Last Updated on May 25, 2021 – 9:00 AM CDT
This article originally appeared in The Texas Tribune: Read More
Workers repair a power line in Austin on Feb. 18, 2021, during the winter storm that left many Texans without power. State lawmakers are close to approving billions of dollars in financing to offset the storm’s costs to companies.
Credit: Sergio Flores for The Texas Tribune
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Justin Aguilar’s bingo halls in Corpus Christi lost a week of business and thousands of dollars during February’s deadly winter storm. That was devastating enough.
But that loss of income is dwarfed by what the business now owes because of the Texas power crisis: There’s a $120,000 electricity bill waiting to be paid.
Since the bookkeeper for Bingoland, Margaret Baldwin, got the eye-popping bill — nearly 50 times more than an average month for the two buildings — she’s just held on to it. Normally, the organizations that rent the bingo halls would be on the hook. But instead of passing on the obscene costs, Baldwin is hoping for help from Austin.
“If we had to come up with the money and pay this, it would shut down the halls,” she said.
The bingo halls had a variable electricity plan from Summer Energy that offers cheaper power when the state’s electricity supply is sufficient, but more expensive rates when it’s scarce. Exorbitant power bills now loom over thousands of Texas businesses like an overfilled dam, waiting. Baldwin and others are waiting for a desperately needed bailout from the Texas Legislature.
The February winter storm was one of the most devastating disasters in the state’s history, killing at least 100 people. It was also one of the most expensive because of spikes in wholesale power prices and natural gas prices. Electricity regulators set power prices at the maximum rate — $9,000 per megawatt-hour — for several days in hopes that market dynamics would encourage more electricity to be supplied.
Because the freeze knocked out many of the state’s power generators, electricity companies had to buy what little power was available at that exorbitant rate (the average price for power in 2020 was $22 per megawatt-hour). Natural gas fuel prices also spiked more than 700% during the storm.
But a package of bills to provide several billions of dollars in financial relief to the state’s electricity and gas market could leave retail electric providers and their customers — mostly commercial real estate companies and small businesses like Bingoland — out of the bailout.
“I see no relief at all for the customers, who did absolutely nothing wrong,” Marcie Zlotnick, a co-founder of two small retail electric businesses, said during a Senate committee hearing on Thursday.
She estimated that allowing retail electric providers to issue bonds to cover their storm-related costs would cost less than $1 per month for customers, and warned that the cost of not doing so could result in more retail electric provider bankruptcies and huge bills to their customers, which ultimately could mean less competition in the market.
“I am absolutely concerned about market consolidation,” Zlotnick told lawmakers.
Texas-sized bailouts
Lawmakers are close to approving roughly $7 billion in ratepayer-backed bonds to deal with the financial fallout from the storm, according to estimates by lawmakers. That’s several times what utilities requested and received to help finance damages from Hurricane Ike and Hurricane Harvey combined.
The bills, which are nearing passage as the Legislature begins its final week in session, would allow gas utility companies and electric co-operatives to issue bonds backed by the state’s assurance that there will be an extra charge on customers’ utility bills to pay back the bonds — a financial tool known as securitization.
Texas leads the U.S. in this type of bailout for its utilities when disaster strikes. The state’s Public Utility Commission has approved $11 billion in financing in the last two decades, state data shows; by comparison, California, the next largest, approved around $8.8 billion in securitized bonds between 1997 and 2019 — although it’s poised to issue a whopping $7.5 billion to bail out Pacific Gas & Electric for costs from the 2017 California wildfires.
In Texas’ winter storm package, about $4.5 billion in ratepayer-backed bonds would rescue gas utility companies that were forced to buy natural gas for residential customers at soaring prices during the storm, and another $2 billion in such bonds would aid rural electric cooperatives hard hit by the high electricity prices, lawmakers said.
Yet the approximately $7 billion in financing may not cover Texas retail electric providers reeling from the Public Utility Commission’s decision to set power prices at $9,000 for four days in February — well after some argue it was necessary.
Eric Gimon, a senior fellow at Energy Innovation Policy and Technology, a clean energy policy firm, said reform is necessary to ensure future catastrophes aren’t so costly. Gimon called the damage to the market “self-inflicted” due to the state’s pricing model, which left regulators with the option to set prices at the extremely high cap for several days.
“The markets need a circuit breaker,” he said. “Letting the price go to $9,000 for four days was just crazy.”
The Texas House and Texas Senate are still debating whether to allow those companies to seek a few more billion dollars in ratepayer-backed bonds to pay for the “pricing error” as well as for power the companies paid for but never received during the storm. The House proposal includes that relief for retail electric providers — which state Sen. Kelly Hancock, R-North Richland Hills, unsuccessfully attempted to strip from House Bill 4492 at a committee hearing last week.
The bill, which could also provide assistance to pay off debts to the Electric Reliability Council of Texas, will soon be taken up by the Senate.
Using bonds approved by the state allows debt-strapped companies to attract cash from investors at a lower interest rate than if the utility tried to borrow money from investors on their own; so customers won’t have to pay as much to cover the debts from the storm.
Without that option, companies could be forced to send the high bills from the storm to their commercial customers — like Bingoland — and then declare bankruptcy when those customers can’t pay. Some retail electric company executives told lawmakers that they’ve delayed sending the flood of huge bills from the winter storm to customers in the hopes that the Legislature would approve relief.
Utility finance experts agree it is necessary to prevent gas and electric utility customers from being slammed with high bills. Still, Joseph Fichera, chief executive officer for Saber Partners, a consulting firm that typically represents utility regulators and ratepayers in securitization negotiations, warned that the practice can be challenging to effectively — and fairly — implement.
“There’s a question of fairness: Are we going to socialize the costs and privatize the gains?” Fichera said. “And, at what cost? Any cost or the lowest cost?”
Response to climate change
In recent years, power sector and utility finance experts said, bailouts backed by ratepayers are increasingly being used to finance the costs of climate catastrophes.
“This is what adapting to climate change looks like: Things you need to plan for or pay for,” said Ben Serrurier, who analyzes power markets for RMI, a clean energy policy nonprofit formerly known as the Rocky Mountain Institute.
As climate change brings more devastating wildfires in the West, California has used securitized bonds to pay for the costs of fire damage. And as a warming ocean causes stronger hurricanes in the South, Texas, Florida, Louisiana and Mississippi have used the same types of bonds to pay for storm damages.
The winter storm will require several times more in bonds than what the state typically approves for a hurricane.
“These catastrophic weather events that are a result of climate change are costing billions of dollars,” said Harriet Moyer, an energy finance consultant who works with the National Utility Finance and Securitization Project, a coalition of securitization and climate consultants and nonprofits. “We’re playing catch-up, and we’re never going to catch up.”
Gimon, of Energy Innovation Policy and Technology, said that as climate change makes severe weather events more common, policymakers have to make difficult decisions about who is left with the bill and where the assistance should stop.
“This could happen again,” Gimon said. “How often are we going to securitize something this big that’s not addressing the underlying problem?”
What will Texas do?
House Bill 1520, approved by the House and voted out of a Senate committee, would provide gas utility companies permission to seek about $4.5 billion in low-cost loans, lawmakers said. It’s likely to pass because the market price for gas is passed on directly to customers, so failing to act would leave residential customers with devastatingly high increases to monthly bills, lawmakers said during a committee hearing on the proposal.
CenterPoint Energy, one of the largest gas utility companies (and electric companies) in the state, will seek at least $1 billion to cover the costs of gas it purchased during the winter storm, according to the company. If CenterPoint Energy tried to finance the cost itself, the average customer would pay about $40 more per month for gas, Jason Ryan, CenterPoint senior vice president of regulatory services and government affairs, told lawmakers during a March House Energy Resources Committee hearing.
With the state’s aid in getting a cheaper, longer-term loan, customers will pay between $2 and $5 more per month for 10 years, Ryan said.
Daniel Pope, a vice president of SíEnergy, a gas distribution company, told lawmakers at the same hearing that without the financing, it would have to hike its customers’ bills by as much as 13 times to pay for February’s storm costs.
“We feel we have an ethical and moral obligation to provide service at a reasonable cost,” Pope said. “The cost of gas experienced during February is, in no way, reasonable.”
Several cities and municipalities that operate natural gas utilities — about 80 in Texas — are also distressed, the Houston Chronicle reported. But not all will need such direct help from the state. Some cities are opting to go directly to the bond market: In Corpus Christi, the city has already said it will issue a $35 million bond to take care of natural gas costs from the storm to avoid passing on enormous bills to customers.
Rural electric cooperatives will also likely get permission to seek the state-supported low-cost loans. Senate Bill 1580 has already passed the Senate, and the House gave it an initial approval Monday. It would allow electric cooperatives — namely Brazos Electric Power Cooperative and Rayburn Country Electric Cooperative Inc. — to go to the bond market for a total of more than $2 billion, lawmakers said.
That’s a unique use for that financial tool, experts said, because cooperatives aren’t state agencies, and that difference could make the bonds more expensive. But the state doesn’t have much of a choice, said Paul Forrester, a corporate finance, securities and energy lawyer at Mayer Brown, a Chicago law firm.
“These are extraordinary events and extraordinary costs, and you can’t get blood out of a stone,” Forrester said. “It really is the most efficient way to finance this type of event, and it’s clearly the right thing to do, if you can.”
Disclosure: CenterPoint Energy has been a financial supporter of The Texas Tribune, a nonprofit, nonpartisan news organization that is funded in part by donations from members, foundations and corporate sponsors. Financial supporters play no role in the Tribune’s journalism. Find a complete list of them here.