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Brazos Execs Knew Electric Prices Would Soar Even Before Winter Storm Uri Hit

Feb 28, 2022
The Texas Lawbook

Two top executives of Brazos Electric Power Cooperative Inc. testified Monday in U.S. bankruptcy court that they knew skyrocketing prices for electricity were coming even before a weather-related emergency caused the Texas Public Utility Commission to make those prices a reality during last February’s Winter Storm Uri.

Clifton Karnei, general manager of the bankrupt Waco-based co-op, and John Clevenger, its vice president for power supply, said their projections and market analyses indicated that the emergency cost of electricity would soar to $9,000 per megawatt hour –  the highest price allowed at the time under Texas law, and hundreds of times the normal rate – even as the storm, with its ice, snow and record low temperatures, was barreling toward Texas.

“Was it any surprise to you that prices were at $9,000?” Karnei was asked by Jamil N. Alibhai, one of the lawyers representing the Electric Reliability Council of Texas, the state-certified nonprofit entity that manages the state’s electric grid.

“No,” Karnei replied.

Brazos, the state’s largest and oldest electric co-op, contends that it was plunged into bankruptcy by the $9,000-per-megawatt-hour price imposed by ERCOT during the deadly storm.

In an adversarial proceeding under its Chapter 11 petition, Brazos is asking Chief U.S. Bankruptcy Judge David Jones of the Southern District of Texas to slash ERCOT’s creditor claim of $1.9 billion, arguing in court documents that ERCOT’s invoices overstate what Brazos legitimately owes by “hundreds of millions of dollars, if not over a billion dollars.”

ERCOT’s $1.9 billion claim is by far the largest pending against Brazos – more than the co-op’s total revenues from the wholesale delivery of power in 2019 and 2020 combined. Jones’s decision on whether to uphold that claim will profoundly affect Brazos’s efforts to emerge from bankruptcy as a robust, reorganized business entity. 

ERCOT contends that it acted on inviolate orders from the PUC, which ordered the “scarcity pricing” to encourage any generator that could do so to produce as much power as possible during the storm.

It further contends that the price was what market conditions demanded during the storm, and that Brazos knew it would have to pay an arm and a leg for electricity as the co-op monitored the progress of the storm; the soaring cost of natural gas (used to power most electrical generating plants) in the days leading up to Uri; and breakdowns in supplies of electricity as generators, including those powered by wind, were hobbled or knocked entirely offline by the bitter ice and cold.

“This storm was predicted,” Alibhai, of Munsch Hardt Kopf & Harr in Dallas, said last week in opening statements in the adversarial proceeding.

He added: “Brazos was, by its own choice, subject to buying market- price electricity, and that $9,000 was market price. … Certainly, they’re disputing the price that they were charged now. They did not do so at the time.”

Brazos, he said, “is a company in bankruptcy because it ran up a very large electrical bill and was charged a high amount per megawatt hour for electricity, and now contends that that amount shouldn’t apply to it, even though it applied to the market, and the market had been set up for that rate to take effect in that very situation.”

In addition to Alibhai, ERCOT is represented by Kevin M. LippmanDeborah Perry and Ross H. Parker of Munsch Hardt.

Among others, Brazos is represented by Lou Strubeck Jr. and Nick Hendrix of O’Melveny & Myers in Dallas; Jason L. Boland, Paul Trahan, Michael M. Parker and Steve A. Peirce from the Houston, Austin and San Antonio offices of Norton Rose Fulbright; and Lino Mendiola and Michael Boldt of Eversheds Sutherland in Austin.

On Monday, Alibhai walked Clevenger, the Brazos vice president, through memos, emails, spreadsheets and other documents that showed the co-op knew in early February that a brutal storm was headed toward Texas; that it knew on Feb. 8, a week before Uri arrived, about the likelihood of huge shortfalls in its ability to deliver electricity to its 16 member companies; and that it knew by Feb. 10 that disruptions in the delivery of natural gas would exacerbate its struggles to produce electricity.

All of those warning signs occurred before the PUC on Feb. 15 ordered ERCOT to impose scarcity pricing.

He asked Clevenger if it was correct that “even under optimal conditions” Brazos would be unable to meet the demand of its utility customers.

“Yes,” Clevenger answered.

Similarly, Alibhai asked Karnei, the Brazos GM, about a document he wrote on Feb. 15, before the PUC ordered imposition of the scarcity pricing, in which Karnei described a “perfect storm” of conditions – severe weather, frozen turbines at wind generators, spiking prices and shortages of natural gas.

“I don’t believe ERCOT had any responsibility for those three,” Karnei said.

His testimony resumes Tuesday. At the end of Monday’s court session, Jones and the lawyers for both sides said the trial likely will continue until the week of March 14.


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