For many households and businesses, this winter will be the first in which they face freezing weather and skyrocketing energy bills. But these are uncomfortable conditions that Texans know all too well.
In February 2021, Storm Uri crossed much of the United States, hitting Texas hard. The arctic blast devastated the state, killing at least 200 people and causing power outages for nearly a week, as well as extensive damage to homes and infrastructure.
The Federal Reserve Bank of Dallas estimated the economic costs of Storm Uri at $80 billion to $130 billion, while a survey by the University of Houston’s Hobby School of Public Affairs found that 69% of Texans lost electricity during the month.
The bad weather caused electricity prices to skyrocket, which made it difficult for many electricity cooperatives (local energy suppliers) to pay their bills, and brought to light the fragile state of Texas power distribution systems.
Winter storm Uri leaves more than six inches of snow in more than 25 states in the United States.
He also highlighted the role lawyers have played in helping some of the biggest loss companies deal with soaring costs.
Nearly 90% of Texans rely on the Electric Reliability Council of Texas (Ercot), which manages the electric grid and balances the interests of electric cooperatives and power producers in the state’s wholesale energy market. , to supply energy to consumers.
During Storm Uri, as power supplies failed, the Texas Public Utilities Commission urged Ercot to raise prices in response to shortages.
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Regulators then allowed wholesale prices to reach $9,000 per megawatt-hour (MWh) for several days, more than 300 times the usual price at this time of year.
The result was that while many Texas electricity retailers were faced with unexpected bills of billions of dollars to pass on to customers, some producers have made billions in extra profits by selling electricity at these extraordinarily high prices.
“The winners were gas suppliers and generators, and the losers were consumers and utilities who relied on a stable market price,” said Clinton Vince, president of the U.S. energy practice at the global law firm Dentons. “Several of our customers in Texas have received incredibly astronomical bills,” he says, adding that one received a bill for nearly $1 billion for five days of power usage.
“It was equivalent to several years of electricity costs,” adds Vince.
The preparation and actions of price regulators in response to the winter storm remain controversial.
A study by London Economics International in June 2021 found that prices would have been just $2,404 per MWh had the directive not increased them.
“If our customers didn’t pay these gigantic bills, they would be in default and out of the deals,” says Vince.
Faced with such exorbitant energy costs and the threat of bankruptcy, many retailers have turned to law firms for advice. Orrick worked with 76 co-ops to craft a new law to reduce their substantial costs. The law, SB 1580, allows co-ops to securitize their unpaid energy bills, allowing them to spread the costs over several years instead of being forced to accumulate the large sums immediately.
“At first there were differences of opinion,” says Kyle Drefke, partner at Orrick. “Different co-ops were affected in different ways by the winter storm. Some incurred a large amount of cost; some incurred extraordinary expenses; some owed money as a result of the storm.
So Drefke and his team crafted a flexible law that would meet the needs of the 76 clients. He says it gives them “the flexibility to approach the market in a way that leverages the benefits of securitizations but doesn’t require them to do so if a co-op feels other financing options are best for its members. “.
“The extent and duration of power outages were much more severe in Texas, particularly in the territory served by Ercot,” said ratings agency Moody’s, adding that “fuel supplies were reduced, resulting in extremely high electricity and gas prices”.
The state’s Republican Gov. Greg Abbott signed the bill into law in June 2021.
One group that benefited from securitization was Rayburn Country Electric Co-operative, which enlisted the help of Vince and his team at Dentons.
The team developed structured finance for the co-op to help Rayburn pay its bills and prevent it from going bankrupt. Rayburn raised $908 million in bonds maturing in 2049, enabling the group to cover extraordinary costs incurred due to extreme weather conditions.
“We were able to finance the debt using the security of future taxpayer payments, [and] spread it over many years so that the monthly fee is quite low,” he says. “This not only saved taxpayers from price spikes, it provided much-needed liquidity to the co-op and it also allowed them to restore their bond ratings.”
‘Collection bonds’ mean Rayburn can pay its bills over decades rather than being forced to pay a lump sum up front and face bankruptcy.
And, since Rayburn became the first to pay its bills this way, others have followed suit.
The Oklahoma Natural Gas Company raised $1.3 billion in bonds in August under a similar structure, to help repay costs incurred after Storm Uri. Meanwhile, 140-year-old utility company CenterPoint Energy has filed for securitization of its costs, showing how the new law and new form of financing are helping energy companies across the United States find a way out of the pain caused by the great storm.