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Here is an update on last week’s hearings on the winter storm and a preview of what’s on the horizon for this week.

House and Senate hold marathon hearings on ERCOT. Thursday and Friday saw the House and the Senate take hours and hours of called testimony regarding the power outages during the winter storm. Power generators, the Public Utilities Commission, ERCOT, gas pipeline companies, the renewable energy industry and others were questioned as to their role in the grid failure with little in the way of final resolution.

  • ERCOT receives scrutiny. As we suspected, ERCOT received most of the scrutiny from lawmakers. Power generators and ERCOT told different stories regarding the root cause of the power outages, with ERCOT pointing the finger at generators being unable to withstand the winter storm while power companies like Vistra blamed ERCOT for mismanagement of the grid. We expect the scrutiny on ERCOT to continue, with continued personnel changes likely. (See below.)

  • Lawmakers also questioned PUC’s oversight of ERCOT. Some lawmakers also focused on the PUC’s role in overseeing ERCOT. We view this conversation largely as a political tactic designed to shift blame to Republican leadership; the Governor appoints the PUC commissioners and the legislature both confirms those nominees and has legislative oversight over the board. We expect this storyline to continue.

ERCOT Board members resign. Seven ERCOT board members resigned last week in the wake of the hearings. Most of these board members reside out of state – a fact that came to light during the winter storm and one that caused quite a stir among lawmakers. We expect more personnel changes at ERCOT, especially as revelations about the compensation of ERCOT executives continue to percolate.

ERCOT experiences the first non-payment from electric retailer Griddy. Griddy was unable to make payments to ERCOT, after it could not collect payment from its customers. As a result, ERCOT has reassigned its remaining customers. Large integrated power companies, such as Vistra (which is the largest generator of electricity in the state and also owns TXU a retail provider), stand to benefit the most as they absorb many of the displaced retail customers – a ironic result given the wholesale prices Vistra and other large generators were able to charge during the winter event. Griddy markets electricity direct to consumers, passing along the wholesale market price. Griddy charges customers a flat fee for its service. While Griddy has been the focus of much media coverage, the sky-rocketing wholesale prices during the winter storm likely present financial issues for many other retail electric companies, and thus for ERCOT. Griddy provides what is known as variable rate plans, but even fixed rate plans will be confronted with the problem of how to recoup the costs of the higher wholesale rates they paid if they are unable to charge or collect on higher bills to consumers. Moreover, ERCOT socializes missed payments like Griddy among its other retail electric providers, potentially causing issues for many other retail electrics who may be asked to absorb these unpaid bills. As a result, we expect Griddy to be the first of these financial troubles, not the last. These financial troubles may spark litigation against ERCOT and have already raised questions about ERCOT’s alleged immunity from suit.

Senate Finance continues hearings on the state budget. The Senate Committee on Finance has three meetings scheduled for this week, starting Monday at 10:00. (Watch here.) They will hear testimony on Article VI (Natural Resources), Article VII (Business and Economic Development), Article VIII (Regulatory), and Article V (Criminal Justice).

House appropriations subcommittees will begin hearings on the budget; other committees will hold their initial meetings. House committees will have their first full week of hearings. The appropriation subcommittees will meet several times this week, and most other House committees will hold initial, organizational hearings with some invited testimony. The full schedule can be found here. The House of Representatives did begin referring bills to committee this past week. In total, the House referred nearly 500 bills.

Needless to say, last week’s winter storm has left an indelible mark on Texas and the complexion of the legislative session. Last week, was dominated by the fallout from the winter storm and power grid failures, which will also dominate much of this week … and likely the rest of session. Here is a quick rundown of the latest from the Capitol, including a brief synopsis of what to expect going forward with respect to the winter storm.

Senate Finance begun hearings on the state budget. Prior to the storm, Senate Finance did begin hearings on S.B. 1, the state’s budget bill. Those hearings will resume this week as they dig deeper into Article III, which covers public education and higher education.

  • The budget outlook is improving. Comptroller Hegar testified before Senate Finance and again provided a much more optimistic outlook on the current budget. Once forecasting a $4.5 billion budget deficit in the current biennium, the Comptroller estimates that the current deficit is only $950 million. That number does not take into account several important unknowns. On the positive side, budget cuts made by state agencies starting in June 2020 are likely to erase most, if not all of the projected deficit. Moreover, we still don’t know the impact of the use of CARES Act funding to replace general revenue. On the negative side, the projected deficit does not take into account any supplemental budget. Typically, the supplemental budget is dominated by a big Medicaid shortfall – but none is expected this year, thanks in large part to an increased federal match due to COVID. The combined effect of these factors likely means the Legislature will enter the next biennium with a surplus, not a deficit.

  • The revenue outlook is trending in the right direction. Prior to his testimony, the Comptroller reported January revenue collections, which were approaching pre-pandemic levels. Moreover, oil prices are hovering near $60 – more than the $50 and $55 dollars assumed for FY2022 and FY2023 respectfully – which is a good sign for the overall health of the Texas economy. We expect the Comptroller to continue to watch the next couple of months of revenue collections. Should those remain on the current trajectory, we expect the Comptroller will revise his Biennial Revenue Estimate upward, giving appropriators more money to spend.

House appropriations sub-committees announced, hearings to begin. Last week, Chairman Bonnen announced the make-up of the subcommittees. In addition, the committee will have two hearings this week.

Census data delayed to September. The Census Bureau announced that it will NOT deliver Census data on a flow basis. Instead, all data will be delayed until September. This means that the Legislature cannot take up redistricting during the regular session, something that was in doubt anyway. We expect this delay to spark litigation, as often follows reapportionment. We also believe there is a high likelihood that election delays will likely result from these postponements.

A brief overview of the winter storm, the power outages, and expected legislative fallout. We want to provide a brief overview of last week’s events and the likely fallout. This week hearings will be held on Thursday by Senate Business & Commerce and jointly by House Natural Resources and House State Affairs.

What happened. Let’s start with the most basic cause: the weather. By all accounts, Texas was hit by a historic winter storm. All 254 Texas counties were hit with a deep freeze for multiple days in a row. While extreme cold fronts often reach Texas, they rarely affect all 254 counties for such an extended time. The state also received historic levels of frozen precipitation. Texas generators are built to meet peak demand, which in Texas occurs during extreme heat waves. As a result, many generators were unable to meet expected generation levels. This occurred while demand spiked, rivaling demand seen during extreme heat waves. This imbalance required ERCOT to shut off power to nearly 4 million people across the state. The outages were necessary to avoid a much wider severe damage do the grid and much wider and longer outages.

Expect an immediate response from state leadership and legislators. As mentioned, both chambers are holding hearings this week to understand what happened and discuss ways to avoid such issues going forward. Below we provide a list of key issues to keep an eye on.

  • Winterization of generators. One topic that is likely to dominate is how to winterize our generation. This was a recommendation back in 2011, when the state experienced rolling blackouts, but evidently was never fully implemented. The Governor has made clear that winterization will happen. The only question that remains is who will pay.

  • ERCOT Reform. ERCOT is shouldering most of the blame for last week’s power outages. ERCOT is likely to stay in the spotlight during hearings this week and beyond. In particular, we would expect conversations to focus on personnel and oversight.

  • Sky-rocketing electric bills. The Governor convened a meeting of legislators from both chambers over the weekend. The topic will be how to deal with skyrocketing electricity bills that consumers are seeing. There seems to be consensus among legislators that consumers shouldn’t have to foot the bill … that leaves the question of who will?

  • Renewables v. natural gas. Even before power was restored, a political back and forth emerged regarding the performance of renewables and natural gas. We believe that both sides raise key issues, but mostly ignore a more fundamental issue. In terms of raw megawatts, more natural gas came offline. But, natural gas makes up a far greater portion of the generation mix. Wind and solar completely nose-dived in terms as a percentage of previous and expected generation. However, we believe the real debate underlying this discussion is whether and how the energy mix has been impacted by market manipulations, through the subsidy of renewals on the one-hand and the regulatory handicapping of more reliable, but “dirtier”, generation like coal. Coal, along with nuclear, performed the best on a percentage basis and has steadily declined as a percentage of Texas energy mix over the last decade. Texas had 3 early “retirements” of coal plants just back in 2018.

  • Capacity market. Although this issue may stay just beneath the surface, we expect chatter around whether Texas should move towards a capacity market. Briefly put, Texas is an electric-only market, which means that generators are paid only for the electrons they actually produce to the grid. Capacity markets incentivize (usually through higher consumer rates) extra capacity by paying generators not just for the electricity they produce, but also the capacity they have on standby. Texas has resisted this move several times over the last two decades, and that remains a reason ERCOT seeks to avoid FERC regulatory oversight (something we also believe will be a topic of intermittent conversation).

Here’s an update as we head into Week 5 …

Speaker Phelan announced committee assignments. On Thursday afternoon, Speaker Phelan announced committee assignments. Read here and here for some local analysis.

  • Leadership of the major committees saw some changes, but also saw some of former Speaker Bonnen’s chief lieutenants remain in key positions. For instance, Greg Bonnen (Friendship, TX) – the former Speaker’s brother – was tapped to head the Committee on Appropriations, replacing Gio Capriglione (R-Southlake) who had been overseeing the budget process leading up to the release of H.B. 1, the House’s initial draft of the budget. Dustin Burrows (R-Lubbock) who had chaired Ways and Means during last session’s monumental property tax reforms will now chair the powerful Calendars committee. Craig Goldman (R-Fort Worth), who was often seen on the dais of the House Chamber last session, will chair Energy Resources. He will be taking the reins from Chris Paddie (R-Marshall) who will assume the Speaker’s former role as chair of State Affairs. Todd Hunter (R-Corpus Christi) will head the Redistricting committee during this redistricting cycle.

  • Speaker Phelan also placed thirteen close Democratic allies in key positions: Joe Moody (D-El Paso), who will again serve as Speaker Pro Tem, is vice-chair of Calendars. Terry Canales (D-Edinburg) will continue as chair of Transportation. Chris Turner (D-Tarrant) will chair Business & Industry. Joe Deshotel (D-Beaumont) will chair Land & Resource Management. And Senfronia Thompson (D-Houston) will chair Licensing & Administrative Procedures.

  • But, the Speaker signaled his reliance on new confidants as well. Brooks Landgraf (R-Odessa) will chair Environmental Regulation. Will Metcalf (R-Conroe) will chair House Administration. Briscoe Cain (R-Deer Park) will chair Elections.

  • You can view the full list of assignments by committee here, and by member here.

Governor releases his budget. On Friday, the Governor released his budget for the 2022-2023 biennium. The budget echoes many of the priorities that he emphasized in his state of the state. The document is primarily a policy statement and does not play any formal role in the appropriations process. You can view Governor’s Budget here.

Senate Finance will begin consideration of the state’s budget. As we mentioned last week, Senate Finance will begin its consideration of S.B. 1, the state’s budget, this week. Today, they will hold an organizational meeting. Later this week, they will begin consideration of Article I and Article IV.

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