Winter power collapse forces legal action in Lone Star State
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
For many households and businesses, this winter will be the first in which they face freezing weather and soaring energy bills. But these are uncomfortable conditions that Texans know all too well.
In February 2021, Storm Uri ripped through much of the US, hitting Texas hard. The Arctic blast devastated the state — killing at least 200 people, and causing blackouts for nearly a week, as well as widespread damage to homes and infrastructure.
The Federal Reserve Bank of Dallas estimated Storm Uri’s economic costs at $80bn to $130bn, while a survey by the University of Houston Hobby School of Public Affairs found that 69 per cent of Texans lost power during the month.
The bad weather sent power prices soaring, which caused difficulties for many of the electric co-operatives (local energy suppliers) in paying their bills, and shone a light on the fragile state of Texas’s power delivery systems.
Winter Storm Uri leaves over six inches of snow in more than 25 states across the United States.
It has also highlighted the role that lawyers played in helping some of the biggest corporate casualties navigate rocketing costs.
Nearly 90 per cent of Texans rely on the Electric Reliability Council of Texas (Ercot), which manages the electricity grid and balances the interests of electric co-operatives and power generators in the state’s wholesale energy market, to provide consumers with energy.
During Storm Uri, as power supplies failed, the Public Utility Commission of Texas urged Ercot to raise prices in response to shortages.
Regulators then allowed wholesale prices to rise to $9,000 per megawatt hour (MWh) for several days — more than 300 times the typical price at that time of year.
The result was that, while many Texan power retailers were faced with unexpected bills of billions of dollars to pass on to customers, some generators enjoyed billions extra in profits from selling power at these extraordinarily high rates.
“The winners were the gas suppliers and generators, and the losers were consumers and utilities who were relying on a stable market price,” says Clinton Vince, chair of the US energy practice at global law firm Dentons. “Several of our clients in Texas received unbelievably astronomical bills,” he says, adding that one was sent a near-$1bn bill for five days’ energy usage.
“It was equivalent to several years of electricity costs,” Vince adds.
The preparedness and actions of the price-setting regulators in response to the winter storm remain controversial.
A study conducted by London Economics International in June 2021 found that prices would have been just $2,404 per MWh if not for the directive to raise them.
“If our clients didn’t pay these gigantic bills, they would be in default and barred from the markets,” Vince says.
Faced with such eye-watering energy costs and the threat of bankruptcy, many retail distributors turned to law firms for advice. Orrick worked with 76 co-operatives to develop a new law to help reduce their substantial costs. The law, SB 1580, allows co-operatives to securitise their unpaid energy bills, enabling them to spread the costs over several years instead of being forced to stump up the vast sums immediately.
“Early on, there were differences in opinion,” says Kyle Drefke, partner at Orrick. “Different co-operatives were affected in different ways by the winter storm. Some incurred a large amount of costs; some incurred an extraordinary amount of costs; some were owed money following the storm.”
So Drefke and his team developed a flexible law that would accommodate the needs of all 76 clients. He says it gives them “flexibility to approach the market in a way that took advantage of the benefits of securitisations but did not mandate doing so if a co-operative felt that other financing options were best for its members”.
“The extent and duration of electricity blackouts were much more severe in Texas, specifically within the territory served by Ercot,” says credit rating agency Moody’s, adding that “fuel supplies were squeezed, resulting in extremely high power and gas prices”.
The state’s Republican governor, Greg Abbott, signed the bill into law in June 2021.
One group that took advantage of the securitisation was Rayburn Country Electric Co-operative, which sought help from Vince and his team at Dentons.
The team developed structured finance for the co-operative to help Rayburn pay its bills and prevent it from collapsing into bankruptcy. Rayburn raised $908mn in bonds set to mature in 2049, allowing the group to cover the extraordinary costs incurred because of the extreme weather.
“We were able to finance the debt using the security of future payments by ratepayers, [and] spread it out over many years so that the monthly charge was pretty small,” he says. “That not only allowed the ratepayers not to have price spikes, but it provided much-needed liquidity in the co-op and it also allowed them to have their bond ratings restored.”
The “recovery bonds” mean Rayburn can pay its bills over several decades rather than being forced to pay a lump sum upfront and potentially face bankruptcy.
And, since Rayburn became the first to pay its bills in this way, others have followed suit.
The Oklahoma Natural Gas Company raised $1.3bn in bonds in August under a similar structure, to help pay back costs incurred after Storm Uri. Meanwhile, 140-year-old utility company CenterPoint Energy has filed an application to securitise its costs, showing how the new law and form of finance are helping energy companies across the US to find a way out of the pain caused by the great storm.