Texas Grid Operator in the ordeal of bankruptcy for more than 2 billion dollars

A failed Texas electric utility’s battle with the state grid operator over massive financial losses caused by last year’s historic winter storm threatens to shock the Texas energy market. state and trigger a wave of similar bankruptcies.

Brazos Electric Power Cooperative Inc., which filed for Chapter 11 in March 2021, was one of the first energy companies to file a lawsuit to reduce its exposure to the grid operator’s multi-billion dollar charges. Electric Reliability Council of Texas Inc. (ERCOT) for purchasing power during the storm.

ERCOT’s “exorbitant and excessive” $1.9 billion bill plunged Brazos from financial stability to insolvency almost overnight, according to the generation and transmission cooperative. Brazos says it suffered losses because it did not pass on the high costs to its members.

In a trial beginning later this month, US File Bankruptcy Judge David Jones will determine whether ERCOT has a legitimate claim to the $1.9 billion it is seeking from Brazos, or whether the network must reduce its bill.

The outcome could influence many other lawsuits ERCOT faces and may prompt other companies to file Chapter 11 either to avoid paying the fees or to recoup what they believe was overpaid.

Any ruling that Brazos was overcharged for electricity “will have repercussions far beyond” the co-op’s case and shift the burden of paying to other market players, the Texas Public Utilities Commission warned in a court filing in the Brazos case. The result “could lead to a domino effect of other market participants filing for bankruptcy seeking similar relief,” the commission said.

Beginning February 13, 2021, a winter storm blanketed much of Lonestar State in snow and ice and kept temperatures abnormally low for the following week. The storm and its aftermath killed 246 people and left economic damage estimated at $130 billion, the state said. reports.

In seven days, the price of electricity in Texas was more than 400 times the average billed price in 2020, according to natural gas and electricity retailer Just Energy Group Inc. The state’s wholesale market consumed 55 billion in transactions for the week, an amount that would normally take four years to complete, Just Energy noted in court records.

In Texas’ deregulated independent grid, generation companies generate electricity that retailers buy and sell to approximately 26 million individual customers. ERCOT, a non-profit corporation, is responsible for supplying energy to the state’s single market and providing it to cooperatives like Brazos. ERCOT also maintains reliable operation of the supply in the system. The network manager compared his function to that of air traffic controller.

ERCOT’s energy billing during the storm led to a handful of bankruptcies among Texas energy co-ops and retailers, including Brazos, Just Energy, Griddy Energy LLC, and Entrust Energy Inc.

Just Energy and Entrust Energy are also difficult electricity bills from ERCOT in connection with their Chapter 11 cases.

Rarity conditions

During the storm, demand for electricity soared, but frozen equipment and pipelines prevented supply from sustaining.

ERCOT issued its highest level of urgency on Feb. 15, ordering transmission operators to reduce service, or “load shedding,” to avoid overwhelming the power grid. The Public Utilities Commission then ordered ERCOT to set prices at the highest permitted rate – $9,000 per megawatt hour – to reflect the scarcity of electricity in the market.

Temperatures finally rose enough on February 19 for the network to normalize.

The state government has since adopted measures to prevent another disaster. But questions remain about pricing decisions and what went wrong last year.

“It’s very difficult to understand and appreciate the details of who did what, when and why,” said David Prager, head of the U.S. restructuring advisory practice at Kroll LLC.

One of ERCOT’s primary defenses is that it is an arm of the state and therefore cannot be sued in federal court.

In a separate case brought in 2016 by production company Panda Power Funds, the Texas Supreme Court is expected to decide whether ERCOT enjoys sovereign immunity.

“I think everyone wants to know if ERCOT is responsible or can they just do whatever they want?” said Leslie Thorne of Haynes and Boone LLP, which is representing Panda Power Funds in the case.

First answers

But Brazos’ bankruptcy proceedings already answer some of these questions.

Proceedings in the Brazos case will allow other players in the Texas electricity market facing the same scarcity price to determine whether they can find relief in bankruptcy court, Thorne said.

The U.S. Bankruptcy Court for the Southern District of Texas in October denied ERCOT’s motion to dismiss Brazos’ lawsuit on sovereign immunity and other grounds.

The bankruptcy court also ruled separately that ERCOT’s $1.9 billion claim against Brazos for electricity was not a debt incurred in the ordinary course of Brazos’ business. Accordingly, ERCOT’s claim does not take precedence over creditors with general unsecured claims in the bankruptcy, requiring ERCOT to share recoveries with other unsecured creditors.

ERCOT also argued that it simply followed the PUC’s power pricing orders.

“The ordinances dictated the market price of energy in the State of Texas during the time this order was in effect and throughout the winter storm,” said ERCOT attorney Jamil Alibhai of Munsch. Hardt Kopf & Harr PC, January 31. court hearing in the Brazos case.

However, ERCOT charged maximum prices for 33 hours after the end of load shedding, resulting out of a total of $16 billion in additional costs, according to an independent observer hired by the state government.

But a win for Brazos could mean more payment obligations for other energy market players in the state.

Other Texas power producers have sought to intervene, saying they would be forced to bear the economic burden if the bankruptcy court finds any of ERCOT’s winter storm charges invalid. ERCOT’s system includes an “uplift” fee, which spreads debt from defaults across the market.

“We’re all in this strange market together,” said Britta Stanton of Castañeda, which is representing a pair of Texas power generators in a court case over pricing. “It’s just a mass procedural quagmire.”