Is the ERCOT Market Headed for Failure?

On 7/18/18, Axon Power & Gas, LLC – a Retail Electric Provider (REP) in ERCOT and a QSE – filed a lawsuit in the Travis County District Court, seeking a temporary restraining order (TRO) against ERCOT from making a collateral call on Axon. The PUCT held an emergency open meeting later that day to address the matter.

The lawsuit stated, in part: “… earlier this week, ERCOT, without formal notice or explanation and in violation of both the contract and the incorporated protocols, began demanding collateral six-to-seven times greater than before. Not only did this action violate the Contract and the protocols, but was entirely unnecessary to protect ERCOT’s financial interests. ERCOT was fully secured under the previous collateral demands.” It further alleged that ERCOT, without notice or explanation – changed real-time and day-ahead forward adjustment factors from 1 to 7.49 and 6.29, respectively. This has caused company’s collateral requirements to go from about $200K to $1.2 million, leading to significant over-collateralization. Axon is asking for a TRO and, ultimately, a declaratory judgment that ERCOT’s action is improper, resulting in a breach of contract.

Axon is hardly alone in facing collateral calls. At the last meeting of stakeholder credit groups at ERCOT, staff said that such calls have increased from the typical 1-2 to 45. This comes after the Feb. 2018 implementation by ERCOT of new credit requirement methodology, using ICE forward prices as an input into collateral calculations, and other changes. Many stakeholders understood at the time that – with hot summer and lower power supplies – collateral amounts could rise significantly, potentially pushing some market participants out of the market. There has already been one exit of a small REP at the end of May; more will likely follow, as new methodology is leading to large increases in total potential exposure and excess collateral amounts (i.e., from $1,802 million in May to $2,460 million in June).

While the parties argue about precise calculations and proper notices, what is much harder to compute is the impact on customers should several REPs be forced out of business. With a recent proposal to shorten the mass transition timeline, affected customers would have even less time to pick a new REP, virtually guaranteeing a drop to POLR (Provider of Last Resort). The rates a POLR charges are based on real-time prices, which can be very high in the middle of a hot summer. And even if a new REP is found, it will most likely charge much higher rates, reflecting the current market conditions. Thus, a question may be asked, “what is the benefit of ERCOT’s high over-collateralization and could we, in time, see a failure of the Texas competitive market as a result?”