parallel Docket, and for a Good Cause Exception. This proceeding was contested, and the intervening parties have worked out a settlement agreement that will be presented to the PUCT next week. DME, through our outside counsel, Lloyd Gosselink Rochelle & Townsend, P.C., has been participating in the settlement discussions with the intervenors. Basis for Opting Out Eligible expenses incurred by DME during Winter Storm URI are limited to Ancillary Service costs above $9000/MWh and Reliability Price Adders. ERCOT reports that DME’s eligible expenses amount to $26.7 million2 or less than 20% of the $140 million in unexpected power supply expenses associated with the storm. Under the settlement agreement proposed by the intervenors, to follow legislative intent of HB 4492, those LSE’s who pose the most risk to market stability should they not have access to securitization funds, were to be prioritized over those entities that have access to the capital markets. The total eligible securitization exposure is reported to be $4.8 billion before eligible parties determine if they will opt out. Consequently, with a maximum available securitization amount of $2.1 billion, the fund will likely be oversubscribed. Under the proposed settlement agreement, entities like Denton would not be eligible to draw 100% of our exposure and would only be eligible to draw $11.9 million3. The rationale used by intervenors is that MOUs, Cooperatives, and generation owners have access to other forms of debt or equity (issuing stock, or warrants) than do small REPs whose default would introduce additional instability into the ERCOT market. Not Opting Out Will Cost Customers. While the precise interest rate to borrow the $2.9 billion in securitization funds authorized by HB 4492 is unknown at this time, ERCOT has estimated the range at 4.5 to 5% for the 30-year loan. The recent Revenue Bond Sale by the City of Denton                                                              2 Denton Exposure – RDPA = $8,330,673.81; Ancillary Services = $13,364,660.23. ERCOT reported values as of 8/23/20211 3 Proposed Settlement agreement spreadsheet provided by NRG September 17, 2021 Report No. 2021-075       achieved an interest rate of 2.95%4. Consequently, any amounts accessed by DME from the securitization funds represents a significant “premium” that would be shouldered by DME’s customers. Opting Out Reduces Regulatory Risk. If DME is included in the settlement agreement, (as is proposed) ERCOT and the PUCT will not be able to assess any of the tranche 2 securitization costs to DME. The specific language in the settlement agreement reads: “Parties agree all municipally owned utilities may opt out of participating in the Subchapter N Securitization, and ERCOT will not assess uplift charges to any current or future load served by municipally owned utilities that have opted out” Opting Out Avoids Subsidization of Other Market Participants by DME Customers. Because the repayment of securitized amounts will be based upon the actual load ratio share of the total ERCOT served load by DME rather than the load ratio share of total ERCOT load during Winter Storm Uri, DME customers could be subsidizing other LSEs. As a community experiencing extreme load growth due to the addition of Core Scientific and other industrial loads that DME has a high potential to serve, our load ratio share of the ERCOT total load served will be increasing. During Winter Storm Uri, DME was serving 0.5% of the total ERCOT load. After Core Scientific is fully operational, DME’s load ratio share of the ERCOT total load is expected to exceed 1%. Under the settlement agreement, DME’s participation in the repayment of the securitized funds would be 1% of the total annual cost, even though our actual impact was 0.5% during winter storm Uri. Opting out avoids this potential cross subsidization. Most Eligible MOUs and Cooperatives will Opt Out. While the specific names of the entities that have determined they will opt out remains confidential pursuant to the PUCT orders on the settlement, as a participant in the settlement discussions, DME can state definitively, virtually all eligible opt-out entities will be opting out. We anticipate that the list will become a matter of public record next week. CONCLUSION: After consultation with other MOUs, outside counsel, the City Attorney’s office, the City Manager’s Office and DME leadership, the consensus was that opting out is warranted as it represents the lowest cost and lowest risk to DME customers and the City of Denton.                                                              4 See: Hilltop Securities, City of Denton, Texas $141,990,000 Utility System Revenue Refunding Bonds, Taxable Series 2021 (Funding $140 mm_30 Years) Insured Taxable Rates as of 08/26/2021 (A+/A) *** Final ***, August 26, 2021, September 17, 2021 Report No. 2021-075       ATTACHMENTS: 1. Filing Receipt STAFF CONTACT: Terry Naulty, Asst. General Manager DME Terry.naulty@cityofdenton.com (812) 972-1457 mobile REQUESTOR: Staff Initiated PARTICIPATING DEPARTMENTS: DME, Legal