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Texas Grid Operator in Bankruptcy Showdown Over $2 Billion Charge

Feb. 10, 2022, 11:01 AM

A bankrupt Texas electric company’s battle with the state’s grid operator over massive financial losses from last year’s historic winter storm threatens to shock the state’s energy market and launch a wave of similar bankruptcies.

Brazos Electric Power Cooperative Inc., which filed Chapter 11 in March 2021, was one of the first energy companies that sued to reduce its exposure to multibillion dollar charges from grid operator 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 nearly overnight, the generation and transmission co-op says. Brazos says it incurred losses because it didn’t pass on the high costs to its members.

In a trial beginning later this month, U.S. Bankruptcy Judge David Jones will determine whether ERCOT has a legitimate claim to the $1.9 billion it’s seeking from Brazos, or whether the grid operator must reduce its bill.

The outcome could influence numerous other lawsuits ERCOT is facing and may drive other companies to file Chapter 11 either to avoid paying the charges or get back what they believe was overpaid.

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

Starting Feb. 13, 2021, a winter storm blanketed much of the 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 estimated economic damages of up to $130 billion, according to state reports.

Over the course of seven days, the price of electricity in Texas was more than 400 times the average price charged in 2020, according to natural gas and electricity retailer Just Energy Group Inc. The state’s wholesale market consummated $55 billion in transactions for the week, an amount that normally would take four years to be realized, Just Energy said in court filings.

In Texas’ deregulated independent grid, generation companies produce electricity that retailers buy and sell to about 26 million individual customers. ERCOT, a nonprofit corporation, is responsible for procuring energy within the state’s unique market and supplies it to co-ops like Brazos. ERCOT also maintains reliable operation of supply in the system. The grid operator compares its function to that of an air traffic controller.

ERCOT’s energy billing during the storm resulted in 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 also are challenging ERCOT’s electricity bills as part of their Chapter 11 cases.

Scarcity Conditions

During the storm, electricity demands skyrocketed, but frozen equipment and pipelines prevented supply from keeping up.

ERCOT issued its highest level of emergency Feb. 15, directing transmission operators to curtail service, or “load shed,” to avoid overwhelming the power grid. The Public Utilities Commission then ordered ERCOT to set prices at the highest allowable rate—$9,000 per megawatt hour—to reflect the scarcity of power in the market.

Temperatures finally rose enough Feb. 19 for the grid to normalize.

The state government has since enacted measures to prevent another disaster. But questions still linger over pricing decisions and what went wrong last year.

“It’s very hard 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 main defenses has been that it’s an arm of the state and therefore can’t be sued in federal court.

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

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

Early Answers

But the Brazos bankruptcy proceedings already are answering some of those questions.

The Brazos case proceedings will allow other Texas power market participants subjected to the same scarcity pricing 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 rejected 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 wasn’t a debt incurred in Brazos’ ordinary course of business. As a result, ERCOT’s claim doesn’t take precedence over creditors with general unsecured claims in the bankruptcy, forcing ERCOT to split recoveries with other unsecured creditors.

ERCOT also has argued that it simply followed PUC orders on electricity prices.

“The orders dictated what the market price in the state of Texas was for energy during the time that this order applied and that applied during the entire winter storm,” ERCOT attorney Jamil Alibhai of Munsch Hardt Kopf & Harr PC said at a Jan. 31 court hearing in the Brazos case.

Yet ERCOT charged maxed-out prices for 33 hours after load shed had ceased, resulting in a total $16 billion in overcharges, according to an independent monitor hired by the state government.

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

Other Texas power generators have sought to intervene, saying they will be forced bear the economic burden if the bankruptcy court deems any of ERCOT’s winter storm charges invalid. ERCOT’s system includes “uplift” charges, which spread debt from defaults on payments across the market.

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

To contact the reporter on this story: Alex Wolf in New York at awolf@bloomberglaw.com

To contact the editors responsible for this story: Laura D. Francis at lfrancis@bloomberglaw.com; Roger Yu at ryu@bloomberglaw.com