Reforming Texas’ electric power sector was not on the agenda when the 87th Legislature convened in January 2021. That changed in late February after Winter Storm Uri exposed critical weaknesses in the state’s power grid and its regulatory framework. Fortunately, ample time remained for Texas lawmakers to switch gears and pass bills in response to the storm’s devastating impact on the state. This article highlights changes to the state’s electric power industry in key bills passed by the 87th Legislature and signed by Gov. Greg Abbott.
Photo courtesy of TXDOT
Changes to the Regulatory Entities
Senate Bill (SB) 2 overhauls the governance structure of the Electric Reliability Council of Texas (ERCOT), the independent system operator that manages the flow of electricity for most of the state’s power needs. Prior to this measure, ERCOT was governed by a board of directors with 16 members — eight members representing different electric industry segments; three “ex officio” members (who served on the board as a result of other official positions they held); and five members unaffiliated with any electric industry segments.
SB 2 reduces the number of ERCOT board members to 11 and requires that eight of those members be selected by a newly established three-member board selection committee appointed by the Texas governor, lieutenant governor and House speaker. The bill requires the eight board members selected by the committee to have executive-level experience in certain fields.
With this bill, all ERCOT board members must be residents of Texas. At the time of the winter storm, five of the 16 ERCOT board members did not reside in Texas.
Another important provision of the bill strengthens oversight of ERCOT by requiring that any rules adopted by or enforcement actions taken by ERCOT be approved by the Public Utility Commission of Texas (PUC). At the time of the storm, ERCOT rules and enforcement actions were subject only to oversight and review by the PUC.
Likewise, SB 2154 makes changes to the governance structure of the PUC. For example, the bill increases the number of PUC commissioners from three to five and requires commissioners to reside in Texas. Exhibit 1 shows bills related to ERCOT and the PUC during the 87th Legislature’s regular session.
Exhibit 1: Legislation Related to ERCOT and the PUC
BILL
DESCRIPTION
EFFECTIVE DATE
SB 2
Relating to the governance of the Public Utility Commission of Texas, the Office of Public Utility Counsel and an independent organization certified to manage a power region
6/8/2021
SB 3
Relating to preparing for, preventing and responding to weather emergencies and power outages; increasing the amount of administrative and civil penalties
6/8/2021
SB 2154
Relating to the membership of the Public Utility Commission of Texas
6/18/2021
HB 2586
Relating to an annual audit of the independent organization certified for the ERCOT power region
9/1/2021
Note: This does not represent an exhaustive list.
Source: Texas Legislature Online
The Omnibus Bill
SB 3, the 87th Legislature’s omnibus storm response legislation, consolidates several bills that did not pass on their own, such as House Bill (HB) 12, and enacts a range of reforms to Texas’ electric power industry. This article covers a select few of the bill’s most salient provisions.
Power Outage Alert System
Under SB 3, the Texas Department of Public Safety (DPS), in coordination with the PUC and certain other state agencies, is required to develop and implement a new statewide alert system activated when the PUC or ERCOT determine the power supply in Texas is potentially inadequate to meet demand. The bill requires DPS to send an alert to designated media outlets, such as radio and TV stations, informing electricity customers that they may experience a power outage.
Texas Energy Reliability Council
SB 3 further establishes in law a 25-member council to supplement regulation of the state’s electric power markets, called the Texas Energy Reliability Council (TERC). At the time of the winter storm, TERC was a small, informal group. The bill requires TERC “to (1) ensure that the energy and electric industries in [Texas] meet high priority human needs and address critical infrastructure concerns and (2) enhance coordination and communication in the energy and electric industries in this state.”
Before each legislative session, TERC will submit a report to the Legislature about the status of Texas’ electricity supply chain.
Texas Electricity Supply Chain Security and Mapping Committee
A new five-member committee under SB 3 will identify critical infrastructure sources in Texas and map the state’s electricity supply chain, which includes all natural gas facilities and practices required for electric generation facilities to maintain service for Texans. The supply chain map — slated to be updated by the committee at least once a year — will serve as a tool for state leaders to prioritize electricity service needs statewide during extreme weather events like Winter Storm Uri. The committee also is responsible for enhancing lines of communication among the PUC, ERCOT and critical infrastructure sources during those events.
Weather Emergency Preparedness
SB 3 also requires certain energy facilities in Texas to weatherize (i.e., make the preparations necessary to maintain electric service during extreme weather conditions, including severe winter storms). Facilities directed to weatherize include electric generation facilities, transmission providers, certain natural gas facilities and pipelines and water utilities. The bill requires ERCOT to inspect those facilities for compliance and report continuing violations to the PUC. To enforce the new weatherization requirements, certain regulators are authorized to levy fines ranging from $5,000 per violation per day to $1 million per violation per day.
SB 3 gives certain state agencies rulemaking authority, notably the PUC, meaning the bill’s implementation will depend on the adopted rules. The PUC, for example, must develop new rules that specify weatherization requirements for energy facilities, as well as rules that establish a classification system for violations.
CRITICAL INFRASTRUCTURE is any physical or cyber asset, system or network unequivocally necessary for society and the economy to function and whose major disruption could have disastrous effects on national security, public health and economic growth. Electric power generators, such as utility providers, comprise only one sector of critical infrastructure in the U.S. There are 15 other sectors:
The 87th Legislature modified the structure of the state’s electric market, including electricity pricing (Exhibit 2). One of the Legislature’s priority bills — HB 16 — prohibits retail electric providers in Texas from selling “wholesale indexed” service plans to residential customers. Electricity pricing under those plans is directly tied to the wholesale electricity spot price on the power grid, which can fluctuate wildly during extreme weather events and leave customers subject to sudden price spikes. That scenario occurred and was reported widely during Winter Storm Uri when the wholesale electricity price maxed out at $9,000 per megawatt hour and saddled some customers with thousands of dollars in electricity bills.
Exhibit 2: Legislation Related to Electric Market*
BILL
DESCRIPTION
EFFECTIVE DATE
SB 1281
Relating to a reliability assessment of the ERCOT power grid and certificates of public convenience and necessity for certain transmission projects
9/1/2021
HB 16
Relating to the regulation of certain retail electric products
9/1/2021
Note: This does not represent an exhaustive list.
Source: Texas Legislature Online
*SB 3 (Exhibit 1) includes legislation related to the electric market as well.
Addressing the Costs
The 87th Legislature also grappled with the financial fallout from Winter Storm Uri that resulted from several electric market participants defaulting on payments to ERCOT, as well as disruptions in the natural gas market that inflated prices for gas utilities and gas-fired electric generators. Exhibit 3 shows legislation related to storm costs that was passed by the 87th Legislature.
Among the bills, SB 1580 enables the state’s electric cooperatives (not-for-profit organizations owned by their customers) to use a financing tool called securitization to recoup “extraordinary costs and expenses” resulting from the winter storm. Securitization is the practice of issuing low-interest bonds funded by small fees charged to customers over an extended period and is employed as an alternative to passing on the costs to customers all at once.
Exhibit 3: Legislation Related to Storm Costs
BILL
DESCRIPTION
EFFECTIVE DATE
SB 1580
Relating to the use of securitization by electric cooperatives to address certain weather-related extraordinary costs and expenses and to the duty of electric utility market participants to pay certain amounts owed
6/18/2021
HB 1510
Relating to the response and resilience of certain electricity service providers to major weather-related events or other natural disasters; granting authority to issue bonds
6/1/2021
HB 1520
Relating to certain extraordinary costs incurred by certain gas utilities relating to Winter Storm Uri and a study of measures to mitigate similar future costs; providing authority to issue bonds and impose fees and assessments
6/16/2021
HB 4492
Relating to financing certain costs associated with electric markets; granting authority to issue bonds; authorizing fees
6/16/2021
Note: This does not represent an exhaustive list.
Source: Texas Legislature Online
HB 1520, likewise, enables gas utilities to use securitization to recoup extraordinary costs incurred due to the winter storm. And HB 4492, another related storm bill, requires the Comptroller’s office to invest up to $800 million of the Economic Stabilization Fund in bonds issued by the ERCOT. LBB fiscal note analysis states, “The bill enables ERCOT to issue debt obligations to finance substantial balances owed by wholesale market participants.”
Conclusion
Texas lawmakers were swift to respond to the aftermath of Winter Storm Uri. By the regular legislative session’s end in May 2021, they had passed laws that overhauled the structure of electric power regulatory entities, made changes to the electric market itself to reduce the risk of future disruptions and tempered the financial fallout. It’s too early to draw conclusions about the effects of those changes. FN
Related to utility management, did you know the Comptroller’s State Energy Conservation Office (SECO) reports the electricity, natural gas, water and transportation fuel consumption of state agencies and state universities? Read about it on our website.
A REVIEW OF THE TEXAS ECONOMY