Coming after the fight against the upgrade in which Lieutenant Governor Dan Patrick put pressure for electricity price to adjust upstream of transactions made during outages, securitization focuses on the financial background consequences of pricing that has spiked to $9,000 per megawatt-hour for several days.
Sen. Kelly Hancock (R-North Richland Hills) has introduced legislation to create a line of credit that businesses can borrow from to pay exorbitant and unexpected bills such as those stemming from the winter storm.
The state’s largest power cooperative, Brazos Electric Power Cooperative, filed for bankruptcy in early March after it was unable to pay $1.8 billion in fees for transactions on the Electric Reliability Council of Texas (ERCOT) network. This reform, says Hancock The Texandirectly targets such a situation.
Hancock’s legislation, divided into three categories – natural gas, cooperativesand for other outfits as Retail Electric Providers (REPs) – create a non-profit corporation called Texas Electric Securitization Corporation (TESC).
Through the TESC, entities in financial difficulty due to February’s winter storm can obtain loans at above-market interest rates where they otherwise could not get out of the market.
“It’s about applying simple business practices that I use every day,” Hancock said, “and using them to provide a solution to problems caused by breakdowns.”
According to Hancock, there are currently two options when Texas electricity providers find themselves saddled with insurmountable debt payments: Either the entity can obtain a private loan, or it files for bankruptcy and the amount owed is never refunded in full.
Cooperatives such as Brazos do not bring in much in terms of profits. To repay his $1.8 billion owed, Brazos would need some sort of loan. But in making such a loan, the potential private financier would likely be taking on far more risk than most are willing to assume. “Risk” here means the chances that the lender will not be able to repay the loan.
Cooperatives are designed to provide services in areas where it is already difficult to get much of any return on investment. And that in normal times, let alone when entities incur costs hundreds or even thousands of times higher than they would normally expect.
If Hancock’s legislation passes, outfits will have another option. Interest rates are low right now and are even lower for governments with good credit ratings. Since Monday, the current 10-year US Treasury government bond interest rates is about 1.7%.
With the TESC, government bonds would be obtained to repay an entity’s principal – that is, the total amount owed – and it would then have to repay that total plus the agreed interest rate.
In the Hancock legislation, the interest rate negotiated by the TESC is required to be 2% above the market rate at that time. For example, if the prevailing open market interest rate is 4%, a TESC loan to a potential borrower like Brazos must be 6%. The purpose is to entice private loans to be explored before seeking the government bond.
“We have to be above market rates because I never want the government to take over the market,” Hancock added.
TESC would be the “financier of last resort”, as Hancock put it in a telephone interview. “It provides another safety net to avoid as many bankruptcies as possible.”
Hancock said a company told her that with this TESC tool, she could pay off her $11 million hole in 10 years.
And in the scenario above, at the government’s current interest rate, the TESC would earn 4.7% net interest which Hancock says could then be used for other costs in the ERCOT market, such as costs of ancillary services or other proposed routes. In this example, the TESC would have a net gain of $660,000 from interest.
Just as the costs currently facing electricity companies will eventually trickle down to taxpayersthis potential windfall could also trickle down, creating downward pressure on prices paid by consumers.
This is where Hancock’s support for this proposal crescendos. Rather than taxpayers somehow being saddled with higher back end costs to offset the initial debt, Hancock says this route allows taxpayers and taxpayers to get away with the green.
During the outages, some companies emerged relatively unscathed through prudent hedging practices that others neglected. Those who have neglected are usually those who have found themselves in a money pit from which it is difficult to get out.
Some criticize this proposal as a bailout, but Hancock rejects this framing. “It’s really the opposite of a bailout because it says we’ll work with you but you’re going to pay us a premium for using our money.”
The most famous bailout of this century is that of the auto industry in recent times. Taxpayers liquidated in short circuit $10.2 billion of their initial “investment” of approximately $80 billion.
But when combined with the bank bailouts that took place around the same time, taxpayers net about $15 billion in total. Then, as now, businesses that failed to protect themselves against unforeseen circumstances found themselves in deep trouble.
“I don’t want to force good customers who made good decisions to pay the expenses of those who made bad ones.” This reform would place the full burden of the cost and the responsibility to repay it on the borrowers rather than “socializing” it throughout the industry.
And about entities that made poor financial decisions, Hancock emphasized the need for them to learn from prescient entities to avoid a similar situation down the road.
One of Hancock’s bills was heard in committee last week and another will still be heard, while the third has already gone through committee.
The house has its own version filed by Rep. Chris Paddie (R-Marshall) and what will ultimately come out of the legislative process remains to be seen.
The financial impacts of the February storm continue to worsen long after the physical impacts have mostly subsided.