Energy Legislation Pending Approval

Texas lawmakers in the current legislative session are pressed with time to pass some type of legislation to address and fix some of the issues that ensued during winter storm Uri. There were a few pieces of legislation that were gaining popularity a few weeks after the winter storm, one of which was Senate Bill 3 (SB3). This proposed bill originally suggested a ban on real-time, index-based services, limited wholesale electricity prices, and mentioned the winterizing of generating assets. Several amendments and votes later, SB3 passed the Senate and it is now in the House, waiting approval before the legislative sessions end on May 31. Another bill that has already passed the Senate and House this May is House Bill 16 (HB16) and will most likely be signed by Governor Abbott in the next few days.

House Bill 16 (HB16) concentrates on some parts of SB3, such as placing bans on index-based electricity services for residential and smaller commercial users.  Index-based electricity services present risk for the consumers since they are entirely exposed to unstable real-time electricity rates. In bear markets and when the electricity supply is plenty, these services are beneficial. Nevertheless, winter storm Uri proved how that risk can be disastrous. Figure 1 below shows the variation of real-time prices in North Texas in years with the highest annual and monthly index prices. Wholesale index prices during and after Uri were of a higher magnitude than ever seen before. In 2020, the average price for index-based electricity rates was $22/MWh, during and after Uri the prices shot up to the price cap of $9,000/MWh. HB16 proposes to not allow electricity suppliers to enroll small commercial and residential customers into that type of service structure to make sure they are not exposed to the same scenario in the future.

The new legislation would still allow the large commercial customers to enter index-based contracts given that they understand the risks that could occur due to the nature of those services.

All retail electric providers (REPs) are going to be required to include language in their contracts that describes the price risk and unpredictability of wholesale energy prices. While it is not detailed in SB16, this requirement also applies to holdover language in retail energy contracts. Energy contracts many times contain agreements that allows REPs to transfer their clients to index-based rates once the fixed price contract expires and a new one is not signed. The index-based holdover rates will most likely be replaced by month-to-month pricing that is higher than the expiring fixed price rate. HB16 would also apply to hybrid structures where some of the client’s energy volume is indexed at real-time prices. In the signed electricity contract, there must be an acknowledgement of the wholesale energy price risk, or in a signed addendum.

Senate Bill 3 (SB3) would currently require winterizing all generation, transmission, and natural gas pipelines. Both House Bill 14 (HB14) and 3648 (HB3648) include legislation that would protect essential facilities and infrastructure from rolling blackouts. HB14 is still in the committee while HB3648 is up for debate in the Senate.

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