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Brazos Calls ERCOT Billing Unreasonable In Ch. 11 Trial

Feb 22, 2022

Bankrupt power provider Brazos Electric Power Cooperative Inc. told a Texas judge Tuesday that a decision by the state's electricity market regulator to raise the price of power to the statutory maximum during a 2021 winter storm wasn't a reasonable action and that the regulator's $1.9 billion claim should be disallowed.

During the opening phase a trial over the claim of the Electric Reliability Council of Texas, debtor attorney Lino Mendiola III of Eversheds Sutherland said the decision in the midst of the February 2021 storm to increase the price of power in the state's power market to $9,000 per megawatt-hour worsened the situation in Texas and provided no benefit to power suppliers or customers.

"Winter Storm Uri was a tragedy that caused real human suffering, but ERCOT's actions to peg the price of energy at $9,000 and hold it there for 83 hours straight added to that suffering," Mendiola argued. "ERCOT interfered in the market in the costliest way possible."

ERCOT billed Brazos for $2.2 billion for power the debtor purchased during the storm, sending the previously financially stable company into bankruptcy in the weeks after the weather event that saw below-freezing temperatures blanket Texas, resulting in spiking demand for power at the same time many generating facilities were shut down due to weather.

In the Chapter 11 case, ERCOT has asserted a $1.9 billion claim against Brazos for unpaid electricity purchase invoices made on the state's electricity market. Brazos says it owes no more than $771 million in that time frame because ERCOT improperly raised the price of power and breached its standard agreement with market participants under the orders of the Public Utility Commission of Texas.

ERCOT attorney Jamil N. Alibhai of Munsch Hardt Kopf & Harr PC said the energy market in Texas is governed by scarcity pricing whereas generating reserve capacity goes down, the price of power increases and that the maximum price per megawatt-hour is statutorily limited at $9,000.

He said Brazos was aware of how the market pricing was calculated and elected to participate in the system, and is not disputing the amount of electricity it purchased during the storm, only the pricing during an 83-hour window during the storm.

"Brazos has not disputed the calculations. It is certainly disputing the price they were charged now, but did not do so at the time," Alibhai said.

The price of power did not properly account for measures taken by ERCOT to shed load — or reduce demand through rolling blackouts — at the peak of the storm, and the PUCT ordered ERCOT to reflect that in the pricing model by maxing out the price at $9,000 until load shed had stopped, Alibhai said.

To ensure the stability of the grid, Alibhai said the PUCT and ERCOT made decisions in the public interest to prevent customers from getting their power back only to have it shut off again during continued load shed conditions.

Mendiola argued in his opening statement that these actions by the regulators did not actually accomplish the stated goals and other methods to preserve the grid would have been more effective.

He said the generators were continuing to create capacity and put it into the market, and the pricing reflected the increased demand, at times reaching the maximum of $9,000. Under these conditions the market was operating efficiently and did not need the intervention of ERCOT, he argued.

ERCOT could have brought more generators into the system under a reliability commitment program, he said, or it could have suspended the market altogether and asked generators to continue providing capacity with the promise of a make-whole payment after the weather event.

Following opening statements, ERCOT called its first witness in former CEO Bill Magness who began testifying about the operations of the energy market and how generators feed the system. He called the load shed that occurred during the mid-February winter storm one of the most significant actions ERCOT can take in the face of extreme scarcity.

His testimony is scheduled to continue Wednesday before U.S. Bankruptcy Judge David R. Jones in Houston.

Brazos sought bankruptcy protection March 1, 2021, saying it had been forced into a liquidity crisis after it was hit with $2.2 billion in wholesale power bills and ancillary costs after Winter Storm Uri shut down power generation across the state, leaving millions without electricity for days.

In August 2021, Brazos filed its adversary complaint against ERCOT, seeking to reject the power grid operator's $1.9 billion bankruptcy claim stemming from the bill it presented to Brazos in the wake of the storm.

Brazos Electric Power Cooperative Inc. is represented by Louis R. Strubeck Jr. and Nick Hendrix of O'Melveny & Myers LLP; Jason L. Boland, Julie G. Harrison, Maria Mokrzycka, Paul Trahan and Steve A. Peirce of Norton Rose Fulbright LLP; and Lino Mendiola III of Eversheds Sutherland.

ERCOT is represented by Jamil N. Alibhai, Kevin M. Lippman, Ross Howard Parker and Deborah Michelle Perry of Munsch Hardt Kopf & Harr PC and Elliot Clark of Winstead PC.

The adversary case is Brazos Electric Power Cooperative Inc. v. the Electric Reliability Council of Texas Inc., case number 4:21-ap-3863, in the U.S. Bankruptcy Court of the Southern District of Texas.

The bankruptcy case is In re: Brazos Electric Power Cooperative Inc., case number 4:21-bk-30725, in the same venue.

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