Utility Takeaways from the 88th Legislative Session

by Roslyn Dubberstein

Two years after Winter Storm Uri—the February 2021 winter weather event that left millions without power—utility issues remained a frontrunner during this year’s legislative session. Legislators filed approximately 300 bills relating to electric and gas utilities; of those 300, about 40 made it to the finish line.

Lieutenant Governor Dan Patrick, who presides over the Senate, set down an early marker by unveiling a slate of major utility reform bills during a March news conference. These included bills that would have allocated billions of tax dollars for the construction of standby natural gas generation, created a new day-ahead ancillary service, set limits on the Public Utility Commission’s (“PUC”) Performance Credit Mechanism (“PCM”) plan to subsidize power generation, and required the PUC to place limits on how much Texans pay for power producers to connect to the power grids.

Senate Bill (“SB”) 6, a bill that would have called upon the state to hire one or more companies to build up to 10,000 megawatts of backup power, was arguably the most controversial. Supported by billionaire investor Warren Buffett, SB 6 called for the expenditure of billions in tax dollars to build natural gas-fired generation that would go almost completely unused. SB 6 made it from the Senate but died after its referral to the House Committee on State Affairs, chaired by Representative Todd Hunter of Corpus Christi.

Notably, the PUC, the Office of Public Utility Counsel (“OPUC”), and the Electric Reliability Council of Texas (“ERCOT”) were subject to Sunset review in 2022. The Sunset review process entails a detailed evaluation of agency practices and processes to determine whether the agency should be continued or abolished. A Sunset Commission comprised of legislators considers Sunset staff recommendations and proposes legislation accordingly. As a result, a “Sunset Bill” relating to PUC, OPUC, and ERCOT was passed, and it became the vehicle for buzzer beater electric market reform additions.

House Bill (“HB”) 1500 (the “Sunset Bill”) by Representative Justin Holland and Senator Charles Schwertner contained the following key provisions related to the PUC and ERCOT:

  • Extends the PUC and OPUC through 2029;
  • Requires the PUC to allow public testimony on each open meeting agenda item;
  • Requires the PUC to develop a strategic communication plan;
  • Adds an additional PUC commissioner as an ex officio member of the ERCOT Board;
  • Provides that changes to ERCOT protocols may not go into effect without PUC approval;
  • Limits the ERCOT Board’s ability to enter into executive session;
  • Restricts informal verbal directives from the PUC to ERCOT to rulemakings, contested cases, or memorandums or written orders adopted by a majority vote of the PUC commissioners. PUC direction to ERCOT must be noted on the open meeting agenda and the PUC must allow for public comment; and
  • Requires PUC to formalize informal actions taken during an emergency within 72 hours of the conclusion of the emergency.

In addition to the above Sunset-related reforms, several electric market proposals initially addressed in other bills were incorporated into the Sunset Bill at the last minute. For example, Section 22 of HB 1500 provides a new ancillary service for Dispatchable Reliability Reserve Service, or DRRS. This mechanism was originally proposed in SB 7 and is intended to address uncertainty associated with generation outages and intermittency. Similarly, guardrails on the PUC’s proposed PCM were ultimately funneled into Section 23 of HB 1500, providing a $1 billion annual cost cap and specific standards and requirements before PUC-implementation of the PCM. Importantly, cost allocation was a recurring topic of conversation throughout the session, and Section 23 of HB 1500 requires a report to the Legislature by December 2026 regarding whether and how the costs of certain ancillary services should be allocated. One possibility is allocating costs to generators based on their contribution to unreliability during high-risk periods.

While HB 1500 served as the conduit for multiple electric market reforms, others passed as stand-alone bills. For instance, SB 2627 by Senator Schwertner creates a fund for grants and loans at preferred interest rates for upgrades to, or new construction of, dispatchable generation facilities.

When the Legislature was not evaluating electric market reforms, there was significant attention on the process for Investor-Owned Utility (“IOU”) electric rate cases at the PUC. Senator King was a particularly vocal author in this area. Two of Senator King’s bills related to electric utility ratemaking passed—SB 1015 and SB 1016. SB 1015 modifies the process for an IOU seeking a periodic rate adjustment, also known as a distribution cost recovery factor. Utilities may now file more frequently and the review will be subject to a rapid 60-day timeline. SB 1016 addresses the inclusion of employee salaries and benefits in electric rates and creates a presumption of reasonableness if the utility produces market compensation studies.

Gas utility issues were less prevalent this session. However, Representative Drew Darby’s HB 2263 did pass, which will allow gas companies to offer energy conservation programs and recover the costs of such programs in rates. This may be an area of gas ratemaking for consumers to monitor. The legislation passed out of both chambers and was signed by Governor Abbott on June 12, effective immediately.

Utilities and the future of the electric market in Texas remain key priorities for policymakers. Given the developments discussed above, the PUC has a lengthy and challenging road ahead. We can likely expect several of these dialogues to resurface throughout the interim and into the 89th Legislative Session.

Roslyn Dubberstein is an Associate in the Firm’s Energy and Utility Practice Group. If you have any questions or would like additional information related to this article or other matters, please contact Roslyn at 512.322.5802 or rdubberstein@lglawfirm.com.

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