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The House Committee on State Affairs met on March 23 to hear invited testimony concerning securitization and take up a number of bills. This report covers all bills on the agenda: in order, HB 2586 (Thierry), HB 1510 (Metcalf), HB 2000 (Huberty), and HJR 2 (Huberty).

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.

Invited Testimony

Lee Deviney, Texas Public Finance Authority

  • Aware that several bills have been filed on securitization, have been ramping up to figure out the role of TPFA in relation to this issue
  • Paddie – Could you give us a historical perspective
    • Have not done a transaction like this at TPFA, we do issue debt for a variety of purposes
  • Paddie – Do you see any particular challenges with you doing it?
    • TPFA can execute this, need additional resources depending on what it looks like

Paul Jack, Debt Specialist

  • Specific category of costs looking to be financed, repayment comes from a special itemized charge on customer bills, authorized by legislature
  • Generally looked at as more beneficial to utility and customers than bonds, etc.; more efficient
  • Efficiencies come from high ratings & resulting low interest, insulation of lenders from utility bankruptcy, off balance sheet for utility finance purposes
  • Utility bonds have issues like need to finance debt service, cash funded reserves, etc. that increase cost of borrowing; securitization can avoid or reduce impact of these
  • Important to insulate from bankruptcy of utility, special charge should be non-bypass-able
  • Securitization could be a tool to address high costs from the winter storm & help with prep for events like this in the future
  • Raymond – Asks after history of securitization, do you recall how much we did before
    • I don’t, measured in the billions; can follow up
  • Raymond – Wants info on how much it was and over what period of time, as well as how it was paid
    • Paid through utility bills within individual service areas of a utility, can look into this
  • Raymond – Asks for data from states that have done this
    • Can get this to you
  • Raymond – What are some of the purposes you could see us using securitization for?
    • Two specific needs across the state, one is the ability of utilities to make payments due to storm
    • Can also be used to address what can be done in the future, incl. infrastructure improvements
  • Raymond – Can also be used to help utilities stay afloat?
    • Securitization is a more cost effective way of borrowing, customers are still ultimately paying for it
  • Raymond – Is cost assessment is more general statewide or regional
    • Policy discussion for the legislature
    • In the first category of costs that are payments due, utilities will need to do what they have to in order to stay afloat, might be tougher to come up with statewide solutions beyond flexibilities in method of finance
  • Raymond – Didn’t know if we’re looking at one big number in one package, or one big number divided into 20 separate securitizations
    • With storm costs, will be looking at multiple entities looking to address those & all will be in separate unique situations
  • Raymond – So there will be 20 different agreements
    • Anything is possible in the future, there could be a number of small utilities that pool
    • Larger ones will probably have more unique situations
  • P King – Can’t think of when we’ve done a securitization bill for more than entity, can you think of a time we’ve pooled debt? References Centerpoint, Entergy
    • Nothing specific comes to mind relating to securitization
  • P King – Only thing sort of like this was SWIFT
    • TWDB does a number of programs
  • P King – We created a pool of funding and then individuals could apply to this for a lower rate; utilities are all very different
    • SWIFT isn’t securitization, but it is a pooled loan program
  • Shaheen – Is TPFA the entity issuing the debt?
    • Whoever the legislature authorizes, whoever the legislature authorizes will do it
  • Shaheen – So this is paid back in the consumer bills on a monthly basis?
    • Yes
  • Shaheen – So benefit to utility is that it’s off balance sheet so it doesn’t’ affect other areas
    • Correct
  • Shaheen – If a utility goes under, how would we collect the fees?
    • Actual statute affecting the fee and placing it on the bill would survive the bankruptcy
  • Shaheen – So another utility steps in and collects fees?
    • Yes, the fees would bypass the new accounts and be held in sort of a trust fund

Leslie Brock, Attorney General’s Office Public Finance Division

  • Provides overview of AG’s Office role in securities; reviews public securities issued by public entities
  • Securitizations by private entities are not necessarily in the purview of the AG’s Office, possibly under RRC or PUC depending on the utility
  • Concept is marrying concepts of state agency issuing bonds that would be paid pursuant to financing order that specific utility would apply for
  • AG and Comptroller would review and approve for legal authority
  • Raymond – Are you saying that under Utilities Code Chapter 39, utilities can go to PUC, etc. to ask for permission to pay for a specific expense?
    • That was for deregulation, not sure if there are any financing orders under that Chapter
  • Raymond – Can they go to the PUC right now for permission to charge ratepayers on an expense?
    • Here because AG’s Office reviews local and state issuers
  • Raymond – If legislature passes bill to securitize Uri-related issues, AG’s Office looks at it?
    • Yes
  • Raymond – Have there been any instances where you looked at something like this and didn’t approve?
    • Not sure we’ve had state bonds using securitization feature
  • Raymond – Has the legislature passed a bill that specifically securitized something before?
    • Not aware of any through public utility financing orders
  • Raymond _ But you don’t see any reason we couldn’t do it?
    • Right, if it’s limited to costs, accomplishes public purpose, safeguards exist, etc.
    • AG’s Office ensures that statute is followed

Thomas Gleeson, Public Utility Commission

  • Through financing orders PUC has approved $11 billion in securitization since 2001
  • Under current law, System restoration costs associated with storms can be securitized

Piper Montemayor, Comptroller’s Office

  • Public entities would go through AG’s Office and Comptroller’s Office
  • Raymond – Any updates on budget certification numbers?
    • No info

HB 2586 (Thierry) Relating to an annual audit of the independent organization certified for the ERCOT power region.

  • Adds to utilities Code requiring PUC to conduct annual external audit of ERCOT’s financial stability and compliance audit; to be provided to legislature not later than 60th day after audit, published to PUC web portal
  • Currently PUC can conduct audit, but not required
  • ERCOT can audit itself, but auditing entity serves at pleasure of ERCOT; not independent
  • P King – So this would be an annual audit of generation companies, TDUs, etc?
    • Audit of the ERCOT corporation itself, incl. budget, financial statements, and compliance
  • P King – So it’s an audit of ERCOT, not companies in the market?
    • Correct
  • P King – Passing a lot of bills loading up PUC with a lot of work, will need to think about additional resources if we continue
    • References statements by PUC Chair Arthur D’Andrea that audit was needed
  • P King – I agree with you, I think there needs to be a management audit to analyze everything in the entire event; good bill, but just wanted to note we’re loading them up
    • ERCOT is required to submit a budget annually, but no checks and balances on expenditures
  • Raymond – I think we could find resources to do this from the existing budget; when we finish doing things we need to do, will need to invest more money into prevention
    • Speaker Dade Phelan said we must promote accountability and take steps to close gaps
  • Harless – How does ERCOT come up with their budget without an audit?
    • There is an internal process, they submit their own budget & PUC approves; but no required check on expenditures

HB 2586 left pending

HB 1510 (Metcalf) Relating to the response and resilience of certain utilities to major weather-related events or natural disasters.

  • CS laid out
  • CS clarifies that the 10 megawatt exception is specific to utilities operating only in the non-ERCOT power region
  • Waiting on one final change to make it clear bill only applies to non-ERCOT
  • HB 1510 encourages electric utilities to invest in infrastructure while reducing utility costs
  • Offers new low-cost securitization method for recovery
  • Allows PUC to consider benefits of generation from multiple fuel types and uses fuel storage

Cyrus Reed, Lone Star Chapter of the Sierra Club – On

  • Securitization is something the Sierra Club has seen in many states, good tool
  • When we do a tool like this using public financing, want to make sure this is in the public interest; needs to be a careful check that costs are reasonable
  • Had a cost check at the PUC for entities like Centerpoint
  • As we think about the supply side, shouldn’t forget the demand side; millions struggled in their homes, some states use securitization for things like payment assistance, weatherization, etc.
  • Raymond – Asks after these things covered by securitization
    • If purpose of bill is hardening system for extreme weather; in a non-ERCOT competitive market we should be careful entities aren’t using securitization to add generation to affect the market
    • Want to ensure prudent costs are covered
  • Raymond – Assuming you want us to focus on costs incurred because of the storm and things we should invest in for the future
    • Yes, this bill is about results from the storm and prepping for the future; okay with concept, but want to ensure there is language to protect consumers
  • Raymond – What about other states using this to set aside funds for payment assistance?
    • Other states have used this
  • Raymond – Do we have bills filed dealing with this?
    • There are other bills focusing on pricing, particularly for electric coops; not aware of bills on assistance for those who can’t pay
  • Raymond – Trying to lock on to if we can do something like that
    • I think we can, don’t want to stray too far from this bill, but happy to discuss
  • Raymond – People in all districts who maybe would be interested; would be helpful to have examples
    • Would be happy to provide examples on using securitization for consumer support
  • Paddie – What we’re proposing here would benefit consumers, right?
    • If done properly with checks and balances

J.P. Urban, Association of Electric Companies of Texas – For

  • Continuation of effort to help ratepayers affected by the storm, HB 1510 would help with weatherization, hardening, etc.
  • Securitization is being used at the PUC for other issues
  • Allows facilities to install, own, and operate generation up to 10 megawatts without going through CCN process; encourages dual fuel capacity by allowing consideration as benefit

Tom Glass, Protect the Texas Grid – For

  • Didn’t anticipate the storm when formed, concerned more about solar flare potential to disrupt electric grids around the state and globe
  • Shouldn’t be concerned just about winter weather, should think about other hazards like solar weather, EMP attacks, physical attacks, cyber attacks, etc.
  • Securitization is a means that can be used to lower rates

Matthew McFarland, Python Holdings, Patriot Power Group – For

  • Provides an overview of Python Holdings portfolio
  • HB 1510 will allow Python & power generation to get into substations faster without needing to file a CCN; will help create a more diverse and stable grid

HB 2000 (Huberty) Relating to the funding of utility reliability projects by the Texas Water Development Board and other entities; authorizing the issuance of revenue bonds, granting rulemaking authority, and making an appropriation.

  • Not offering CS at this time to continue working on bill with committee input
  • Need to guarantee state will support projects to weatherize facilities
  • Proposing creation of State Utilities Reliability Fund (SURF) and revenue fund, will function similarly to SWIFT; will likely need to give TWDB ability to create other funds to support functions
  • When we did SWIFT in 2015 we chose $2 billion and bought a large amount of projects
  • Provides overview of membership of SURF; drawn from Comptroller, Senate & House appointees, etc.

Cyrus Reed, Lone Star Chapter of the Sierra Club – On

  • Shouldn’t forget demand side, a lot of demand is A/C in summer; low interest loans could be used for consumer use

Alan Schurr, Enchanted Rock – For

  • Provides overview of Enchanted Rock microgrids, helped support companies during the weather event
  • Recommends bill language be amended to include dual-purpose microgrids for resiliency
  • Raymond – So your customers never lost power?
    • 143 didn’t lose power in the microgrid area, have a little over 200 total
  • Raymond – How long have microgrids been around?
    • Local generation and storage with load control; new term
  • Raymond and Schurr discuss microgrid operations
    • Enchanted Rock is connected at the location with gas fire generators standing by; provides examples of HEB or A&M receiving support generation
    • Microgrids can also provide generation into the ERCOT market
  • Raymond – Would like to know more, seems like a good example of preventative practice

Julia Harvey, Texas Electric Cooperatives – For

  • For rural coops, service costs are ultimately assigned to end users, HB 2000 allows coops to access another tool to secure service during emergencies
  • Creates a mechanism to leverage loans for proactive measures going forward; HB 3544 would help coops manage address storm costs through securitization
  • Regarding use of fund to create excess electric supply during high demand, would be a departure from how system supply is currently determined as market typically dictates this

J.P. Urban, Association of Electric Companies of Texas – For

  • Addresses impacts from winter storm Uri, another useful tool to support ERCOT resiliency
  • Have 2 concerns 1) program should only bolster generation at existing facilities rather than fund new generation, 2) program could be improved by supporting installation of dual fuel capacity where appropriate
  • Raymond – Do you have an opinion on microgrids?
    • Don’t know enough about microgrids, do know that Enchanted Rock is a competitive product
  • Raymond – Are they the only ones with microgrids?
    • Probably others out there
  • Raymond – Do need to look at investing in generation, clearly didn’t have enough during winter storm Uri
  • Paddie – Concerned about usage for new generation and wanting to allow dual fuel?
    • Correct
  • Paddie – So recommendation is to mention this specifically? Dual fuel isn’t under reliability?
    • Good point, if this is how you look at it

Piper Montemayor, Comptroller’s Office – Resource

  • No questions

Tom Glass, Protect the Texas Grid – On

  • Major concern is that we include preparation for all hazards like solar weather, EMP, etc.
  • Agree with Enchanted Rock about microgrids, Enchanted Rock made direct contracts with distribution companies and avoided ERCOT; as needed generation could be very beneficial
  • Should make sure these types of companies are included
  • Raymond – Similar to solar panel process, you’re saying microgrids can be done through your house?
    • Yes, may be too far to go to residential
    • Not just about tech, also about how they’ve arranged their corporation to fit in regulatory space
  • Paddie – Do you not think reliability is a pretty big catchall, would different threats not fit into this category?
    • Yes, but would need to look at bill language more; certainly see limitations in HJR 2

Walt Baum, Texas Cable Association – On

  • SWIFT was one of the most important funding goals passed by legislature, concept of doing this for reliability is a good one
  • Broadband providers are not utilities as typically understood, need a definition for internet service providers or similar in the bill
  • Bill is for winterization and adequate capacity for high demand; high demand for broadband does see high demand, but not normally tied to weather events
  • Saw high demand when people shifted to work from home and remote school
  • If broadband sections stay, then need to be focused on access and capacity

Peter Lake, TWDB Chair – Resource

  • Provides background on SWIFT
  • Complexity and risk would need to be carefully considered; certainly areas where a SWIFT-like program will be effective, but flexibility will be key
  • Need flexibility in design to make an effective tool that is attractive to the end customer, also to utilize federal dollars that become available
  • Need to minimize risk to state dollars and protect state’s overall credit
  • Loan program could be very beneficial for small utilities, could also have alternative financing to expand power grid capacity
  • Asks that you use funds to enhance water resiliency and wastewater issues as well
  • Paddie – Would implementation require you to work with other agencies?
    • Certainly think so, would need to leverage expertise
  • Paddie – Inclusion of private companies is a little different, what impact do you think this would have?
    • Very distinct from public water infrastructure under SWIFT, goes back to flexibility needed to run an effective program
  • Paddie – DO you think challenges can be addressed with a single financing tool or are others needed?
    • SWIFT like tool would be effective, but breadth of sector means we probably would need multiple financing methods
  • Paddie – Can you do this with current resources?
    • At the moment we’re stretched thin with flood programs, would need substantial new resources to do job correctly
  • Paddie – How long did it take to implement previous financing program?
    • Flood and infrastructure plan took a little over 18 months, SWIFT took 2 years
  • Paddie – Would it be more beneficial to identify needs due to the storm
    • Would welcome any time or resources further clarifying infrastructure needs

Kevin Couch, Connect2Educate – On

  • Supports broadband testimony, have some concerns about how HB 2000 exists harmoniously regarding new broadband office bill to pull federal dollars

Michele Richmond, Texas Competitive Power Advocates – On

  • Using fund to provide new generation into ERCOT would be a subsidy that would affect competing market entities; could cause existing resources to retire early, prefers that scope be narrowed to weatherization and reliability for existing entities
  • Some confusing things in definition like electric utility including equipment; current law specifically excludes power generation, requests they be addressed in another definition

Rep. Huberty closes

  • Need to make sure we do everything we can to help providers & avoid entities going offline during emergencies

HB 2000 left pending

HJR 2 (Huberty) Proposing a constitutional amendment providing for the creation of the State Utilities Reliability Fund and the State Utilities Reliability Revenue Fund to provide financial support for projects that enhance the reliability of water, electricity, natural gas, and broadband utilities in this state.

  • Constitutional authorization for SURF
  • Critical to provide opportunities to do P3s, will continue to work with stakeholders

Tom Glass, Protect the Texas Grid – On

  • Main objective of organization is to protect grid against all hazards incl. solar weather, EMP, etc.
  • Hardening against solar flares can also protect against EMP and cyber threats
  • Current HJR 2 states purpose is to weatherize facilities and provide adequate capacity during high demand; language is broad enough to fund projects to harden
  • Could add language to allow hardening facilities against potential attack; need to harden command centers, etc.

Piper Montemayor, Comptroller’s Office – Resource

  • No questions

Peter Lake, TWDB Chair – Resource

  • No questions

HJR 2 left pending