How a Texas electric co-op rebuilt for reliability | Sponsored content from Rayburn Electric

0:00Texas is growing fast and Rayburn Electric Cooperative is ready. Serving more than 625 ,000 North Texans through its four member co-ops, Rayburn is investing in locally controlled dispatchable power to strengthen grid reliability as demand rises. With one major natural gas plant acquired in 2023 and a second facility coming in 2028, Rayburn is putting large-scale power in place with long-term performance in mind. These investments are about reliability where it matters most and affordability for local communities. Rayburn Electric Cooperative. Member focused, member driven. Winterstorm Uri, it was more risky to own generation in the ARCOT market.

0:40Post Uri, it was even more important and less risky for us to now own generation, and it was more risky to rely on the market solely. Winterstorm Uri was what they called a one in a 100 year event. Well, we can ignore the one in 100 years event, but obviously we do it at our own peril. We need to be prudent with our members' money, but we also need to re-evaluate and recognize that from time to time, the market is going to have its bumps and its challenges. Instead of leaning heavily on the market, we're going to lean less on the market and have steel on the ground. And ultimately, we ended up acquiring a power plant and then we'll build another one.

1:19These are probably the most exciting times we've ever had in the power industry.

1:25Hello and welcome to The Energy Gang, a discussion show from Wood Mackenzie about the fast-changing world of energy. I'm Ed Crooks and today we're going to be bringing you a special episode of The Energy Gang focused on Texas and on the lessons from the deadly winter storm Uri in 2021. That storm, which killed at least 276 people, exposed deep vulnerabilities in the Texas power system. It also became a turning point for some Texas utilities, which decided that they couldn't rely on the market alone any longer. One of those was Rayburn Electric Cooperative, which is based in Rockwall to the east of Dallas.

2:00And today we're going to be talking about how Rayburn responded from financial innovation to supporting legislative change to acquiring and building new large-scale generation capacity. And we're going to be asking what their experience tells us about reliability and resilience in electricity systems and how to meet the challenge of rapid load growth in the years ahead. To do that, I'm joined by David Naylor, who's Rayburn's President and Chief Executive. Hello, David. Welcome to the show. Good morning. Thank you. And also by Chris Addison, who's Rayburn's General Counsel. Hi, Chris. Good morning.

2:29So now, as you know, whenever we get new people on the show, we like them to get to talk a little bit about their careers in energy, how they got to the positions they now hold. And I was wondering if you could both do that for us. I mean, maybe, David, to start with you, what's your story? How did you get to the role you now hold? So I was originally started out as a consultant in the power industry, got a background in electrical engineering and worked primarily with electric cooperatives, particularly the generation and transmission cooperatives like Rayburn. Rayburn was a client. And then about 15 years ago, they made me an offer I couldn't refuse.

3:03And so I came on board as the executive vice president. And then in 2017, I took over as the president and CEO at Rayburn. So I've been in the space about 30 years, a little over 30 years now, and it's been quite a road. So having spent a long time telling other people how to do it, you started having to do it for yourself. It's easier to tell people how to do it than it is to tell yourself. Indeed, indeed. Tell me about it. Great. And then, Chris, what about you? What's your story? Well, David made me an offer I wouldn't refuse three years ago. I had retired from an investor-owned utility in northern Minnesota.

3:40I had been there for 27 years and made a restop in the mining industry. After some policy changes by the federal government, I found myself looking for new opportunities. And I found an excellent opportunity here in Rockwell. Yeah, absolutely. Very exciting times in the industry and for Rayburn specifically, as we'll come on to talk about. Also, then, I was hoping you could just tell us a little bit about Rayburn. I think perhaps also particularly for the benefit of listeners outside the U.S. who might not be familiar with the idea of electric cooperatives. Could you talk a bit about what it means to be an electric cooperative and what Rayburn is in particular?

4:18Our customers are our owners. So we call them members. So Rayburn as a cooperative, and this is a cooperative in general, we're a not-for-profit organization. And we have no investors. So if you think of somebody who owns stock, such as an Amazon, they can be an owner of Amazon, don't necessarily have to be a customer, vice versa, you can buy products from Amazon and be a customer but not own stock, so you're not an owner. But in a co-op standpoint, from a cooperative standpoint, they're one and the same. So if you buy electricity from a cooperative, you are also an owner of the cooperative. And so what the benefits of that are is then you get a voice.

5:00and you get to elect their board of directors, you get to participate in the process, and it's a lot more of a local control. So Rayburn, as a cooperative, and we're a generation and transmission cooperative, so we're a wholesale provider of electricity. We buy electricity, we generate electricity, and then we deliver it to, in our case, we have four distribution electric cooperatives who then turn around and ultimately sell it to the retail consumer and their members. So that's who Rayburn is and what a cooperative is. As far as our territory, we serve about 16 counties north and east of the Dallas Metroplex.

5:37That's roughly 625 ,000 Texans that ultimately get served by Rayburn and its members. And probably a lot of people will have heard of ERCOT, the Texas grid operator there. How do you work with ERCOT then? How does it fit together? So ERCOT essentially, they're the clearinghouse, if you will. They're also the monitor and the operator of the grid. So while Rayburn has generation facilities and we have transmission facilities, ERCOT, they're the ones who tell us how much to run. We'll submit bids. They clear the market. They'll also make sure they do whatever needs to be done to keep the grid operational.

6:16So when it comes to reporting outages, they approve the outages to make sure that the grid stays safe and reliable so you're not losing electricity. But they're essentially the police cop and then the clearinghouse for the market. So as I was saying, I really want to talk about Winterstorm, Yuri, and everything that followed that. That was obviously a terrible disaster, really kind of put a spotlight on the power system in Texas and everything connected with it. We're now just coming up on the five-year anniversary, aren't we? It was February 2021 when it happened. So very much, I think, in people's minds at the moment.

6:58Can you talk a bit about what that storm meant for you? How did that affect Rayburn? What was the impact on you? And what lessons do you think you learned from it? So I think, I mean, for Rayburn, this was certainly a seminal moment in our history. I think it's been the biggest event that we have seen basically since we started. We incurred three years of power cost in a five-day period. So, you know, talk about us having a significant financial impact on us. That was, I mean, that was about as bad as it can get. We had our processes in place, you know, two weeks out and ended up, you know, it being a lot colder than projected for a lot longer than expected.

7:43And the market kind of went kind of went crazy a little bit there. And then you had regulators step in. And so for us, it was a huge event that really required us to just refocus and reshift how we do business. Just to be clear then about that financial impact, that's because you're sort of caught between wholesale market prices on the one hand and, as you say, the distribution utilities that are serving individual customers on the other. And those wholesale market prices just went through the roof, right? they hit is it i think it's at five thousand dollars a megawatt hour is the cap and it went up to that cap for a protracted period of time and as you say that's how you can incur three years of cost in five days yeah so so i'll put some actual numbers to it the market cap was nine thousand dollars a megawatt hour so that's nine dollars a kilowatt hour and and most of us are paying normally uh some you know maybe 15 20 cents at most for per kilowatt hour at our homes So just extremely high prices.

8:50And the Public Utility Commission of Texas set that cap and had it stay at that cap for essentially those five days. And so in Rayburn's case, we ended up being only 50 % hedged or covered, and so we had, again, 50 % exposure to those market prices. And, Ed, ironically, we were pretty well covered during the on-peak periods. I mean, we're 80 % covered during the day when normally prices are highest, but we're only 40 % covered in those off-peak periods overnight. And with the price being capped and staying at that cap, we got hammered during those overnight hours that normally are when your prices are the lowest.

9:33And so for Rayburn, we incurred about almost a billion dollars worth of cost. And our choice was, do we pass that on to our members who are going to pass it on to their members? Because, again, we have no outside investors, no other place to recover those costs. And so we just felt like if we passed it on and kept passing it on, we're going to put our members and those ultimate consumers in an untenable position. And so we made the decision internally and with our board, we're going to keep those costs up at Rayburn. We're going to do what we can to figure out how to pay for those costs. And then once we have it resolved, now we'll disperse it amongst our members and then onto their members.

10:17And that's what we end up doing. Right. Yeah. And so that's really what I want to get into then is sort of your response to the storm and what changed after it. I was looking at your book the other day, Status Quo is Not Company Policy, which is a very interesting book, actually. It's well worth a read if people are looking for a management book. and maybe we'll talk a bit more about that in a moment, but was it an event then that made you think the status quo is no longer tenable? Yeah, so, I mean, status quo is not company policy. It was kind of born out of, it was one of those accidents that, it was like, well, that's exactly what applies here, but I don't know that I sat and thought long and hard about that particular phrase.

10:58It just kind of popped out and I was like, hey, I like that. Let's pull that back here and use it elsewhere too. But, you know, there were two pieces that we had to solve with Winter Storm URI. One is how do we pay the bills? And, you know, we went through, I mean, look, a Chapter 11 bankruptcy was on the table. That was an option that we had to consider. We did not like it. And ultimately, we ended up doing a securitization, which had never been done before by a cooperative. And it required us working with the Texas legislature to even get that approval to occur. So we ended up doing that, and I can talk a bit more about the securitization and what that means in just a minute.

11:39But then the other side of things was looking back and taking some lessons learned. What are some things we need to do different? And we really shifted recognizing that, you know, you have to be mindful of the extremes. And Winter Storm Uri was what they called a one-in-a-100-year event. Well, we can ignore the one in 100 years event, but obviously we do it at our own peril. And so it became we need to be prudent with our members' money, but we also need to reevaluate and recognize that from time to time the market is going to have its bumps and its challenges. And so we pivoted to a position where instead of leaning heavily on the market, we're going to lean less on the market and have steel in the ground.

12:28and ultimately we ended up acquiring a power plant and then we were building another one. So can you talk a bit about exactly how you did that? And as you said, there was actually legislative change needed to make it possible. How did you manage to persuade lawmakers that that was the right thing to do? Yeah, well, we're saying the lawmakers, the right thing to do is fairly easy because it meant they didn't have to use state funds to pay for their bill. So that one became fairly easy. It was just a matter of getting it done. But securitization is a concept that had been used by investor-owned utilities for storms from time to time, but had never been applied to cooperatives, and cooperatives had never used that.

13:09And so as we were working with our financial advisors, this became an option that we looked at and said, well, you know what, we really don't want to file bankruptcy. This is a way for us to be able to pay the bills. And so the securitization is essentially like a mortgage. And so we were able to take those costs, spread them out over 28 years, and make those payments smaller, if you will, because, again, like I said, we're spreading them out over 30 years. So it would become much easier to pay than paying that billion dollars all at once. We were able to find – I mean, we basically issued bonds that paid for the power costs that we owe at ERCOT, and then the bond holders get that payment over the next 28 years.

13:56And we ended up with a great response from the market. Folks were very much interested in those bonds, and we were the first co-op in the nation to securitize. It's been very successful. And, in fact, Rayburn paid off. We paid everybody that we owed every cent, so nobody was shortchanged. And then on top of that, our members, because of some of our other decisions to be able to lower their power cost, as well as some things they did on their side, none of our members had to raise their rates to accommodate these increased costs. Wow, that is amazing. I hadn't realized that. Because those bonds get a very good credit rating, right?

14:33Because you're a very stable, secure business. You're not going anywhere. People can be pretty sure that if they are buying those bonds, the revenues are going to be there in the future to pay them back. Exactly. I mean, they ended up being Moody's rated for us. They were AAA rated. So it was, again, very well received. And like you said, electricity is a pretty inelastic demand. Particularly nowadays, of course, even more so, I guess, at the moment. We'll come on to that in a little bit. So anyway, going back to the story then. So after the securitization, the next step, as you say, is to look at physical assets, steel in the ground.

15:09and just to kind of talk through the strategic thinking here this is what essentially to provide a kind of natural hedge is it that so if you have your own generation capacity times when prices go up a lot in the wholesale market you are not so exposed to those prices is that right yeah david can expand on this but the way i think about it so i came to the company post yuri i was part of david's view of let's look at things differently and i guess maybe i'm the different one he gets to look at to help solve some of those problems. But when I think of what URI meant to Rayburn as I came into the company, prior to Winter Storm URI, it was more risky to own generation in the ARCOT market for Rayburn.

15:54Post-URI, it was even more important and less risky for us to now own generation, and it was more risky to rely on the market solely. And so they had been doing generation studies and been looking at different opportunities over time, but URI helped tip that balance. You know, prior to URI, we had not had very many extremes in the market. And so the market prices were pretty stable, pretty low, and it just did not incentivize generation. You just couldn't recover your cost. Post-winterstorm URI, you know, again, we've had a lot more winter storms that have come up. In fact, I don't even know that I knew that winter storms were named until URI came around.

16:36But, you know, you think about it from Rayburn's standpoint, we're Lode. We're going to buy from the market and whatever that market price is. But we have no say, no way to influence what that market price is going to be. When we own generation, well, now we're bidding. I mean, that's what's kind of helping set the market prices is what's the cost of generation? Generators bidding in saying, hey, I'm willing to sell at this price, whereas Lode is essentially just a price taker. And so when we went through Winter Storm Uri, we looked back and said, all right, what lessons learned can we take? Well, we have a better shot of controlling our own destiny if we can help set whatever that price is or at least be able to capture what that price is.

17:21So now when the market prices are really high, well, not only are we buying the power from the market like we were in the past, we're also now being able to sell and get the revenues from the market on that. So it became a, again, Winterstone and Murie really shifted our focus to risk. It exposed the risk element that we had, and we recognized that, yeah, it may cost us some additional money up front to own generation, but the downside is a lot worse because we don't want to have to be securitization anymore. We don't want to have to look at a Chapter 11 anymore or have that option. And so that's where having still on the ground, owning those assets just made more sense for us.

18:02Right. No, that's really interesting. And just going back to something that you were saying then, Chris, in terms of the way that sort of risk calculation shifted. So you're saying kind of pre-URI, the calculation would have been that it was riskier to own generation assets. What, just because you're tying up a lot of capital there, as you say, that that's a big expenditure to have in steel and the ground. And then now, as you've been saying, David, that that calculus has shifted. Is that, am I thinking about that the right way? I think so. Yeah, exactly. Right. Yeah, I agree. I mean, Rayburn was about a$400 million company prior to Winter Storm Uri.

18:37And then once we've decided to pivot and start owning generation, we eclipsed a billion dollars in assets. So, I mean, it was a very big impact on our balance sheet. But a very, I mean, again, when we started factoring in risk, it became very positive for us. And one of the things then when I came into the company then is we also, with using Winterstorm URI in the rearview mirror, okay, what does risk mean to the company in total? So we've instituted an enterprise-wide risk management program. So not only are we looking at potential market risks on the energy market side, but now what kind of discipline can we enforce internally within the company to look at risk of all levels of our operations?

19:21So we actually build from the ground up and have employees self-identify their own business risks and what are the worst case scenarios and what steps do they need to take or can they anticipate taking if things start to go haywire. And so that helps prepare you for tariffs and trade wars and COVID and other things. You begin to look at your business in an entirely different way when you go through a threshold moment like you did with URI. Yeah. Right. All of that very useful in the past few years, I'm sure. And then I think the other thing, I mean, we've been we've been focusing in on the on the asset side and the generation.

20:00You know, the other thing I got to add here is we really took a look at our employee mix as well. And we decided we needed some additional expertise in house. And we brought, you know, we brought some power supply guys in in house. We added some additional IT guys to help us with the data collection that we have. And then, of course, I mean, Chris, good, bad, indifferent, we added some legal. That's always a mixed bag. But, I mean, we really increased the expertise that we had in-house. I mean, we were probably about 75 employees during Winter Storm Uri. And, I mean, here we are five years later, and we're over 100 employees.

20:41And then you go further with that, you know, the linemen that we added, you know, more boots on the ground. But then we also started to look at what else is going on around us. You know, there's wildfires. What are you doing to reinforce your system? Do you, you know, how do you do your pole inspections? How do you do vegetation management? How do you anticipate weather and other events impacting your system and where you place people? What kind of mobile generators can you put in, you know, acquire in advance so that you're ready for an emergency? So those are the types of things that David and the team really instituted to now what makes Rayburn better and more well positioned for an event that can have some of the maybe not the same breadth of impact of YERI, but still be significant impacts on Rayburn and its members.

21:27Right. Very interesting. And I think a lot of other people across the industry have been thinking along similar lines that, as you say, a lot of these kind of issues about physical risk and so on have really risen up the agenda in the past decade or so as things that people are very concerned about. Rayburn Electric Cooperative is planning for the future of power in North Texas. As electricity demand continues to climb, Rayburn is investing in large-scale generation resources that give its members more control over supply and system reliability. By pairing existing generation with new capacity arriving in 2028, Rayburn is building a stronger backbone for reliable power.

22:05These investments help fast-growing communities keep pace with demand and ensure the lights stay on during periods of high demand. Beyond power plants, Rayburn also engages in grid planning, policy development and market design efforts that help electric co-ops participate in statewide programs like the Texas Energy Fund. This work ensures that co-ops remain part of the solution as Texas builds the next generation of energy infrastructure. Rayburn Electric Cooperative, member focused, member driven. So just going back then to the question of acquiring physical assets. So you bought this 758 megawatt natural gas plant.

22:44This is now, this is, it's RES1, right? There's that Rayburn electricity station, Rayburn energy? Rayburn energy station. Rayburn energy station, right. Thanks. So that was quite a departure for you, as we've been saying. It was presumably just kind of coming into the time when natural gas power plants were pretty hot properties, probably even more so now. but even back then there was presumably quite a bit of competition from other companies other kinds of investors to buy that asset how did you manage to be successful at that in as I say what was effectively your first time out trying to acquire that kind of generation capacity I think what really captured the bid for us was I mean one we had a fair price for the for the product We evaluated it correctly.

23:35The second is the attraction that Rayburn and its cooperatives bring is we're load-serving entities. And so we don't have to worry about what's the market going to do to justify the asset. We say, look, this is something that we can use to serve our load. And, again, for us, I mean, look, we're not for profit. That doesn't mean that we want high cost or that we want to lose money. but we can take certain risks with the idea of, hey, this is going to impact our members in a positive way. And so it's less about the profit and loss statement and more about what makes sense for our members. And so by being a load-serving entity, I think that really attracted the counterparty of that plant to say, look, these guys have some certainty into it.

24:26There's not a lot of risk, market, things that they're not likely to come back and do these other things. And so I think we just made a better counterparty and then ultimately closed in July of 23. Got it. So you mean, so again, it's really back to that point about having a natural hedge that by having both electricity supply and electricity demand, if you like, that having that hedge kind of reduces the risk on both sides of the equation, that the demand has guaranteed supply, the supply has guaranteed demand, if you like. It's more than just the asset, it's the people. So one of the things in due diligence, we talk about how did that asset perform during winter storm URI and what kind of people are operating that unit.

25:11So if we buy that asset and we need to keep the people on board, are those good people? And, you know, they did a fantastic job during the storm to make sure that that plant operated. And when we went to the plant and met the folks that run and operate it, you know, we saw quality people that we wanted to be associated with and be part of Rayburn as well. Right. So you saw the good people. You liked the asset. As we've been saying, it was in large part a risk reduction strategy that led you to do that deal. What were the risks still that you worried about at the time? And how did you minimize them?

25:53I mean, were there concerns you had about things that could have gone wrong with it? Yeah. So, I mean, look, we're just in some ways we're changing one set of risk for another set of risk because now we own a power plant. And now we need to make sure, I mean, it's natural gas fired. So what's the natural gas supply situation for the plant? We talked about the people. We wanted to make sure we retained all the people, and we did. We got to make sure that maintenance is done. I mean, because some of the utilities in Texas that got hurt hard and either other cooperatives, they got hurt hard during winter storm Urie.

26:30They had power plants, but they didn't run. And so we wanted to make sure that, hey, guys, in talking to our board, let's make sure we're performing the maintenance, Certainly in our due diligence phase of acquiring that plant, we went through and checked all their maintenance records to make sure things were done. We talked to the manufacturer of the equipment, make sure all the agreements and everything are in order. So, you know, that's where we shifted from one set of risk to another. But we were very confident with the gas supply at the plant. Again, knowing based on the performance during Winter Storm Urie, the gas suppliers that were there we already had some relationships with.