Needless to say, last week’s winter storm has left an indelible mark on Texas and the complexion of the legislative session. Last week, was dominated by the fallout from the winter storm and power grid failures, which will also dominate much of this week … and likely the rest of session. Here is a quick rundown of the latest from the Capitol, including a brief synopsis of what to expect going forward with respect to the winter storm.
Senate Finance begun hearings on the state budget. Prior to the storm, Senate Finance did begin hearings on S.B. 1, the state’s budget bill. Those hearings will resume this week as they dig deeper into Article III, which covers public education and higher education.
The budget outlook is improving. Comptroller Hegar testified before Senate Finance and again provided a much more optimistic outlook on the current budget. Once forecasting a $4.5 billion budget deficit in the current biennium, the Comptroller estimates that the current deficit is only $950 million. That number does not take into account several important unknowns. On the positive side, budget cuts made by state agencies starting in June 2020 are likely to erase most, if not all of the projected deficit. Moreover, we still don’t know the impact of the use of CARES Act funding to replace general revenue. On the negative side, the projected deficit does not take into account any supplemental budget. Typically, the supplemental budget is dominated by a big Medicaid shortfall – but none is expected this year, thanks in large part to an increased federal match due to COVID. The combined effect of these factors likely means the Legislature will enter the next biennium with a surplus, not a deficit.
The revenue outlook is trending in the right direction. Prior to his testimony, the Comptroller reported January revenue collections, which were approaching pre-pandemic levels. Moreover, oil prices are hovering near $60 – more than the $50 and $55 dollars assumed for FY2022 and FY2023 respectfully – which is a good sign for the overall health of the Texas economy. We expect the Comptroller to continue to watch the next couple of months of revenue collections. Should those remain on the current trajectory, we expect the Comptroller will revise his Biennial Revenue Estimate upward, giving appropriators more money to spend.
House appropriations sub-committees announced, hearings to begin. Last week, Chairman Bonnen announced the make-up of the subcommittees. In addition, the committee will have two hearings this week.
Census data delayed to September. The Census Bureau announced that it will NOT deliver Census data on a flow basis. Instead, all data will be delayed until September. This means that the Legislature cannot take up redistricting during the regular session, something that was in doubt anyway. We expect this delay to spark litigation, as often follows reapportionment. We also believe there is a high likelihood that election delays will likely result from these postponements.
A brief overview of the winter storm, the power outages, and expected legislative fallout. We want to provide a brief overview of last week’s events and the likely fallout. This week hearings will be held on Thursday by Senate Business & Commerce and jointly by House Natural Resources and House State Affairs.
What happened. Let’s start with the most basic cause: the weather. By all accounts, Texas was hit by a historic winter storm. All 254 Texas counties were hit with a deep freeze for multiple days in a row. While extreme cold fronts often reach Texas, they rarely affect all 254 counties for such an extended time. The state also received historic levels of frozen precipitation. Texas generators are built to meet peak demand, which in Texas occurs during extreme heat waves. As a result, many generators were unable to meet expected generation levels. This occurred while demand spiked, rivaling demand seen during extreme heat waves. This imbalance required ERCOT to shut off power to nearly 4 million people across the state. The outages were necessary to avoid a much wider severe damage do the grid and much wider and longer outages.
Expect an immediate response from state leadership and legislators. As mentioned, both chambers are holding hearings this week to understand what happened and discuss ways to avoid such issues going forward. Below we provide a list of key issues to keep an eye on.
Winterization of generators. One topic that is likely to dominate is how to winterize our generation. This was a recommendation back in 2011, when the state experienced rolling blackouts, but evidently was never fully implemented. The Governor has made clear that winterization will happen. The only question that remains is who will pay.
ERCOT Reform. ERCOT is shouldering most of the blame for last week’s power outages. ERCOT is likely to stay in the spotlight during hearings this week and beyond. In particular, we would expect conversations to focus on personnel and oversight.
Sky-rocketing electric bills. The Governor convened a meeting of legislators from both chambers over the weekend. The topic will be how to deal with skyrocketing electricity bills that consumers are seeing. There seems to be consensus among legislators that consumers shouldn’t have to foot the bill … that leaves the question of who will?
Renewables v. natural gas. Even before power was restored, a political back and forth emerged regarding the performance of renewables and natural gas. We believe that both sides raise key issues, but mostly ignore a more fundamental issue. In terms of raw megawatts, more natural gas came offline. But, natural gas makes up a far greater portion of the generation mix. Wind and solar completely nose-dived in terms as a percentage of previous and expected generation. However, we believe the real debate underlying this discussion is whether and how the energy mix has been impacted by market manipulations, through the subsidy of renewals on the one-hand and the regulatory handicapping of more reliable, but “dirtier”, generation like coal. Coal, along with nuclear, performed the best on a percentage basis and has steadily declined as a percentage of Texas energy mix over the last decade. Texas had 3 early “retirements” of coal plants just back in 2018.
Capacity market. Although this issue may stay just beneath the surface, we expect chatter around whether Texas should move towards a capacity market. Briefly put, Texas is an electric-only market, which means that generators are paid only for the electrons they actually produce to the grid. Capacity markets incentivize (usually through higher consumer rates) extra capacity by paying generators not just for the electricity they produce, but also the capacity they have on standby. Texas has resisted this move several times over the last two decades, and that remains a reason ERCOT seeks to avoid FERC regulatory oversight (something we also believe will be a topic of intermittent conversation).