More 2021 Polar Vortex Fallout: The Texas Two-Step (aka the Hot Potato) between PUCT Oversight and ERCOT Market Protocols

Mayer Brown - Energy Forward
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Mayer Brown - Energy Forward

In the now obviously challenged Electric Reliability Council of Texas (ERCOT) power market, a strange dance recently occurred. On February 21, 2021, the Public Utility Commission of Texas (PUCT), which oversees ERCOT, issued an order (Order) authorizing ERCOT to use its sole discretion in taking actions under the ERCOT Nodal Protocols to resolve financial obligations between a market participant and ERCOT. The Order further stated that ERCOT's discretion included, but was not limited to, ERCOT's ability to take the following actions:

  • Deviate from protocol deadlines and timing related to settlements, collateral obligations and invoice payments;
  • Utilize available funds, such as undistributed congestion revenue right auction revenues, to cover short-paying invoice recipients;
  • Relax credit requirements and releasing cash or other collateral to provide short-term market-participant liquidity;
  • Deviate from protocol requirements regarding the maximum amount of default uplift invoices;
  • Suspend breach notifications to certain market participants for failure to make payment or provide financial security; and
  • Produce reconciliation settlements following market stabilization.

The Order specifically directed that:

1. ERCOT must exercise its sole discretion to resolve financial obligations between a market participant and ERCOT as provided by the Order.

2. Any and all provision [sic] of the ERCOT Nodal Protocols are waived to the degree necessary to allow ERCOT to take the actions ordered [t]herein.

3. ERCOT must report to the Commission twice each day, beginning February 22, 2021, of the the [sic] actions it has taken in response to the Order.

4. ERCOT must direct any questions regarding its obligations under the Order to the [PUCT’s] Deputy Executive Director or her designee.

However, the Order also stated that it “does not relieve market participants of payment or financial security obligations with ERCOT,” and, “[m]oreover, market participants remain liable for all charges associated with any activity related to its relationship with ERCOT and any expenses arising from the consequences of termination of a market participant's agreements with ERCOT or revocation of the market participant's rights to conduct activities with ERCOT.”

Acting promptly following the Order, on February 22, 2021, ERCOT issued a notice to market participants stating that ERCOT was “temporarily deviating from Protocol deadlines and timing related to settlements, collateral obligations, and Invoice payments while prices are under review” and that “[i]nvoices or settlements will not be executed until issues are finalized by State leaders considering solutions to the financial challenges caused by the winter event, which is anticipated to occur this week.”

Then, on February 23, 2021, ERCOT issued another notice stating that “ERCOT is continuing to use its discretion authority under that order to help protect the overall integrity of the financial electric Market in the ERCOT Region.” As an example, the notice said that “ERCOT will begin utilizing up to $400 Million in undistributed Congestion Revenue Right (CRR) auction revenue to assist in covering short-paying Invoice Recipients.” Notably, ERCOT’s notice indicates that distributions to which a CRR trading participant is entitled might be withheld but does not explain what rights the CRR trading participant would retain, exactly when distributions should be expected, whether and when the CRR trading participant will be made whole by the market, nor whether the dollar amount will be sufficient to provide readjustment cover to a market that has seen billions of dollars in cumulative price spikes in a matter of few days.

The February 23, 2021, notice went on to state: “While the Commission has provided ERCOT with discretion to take actions to help mitigate financial defaults and Market uplift resulting from short-paying Market Participants, such actions by ERCOT will only provide limited financial support to address the Market’s current liquidity issues.” It then said that “ERCOT encourages Counter-Parties and their represented Resource Entitles and Load Serving Entities to explore all available financial and/or business transition options at this time.”

In the final step of this strange dance and now no longer waiting for state leaders, ERCOT issued a second notice on February 23, 2021, stating that “ERCOT has ended its temporary deviation from protocol deadlines and timing related to settlements, collateral obligations, and invoice payments” and that “[i]nvoices and settlement will be executed in accordance with Protocol language.”

Undoubtedly, ERCOT market participants are still hoping for further clarification of market financial practices in the coming days, especially in light of the second of the two ERCOT February 23 notices, but it is less clear as to where such clarification will come from as the PUCT meeting scheduled for February 26, 2021, was cancelled to allow focus on state legislative hearings; however, some market participants are not willing to wait. In what appears to be the first action by a market participant relating to the February storm event, on February 25, 2021, a Texas qualified scheduling entity (and parent company of a retail electricity provider) filed a petition with the PUCT requesting emergency relief and a waiver limited in time and scope of section 9.6(2) of ERCOT’s Nodal Protocols to allow the entity to delay payment of settlement invoices and to dispute invoiced payment amounts.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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