The general manager of Brazos Electric Power Cooperative Inc. testified Tuesday in U.S. bankruptcy court that his company was “in tremendous financial health” until it was slapped with an astronomical bill for electricity during last year’s Winter Storm Uri.
Clifton Karnei also testified that the emergency pricing of electricity during the storm at $9,000 per megawatt hour – hundreds of times the normal rate – did nothing to accomplish what state regulators intended, which was to incentivize generating companies to crank out more power as more than 4.5 million Texas homes and businesses were left in the dark by the storm.
“I don’t believe it added one megawatt of power to the grid,” Karnei said. Every generator in the state, including Brazos, was already doing all it could to maximize output and keep Texans from freezing, he testified.
“This was a humanitarian crisis, and we needed to provide as much electricity as we could to our members,” he said.
Karnei’s testimony consumed the sixth day of a trial in Houston before Chief U.S. Bankruptcy Judge David Jones of the Southern District of Texas. Brazos, the state’s oldest and largest electric cooperative filed for protection under Chapter 11 of the bankruptcy code on March 1, 2021 – exactly one year ago – claiming that the $9,000 price it was forced to pay for each megawatt-hour of electricity during the storm drove it to bankruptcy.
In its court filings, Brazos blames the Electric Reliability Council of Texas, the nonprofit entity that operates the state’s electric grid, for imposing the crippling rate on buyers of power.
ERCOT contends that the high price was justified, given the extraordinary market conditions created by Winter Storm Uri, and, moreover, that it had no choice but to enact the high rate because it was ordered to do so by the Texas Public Utility Commission.
The matter presently before Jones, who is overseeing the Brazos bankruptcy case, is an adversarial proceeding Brazos filed against ERCOT challenging the grid operator’s creditor claim of $1.9 billion for power provided to Brazos in February 2021.
Until it received that staggering bill from ERCOT, Karnei said, everything at Brazos was hunky-dory – and had been for decades. The co-op, established in 1941, is owned by 16 member companies with a service area spanning 68 counties from the Texas Panhandle to Houston, delivering electricity to about 1.5 million customers.
“We were in excellent financial position,” Karnei testified, noting Brazos’s sterling credit ratings, ample liquidity and equity, and long history of stable, reliable operations.
Then came Uri. “We had invoices from ERCOT that we couldn’t pay,” he said.
Karnei was asked by Jamil Alibhai, one of the attorneys representing ERCOT, about a letter he wrote in late February 2021 to Bill Magness, at the time ERCOT’s chief executive officer, informing him that Brazos planned to file for bankruptcy. In it, Karnei, who also served then as an ERCOT board member, stated that Brazos did not intend to blame ERCOT for the co-op’s financial woes – which is precisely what Brazos is now doing in its adversarial proceeding.
Karnei testified Tuesday that he thought overall ERCOT “did a great job” of managing the state’s power crisis during Uri, but that he did not agree with the $9,000 emergency price that the grid operator imposed.
In addition to Alibhai, a partner on the Dallas office of Munsch Hardt, ERCOT is represented by Kevin M. Lippman, Deborah Perry and Ross H. Parker of the firm.
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 Wednesday, expert witnesses on electricity markets and pricing are expected to take the stand.
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