Market Failure Causes a Shuffle

The sinkhole that formed within the Electric Reliability Council of Texas (ERCOT) market in February after Winter Storm Uri caught ERCOT, the Public Utility Commission of Texas (PUCT), the Texas Legislature and more than a few of the grid’s generation resources off guard and vulnerable may not be bottomless, but it is deep.

And those who fell victim to what many within the Texas energy sector are calling the ERCOT market’s largest failure to date believe it will take some very long ropes to climb out of the pit.

To wit, recent financial forecasts indicate credit risks across the ERCOT market remain acute.

Unfortunately, it would appear many electric and gas resources within the Texas electric industry sector may not have fully weatherized power generation resources under their purview—if only as another critical component in overall risk management.

As a result, a variety of energy resources across the ERCOT grid that serves about 90 percent of the state froze and were not completely available when they were most needed during sub-freezing weather.

And months after the shock of  a deep freeze boosted Texas’ promotion that everything here in the Lone Star State is bigger and better—and so, too, its failures—there has been little resolution so far to the lasting financial and economic effects that will stem from February’s near collapse of most of Texas’ electric grid.

Beyond tragic estimates that report potentially hundreds of deaths were attributed to the storm (most reportedly from hypothermia) and nearly week-long mandated power outages that were piled on consumers desperately fending off sub-freezing temperatures, Brazos went on record as one of the most financially exposed generation resources in the state (approximately $1.9 billion) due to its inability to fully respond and provide committed generation resources during the winter event.  

The corporation, in March, also became one of the very first ERCOT market participants to file for Chapter 11 bankruptcy. And as such, the ripple effect of the ongoing Brazos reorganization has forced United and the 15 other Brazos member cooperatives, who have been bound by wholesale power purchase agreements and operational affiliation with the generation and transmission (G&T) provider, to make contingencies for the bankruptcy and its uncertain effect on future operational strategies and planning.

Things are now in a  state of limbo.

Disclosure for where United’s February power bill from Brazos will settle is still among the unknowns being meted out in the G&T’s bankruptcy. And barring any new resolution of the storm’s February costs to Brazos member  cooperatives, United estimates February’s power cost could come in as high as $1.80 to $2.00 per kWh on average.

If that worst case example were to hold, and when considering the average residential United member uses about 1,500 kWh per month, such an estimate would result in a power cost of $3,000 for one month’s usage—in short, an untenable amount the cooperative would never force on members.  Instead, United would have to seek every means to spread out those costs across a much longer term.

United CEO Cameron Smallwood has said the cooperative’s ongoing planning and prospects with respect to the unknown February costs will be solely focused on insulating and protecting members from as much of the event’s financially devastating implications as possible. Further, the cooperative has retained its own legal counsel to help protect the cooperative and member interests in the Brazos bankruptcy.   And while the rug may have been pulled out from under the feet of millions of other unsuspecting Texas electric stakeholders who may have no recourse or relief from the storm’s consequences, Smallwood said the cooperative will do everything within its domain to mitigate the storm’s ultimate cost to members.

“It’s terribly disheartening when a company such as United—an electric distribution cooperative that has been recognized widely for its long-standing service commitment to its membership, its competitive rates and that is one of the very few distribution utilities that was lauded statewide not only for best practices in communicating with cooperative members before and throughout the storm event, but also for flawlessly executing ERCOT mandated calls for shedding load at our members’ expense,” Smallwood said.
“In effect, United was prepared for the event when other organizations within the Texas electric industry were not. And it is sad and seems incredibly unfair that United and its members could be exposed to these financial burdens through no fault of their own."

Smallwood also has related that despite vast shortfalls resulting from the disaster, United members won’t see any changes in United’s daily operational standards or work in electric delivery, the cooperative’s new high-speed intranet network buildout, or any other major operational initiatives that were in progress before February.  

However, a variety of  United’s tenured programs, as well as needed capital improvements—especially any that were tied in some way to operational margins and power supply transactions prior to Brazos’ bankruptcy—have been placed in what United Board of Directors hope will be a temporary holding pattern until uncertainties surrounding Brazos’ bankruptcy reorganization are clarified and examined for effect on United.

MEMBER DIVIDENDS—United has for the past 37 consecutive years returned a percentage of member equity in their cooperative as one of the most tangible benefits of cooperative membership, as well as one of the more notable distinctions of the cooperative business model.  In 2020, United’s Board of Directors approved a member dividend allocation of $5.8 million. And since 2000, the cooperative has returned more than $83.4 million in patronage capital to current and former cooperative members. However, as both conservative and prudent considerations relating to the Brazos bankruptcy, a return this year of member dividends is not likely to occur.

COMMUNITY SOLAR PROGRAM—United implemented a community solar program in 2018, providing a renewable option to United members who could not, or wished not to invest in the high upfront installation costs for a residential solar system. To that end, and since the inception of the program, United’s community solar program has saved members thousands of dollars. Currently, more than 5,000 members are enrolled in the program. But due to Brazos’ bankruptcy, United has had to place an enrollment freeze on future sign-ups in the program.

The co-op’s community solar program has consisted of its association with two solar farm facilities that have provided an avenue to purchase all or a portion of the energy they produce through Power Purchase Agreements (PPAs). One system resides within United’s service territory and the cooperative contracted to accept all the energy generated from that facility. The second facility is located in West Texas, where a consortium of Brazos member cooperatives agreed to purchase specific blocks of energy through a Brazos contract. Due to Brazos’ bankruptcy, the PPA that Brazos entered into to purchase energy from that system collectively on behalf of participating member cooperatives is in jeopardy, and potentially at risk of being terminated. United was also actively working with a solar developer to build an additional community solar facility within its service territory that was completed at the end of February. But due to unknowns stemming from Brazos’ bankruptcy, the project investor has postponed bringing the facility online.  
Without these solar facilities,United’s community solar program will be limited in scope  and could potentially force the cooperative to suspend the program entirely.

ENERGY INNOVATION REBATE PROGRAM— The Brazos bankruptcy proceedings do not immediately threaten United’s widely used energy rebate program. However, if the outcome of the bankruptcy reorganization strips United of the ability to provide any power supply services, then there would be no economic incentive to the membership to continue to offer rebates.

RATE ADJUSTMENT—A rate adjustment originally planned to take effect in April was postponed—helping to defray heightened member concerns about the impact of February’ storm. In effect, the delayed rate adjustment in April resulted in a $6 million rate decrease for members, or an amount approximating a portion of operating margins that may have traditionally been reallocated to member-owners  later this fall in the form of member dividends.

FACILITIES—Construction this year of two sorely needed office expansions to support United’s growing plant and operational space needs were planned in answer to the cooperative’s rapidly developing high-speed internet network buildout. That planning had called for a new Mansfield office in United’s eastern service territory and a rebuild of the cooperative’s Cleburne office and operations facilities. While both projects have been placed on hold, a new temporary office in Joshua is expected to open in August to offset some of the co-op’s current operational space and member service needs in that area.

While skirting all the issues arising from the February disaster is a formidable task, Smallwood said the cooperative is fiscally sound and isn’t giving up in its lasting commitment to provide exceptional service and value to its membership. But he added that United’s aim and position often seems a lonely one within the Texas electric industry.     

“Legislative reforms made to the market during the last regular session of the Texas Legislature weren’t as far-reaching as we had hoped they might be to prevent a catastrophe like this one from ever occurring again,” Smallwood said. “We all realize that something like this can’t happen again, and we feel we exhausted every avenue to provide input and solutions to our representatives during this crisis. But as of today, we are honestly disappointed and feel many of the legislature’s measures haven’t gone deep enough to correct ills within the market—now, or for the future. And worse, we believe many of those actions didn’t weigh the ultimate costs or consequences to consumers—especially those who call themselves member-owners of a cooperative that earnestly tried to meet the promise of service reliability during one of the most seismic tests ever experienced within the ERCOT market. “