House State Affairs met on April 1 to hear testimony on a variety of bills. This report covers pending business voted out of committee and HB 3544 (Holland). The full agenda can be found here, and the archive can be found here.
This report is intended to give you an overview and highlight of the discussions on the various topics taken up. It is not a verbatim transcript of the discussions but is based upon what was audible or understandable to the observer and the desire to get details out as quickly as possible with few errors or omissions.
HB 393, Passed out 10-3
HB 1345, Passed out 13-0
HB 3130, Passed out 13-0
HB 1380, Passed out 13-0
HB 1804, Passed out 13-0
HB 525, Passed out 12-1
HB 2362, Passed out 9-3, 1 absent
HB 1925, Passed out 8-3, 1 absent, 1 PNV
HB 425, Passed out 11-1, 1 absent
HB 3073, Passed out 12-0, 1 absent
HB 2894, Passed out 12-0, 1 absent
HB 3151, Passed out 10-2, 1 absent
HB 2683, Passed out 12-0, 1 absent
HB 1239, Passed out 12-0, 1 absent
HB 1427, CS Passed out 12-0, 1 absent
HB 1510, CS Passed out 12-0, 1 absent
HB 2199, CS Passed out 12-0, 1 absent
HB 1572, CS Passed out 12-0, 1 absent
HB 1607, CS Passed out 12-0, 1 absent
HB 2483, CS Passed out 12-0, 1 absent
HB 3544 (Holland | et al.) – Relating to the restructuring of certain electric utility providers.
- Committee sub enables cooperatives to use security financing to recover costs incurred due to the winter storm’s effects
- Bill permits electric cooperatives the structure and flexibility to acquire securitized bonds, not currently allowed to access
- Would allow cooperatives to access better financing at lower interest rates, improving rates for consumers impacted by higher costs due to winter storm disruptions
- These bonds are not debt for the state, and the state will not take or permit a state agency to impair the value of the securitized item until fully paid off
- Raymond – Who pays these bonds?
- Members of the cooperatives and their retail bill payers
- Not spread out outside the cooperative
- Raymond – What are extraordinary costs and expenses in context?
- The week of the winter storm has seen cooperatives especially presented with massive bills, exceeding $400 million
- Raymond – I want to help the cooperatives, but the language of the bill doesn’t define the specific period in which rates spiked leading to the costs
- The first page does define the timeframe, just not in the section mentioning the extreme costs
- Raymond – What would the amount overall be?
- It would vary by coop, not advised to the total
James Schaefer, Guggenheim Partners – On
- Often, securitization products in times like this are cheap forms of financing that allow costs to be spread over several years, lessening costs to customers
- Securitization bonds are a tool the state can use to raise money at low rates and low cost
- Entities would be able to fund those damaged by the winter storm, and the costs could be spread out over the entire ERCOT system and over 20-30 years, resulting in very low costs to the system and to the consumer
- Paddie – Can you discuss the benefits of securitization bonds more?
- The asset being sold is a revenue stream – it’s a charge on customers’ bills that is rated as a AAA bond, with very low cost of financing
- You can finance an event like the storm’s costs at a very good rate
- King – Do you see the state or controlling entity determining the proper amount of debt relief?
- You would need to figure out how much debt relief is needed, and then groups in an entity would need to approach individually securitization bonds to recover their losses
- This is a large financing market, lot of capital available at low cost
- Raymond – What is the significance of Guggenheim?
- First startup investment bank that is fully functioning on Wall Street
- Raymond – The handout and comments you made, can you discuss the payment model a little more?
- I’m looking outside in, just explaining that there could be a more elegant solution to funding
- Instead of executing the securities, create a fund of securitization bonds which is lower cost and can leverage more capital, whereas if you start at the utility level, there is more friction and it is more expensive to finance each utility
- Covering the entire state would be more efficient and cost effective
- Raymond – What numbers do you hear being discussed for costs associated with the storm?
- Various amounts are being discussed depending on who is hurting the most, don’t want to comment because its uncertain and unconfirmed still
- Raymond – How complex is this really? How much is it going to cost, and what are we going to use it for?
- There are unintended consequences from letting the situation “fester” – additional costs will be incurred from bankrupted companies, etc. Customers will bear the bill at the end of the day
- Advice is to stay big-picture, try and reorient energy system to where it was pre-disaster
- Need to add liquidity to the system – this is a big financial crisis. If you pick winners and losers during the financial crisis, it creates instability and uncertainty long-term
- Securitization bonds will provide funds at low rates and low cost over time to provide stability, spread out over the entire system
- Raymond – We don’t even know how much was lost across different segments of the system yet. Its difficult under these conditions to make any decisions or have any discussions about solutions because we don’t know the extent of the problem. Plus, customers around the state will probably not want to pay for other areas and co-ops around the state
- Raymond – Given a hypothetical number of $20 billion or $30 billion, what would the cost be to consumers under the securitization model?
- We would have to run those models and get back
- Raymond – We need to know, because we have to justify to our constituents and other members why they should pay more for losing power.
- I understand, want to help you justify this because the system is broken
- Shaheen – If a participating co-op runs into a financial crisis or some other issue and cannot meet its payments on the fund, does that financing get redistributed through the other payers?
- If that entity went bankrupt, the customers would still need electricity, so a new entity would just pick up the charges and services
- Securitization bonds are “bankrupt remote” – unlikely that they will go away or go bankrupt due to necessity of electricity providers and services
- Raymond – In that scenario, wouldn’t the state back up a co-op or provider to ensure they don’t go bankrupt?
- Perhaps, but the securitized bond should continue backing
- State would recover, but there is no risk to the state – state would be overseeing it, but the costs would be on the cooperatives not the state overall
- More efficient way of handling the issue
- Howard and Schaefer have back and forth about specifics relating to the process of co-ops and customers picking up the cost of securitized bonds and the process for that, repetition of previous responses about the financing
- Deshotel – If we didn’t have a small increase in costs to cover the securitization, would we see much larger costs?
- If you let the current crisis play out, the companies suffering will really suffer. Hundreds of thousands of people will pay a lot more than if you take action
- It also sends a message to the market that the state will let business fail
- Raymond – Following up on Howard’s question: if a co-op goes bankrupt, will the state have to cover the costs of the financing on behalf of the co-op?
- If an entity goes bankrupt for some reason, the state and taxpayer would not pay for that
- The customers of that entity will simply continue to pay the administrative fee for the securitization fund – customers will support the bankruptcy
- Paddie – What are the predicted rates and costs to consumers based on?
- Actual charge would not be determined until the actual value of securitization bonds needed is known
- We have done theoretical calculations, ex. On $10 billion fund, which results in an additional cost of $1.20 per month per customer
Mark Stubbs, Farmers Electric Cooperative, Texas Electric Cooperative – For
- Storm period electric bill would be greater than annual bill – 13,000% higher than normal
- Cooperatives are owned by members, only place to pass costs on is to customers
- Only way to reduce these costs is to spread out the costs over many years, such as through securitized bonds
- Off-balance sheet model of bonds helps lower costs by 1. Allowing us to access AAA bonds with lower credit rating, and 2. Debt is not on the balance sheet, preventing debt service and balance ratios we would not be able to meet
- Lifeline for the cooperative
- Raymond – What do you think should be included in qualifying expenses/cost?
- Not sure what costs exactly should be covered, but can tell you that Farmer’s Electric paid $1.7 million for electricity the week before and week after the winter storm, and paid about $230 million during the week of the storm
Carl Lyon, Texas Electric Cooperatives – For
- The amount of money involved in costs is staggering to both consumers and the cooperatives
- Securitization provides a low cost and frankly the only path for financing the costs incurred during the winter storm by cooperatives
- Bill defines all extraordinary costs during 10 day period of the storm and emergency declaration
- Number may be around $3 billion for coop customers around the state – not final and doesn’t include uplift, but final number will likely be greater than $3 billion
- Spreading cost over all coops will give us better pricing and deals for the securitized bond
- Bill will allow cooperatives to decide if they want to individually address costs, or if they would like to group with other cooperatives to jointly finance
- State will have no financial liability for the securitized bonds
- Raymond – Cooperatives will be able to decide if they would like to individually tackle the financing, or if they want to get into a pool?
- Yes, coops can choose to opt in to the group financing
- Probably only 3 cooperatives that reach the $300 million threshold on their own for better financing options
- Raymond – Will all coops customers pay the same?
- No, depending on the costs incurred per coop, customers will pay more or less depending on the level of financing, divided amongst the different cooperatives in a group
- Raymond – Would coops with a rainy day fund want to participate, would they pay more?
- Coops could participate in the securitization bonds without needing to in order to pay back funds for the winter storm
- Coops with a rainy day fund may choose to participate, and may pay lower rates if they do participate to recoup their rainy day fund
- Paddie – Wanted to clarify who would pay?
- Just cooperative members/customers
- Paddie – Why don’t you use the term ‘member’ in the bill?
- If a cooperative happens to go bankrupt, the charge still sticks with then-members of the cooperative, but the cooperative no longer exists, so “members” are no longer eligible or required to pay those agencies
Cyrus Reed, Lone Star Chapter of the Sierra Club – For
- Securitization is a good tool and can prevent these kinds of unreliability from reoccurring
- Have some recommendations and suggested language concerning types of financing and ensuing transparency and appeals of financing orders
HB 3544 left pending