Meeting Summary - 10/08/24 Texas Energy Fund Advisory Committee
Grid Monitor AI
10/08/2024
1 - Panel 1 - Mitchell Ross, VP & General Counsel, NextEra Energy Resources - Application to TEF
Mitchell Ross, VP & General Counsel of NextEra Energy Resources, expressed surprise at seeing their name on the Texas Energy Fund list from PUCT.
NextEra never committed or applied for any project seeking Texas Energy Fund support.
Discussions were held with Aegle Power but no equity commitment was made nor any letter signed.
A letter dated May 28, 2024, submitted to PUCT claimed a $252 million equity commitment from NextEra, which they view as fraudulent.
The supposed letter was signed by an employee, Matt Handel, who was involved briefly but did not sign any such document.
NextEra did engage in initial discussions and sent a non-binding draft letter of intent to Aegle, which was unsigned and different from the fraudulent letter.
NextEra chose not to collaborate with Aegle; this decision was communicated to Aegle's investment banker on July 11.
NextEra learned of Kathleen Smith's criminal history but deemed it inappropriate to continue discussions at that point.
No completed deal was ever vetted through NextEra's internal approval protocols.
NextEra reported the fraudulent letter incident to the U.S. Attorney's Office and is cooperating with law enforcement investigations.
1.1 - Chair Schwertner to Mitchell Ross - Fraudulent Letter
NextEra received a fraudulent letter on August 30, which contained false statements about board commitments.
NextEra informed the PUC about the fraudulent letter on September 3.
The PUC withdrew the application from consideration on September 4.
The criminal history of Miss Smith was discovered by NextEra in early May from a source and a press release by the US Attorney's Office for the Southern District of Texas.
NextEra acknowledged errors in continuing discussions with Aegle Power despite knowing the truth of the principal's background.
NextEra has contacted the US Attorney's Office for the Southern District of Texas but not the Texas Attorney General's Office.
NextEra is willing to cooperate with any law enforcement investigations.
1.2 - Sen. Huffman to Mitchell Ross - Due diligence
The discussion involved questions about the due diligence process of the deal team responsible for identifying viable projects.
The deal team was aware of the criminal background of a principal early, but the decision not to pursue was due to other commercial issues.
The process took longer than expected but ultimately resulted in not pursuing the project by mid-July.
There was no contact from Deloitte during the process, despite a fraudulent letter claiming an equity commitment.
A representative from the company contacted the PUCT when their name appeared on a list without their knowledge.
There was an expectation for due diligence by contacting NextEra to verify an equity commitment, but NextEra had not seen the actual application.
Concerns were raised about the level of confidence in the submission under penalty of perjury.
The concept of 'Know Your Customer' (KYC) was discussed, emphasizing its importance for validation in the financial industry.
There was criticism of Deloitte for not applying KYC principles effectively in this situation.
1.3 - Rep. Hunter to Mitchell Ross - Background & Fraudulent Letter
Mitchell Ross is the Vice President and General Counsel of NextEra Energy Resources.
NextEra Energy Resources is a subsidiary of NextEra Energy, Inc.
NextEra Energy Resources does not support the application concerning the fraudulent letter.
A false statement was made indicating that NextEra made an equity commitment to a project, which was not true.
The case has been reported to the authorities after receiving the equity commitment letter on August 30.
NextEra Energy conducted an investigation into the matter and confirmed the fraudulent statement.
Aegle power company's representatives did not show up to the hearing; the company has a past criminal situation from 2017.
Discussion around potential enforcement rules for hearing attendance due to repeated absenteeism.
NextEra's internal and external lobbyists in Texas were named.
NextEra Energy primarily invests in renewable energy projects and owns a transmission company named Lone Star.
1.4 - Chair Spiller to Mitchell Ross - Texas Penal Code
Mitchell Ross was asked about possible criminal offenses under Texas law as part of his role as general counsel for NextEra.
NextEra is reviewing potential civil claims related to the incident but has not made conclusions on criminal liability.
Criminal liability conclusions are considered to be the responsibility of criminal authorities.
NextEra believes it's important for authorities to be aware of the situation given historical context.
The review focuses on potential civil causes of action, with no specific conclusions mentioned.
The situation is described as unusual, based on Ross's 30-year experience at the company.
1.5 - Rep. Hernandez to Mitchell Ross - Internal Policies
Discussion about the knowledge of Miss Smith's criminal history by the deal team.
Lack of specific internal policy prohibiting dealings with individuals with criminal history.
Evaluation of investment opportunities is primarily focused on viability rather than principal’s criminal history.
A fraudulent signature of Mr. Handel was involved in the discussions.
Discussion on the potential mishandling of signatures and documents, and communication with the US Attorney's Office.
Support expressed for the Texas Energy Fund opportunity and the grid reliability in Texas.
Investments in renewables highlighted with a 20 billion investment to date in Texas.
Consideration of thermal generation and natural gas as part of the investment strategy.
Mention of NextEra's interest in the Texas energy market and diversity of generation portfolio.
Introduction of Deloitte representatives as contracted administrators for the Texas Energy Fund.
1.6 - Rod Kleinhammer, Principal, Deloitte on their commitment to TEF
Rod Kleinhammer, a principal with Deloitte, emphasized their commitment to the Texas Energy Fund (TEF) program.
Kleinhammer expressed the importance of trust placed in Deloitte by ERCOT and the Public Utility Commission.
As a long-term Texas resident, Kleinhammer sees the project as personally significant, especially after the challenges faced during Winter Storm Uri.
Increasing state power generation capacity and securing the grid to meet growing energy demand is a priority.
Deloitte intends to enhance risk and reputational checks for due diligence before releasing information on the Texas Energy Fund loan applications.
They have adjusted their processes to ensure that no funding is approved without a thorough review.
Deloitte is committed to supporting the prudent administration of the Texas Energy Fund and looks forward to collaboration.
2 - Panel 2 - Rod Kleinhammer - Background & Information relayed to consultants
Rod Kleinhammer is a Senior Partner at Deloitte, focusing on the state of Texas account.
His background is mainly in Medicaid enterprise systems and IT consulting, not directly in energy.
Kleinhammer holds an executive-level position but is not on the Deloitte board.
He reports to the state and local higher education leader for the US.
There was a discussion about having more senior management attend the meeting, but Kleinhammer was specifically asked to be present.
Kleinhammer confirms he has authority to sign, amend contracts, and handle financial obligations like penalties and restitutions concerning the Texas Energy Fund contract.
2.1 - Chair Schwertner to Chris May, Principal with Deloitte - Background & Due Diligence
Chris May is a principal at Deloitte with a role leading the firm's Texas Enterprise or energy fund.
His background includes experience in e-discovery, forensic investigations, and anti-money laundering.
May is responsible for teams working on KYC (Know Your Customer) at Deloitte.
He has been a Texas partner for twelve years and currently manages 130 people on the energy fund project.
The project started with 45 people and increased to 130, with 60 individuals currently engaged in the due diligence phase.
This energy project is May's sole client engagement, though he leads a practice on a national level at Deloitte.
The committee received a one-page testimony from May to discuss further questions.
2.2 - Chair Schwertner to Principals from Deloitte - Application Review
Chair Schwertner expressed frustration and embarrassment over the lack of basic protocols during the application review process with Deloitte.
The key issue centered around a failure to perform due diligence, specifically citing 'Know Your Customer' (KYC) procedures.
Schwertner emphasized the requirement for basic checks during the application process, such as identifying conflicts of interest and verifying applicant reliability.
Discussion on the contractual obligations of Deloitte, highlighting their failure to adhere fully to terms outlined, including significant items such as deliverables and conflict of interest declarations.
There was a call for restitution due to Deloitte's failure, referencing a PUC request for a 10% clawback on contractual payments.
Request for a commitment from Deloitte to agree and pay some restitution to the state of Texas was made, but Deloitte had no signed agreement at the time of the meeting.
Deloitte executives indicated progress was made in discussions, but approvals were still pending from their internal leadership.
The broader legal and contractual implications of this oversight were discussed with potential subpoenas mentioned for executives involved in decision-making approvals.
Reaffirmation of the requirement from Deloitte to provide a formal, signed reconciliation to meet the demands outlined by the PUC and satisfy the state's requirements.
2.3 - Sen. Huffman to Rod Kleinhammer - Value of accounts in the State of Texas
Rod Kleinhammer leads the Texas account, valued over $200 million, primarily involving technology transformation.
A specific contract related to Texas Energy accounts for 7-10% of their business.
The overall contract for their current project is $74 million over four years, with more work in the first two years.
Kleinhammer confirms the potential impact of a 10% negotiation-based fee reduction would be $7.4 million.
Deloitte was involved in the selection process that started with 72 applicants, heavily participating with 45 employees.
The application review process initially didn't involve direct interaction with applicants to maintain an unbiased evaluation.
Kleinhammer agrees that keeping the process unbiased by not contacting applicants was flawed and should be revised.
Public and committee concerns were raised about Deloitte's adherence to contract commitments and its accountability to Texas taxpayers.
Chairman Hunter pressed for improvements in Deloitte's evaluation process and transparency regarding their due diligence procedures.
A contractual cap increase from $72.4 million to $107 million took place due to increased volume and due diligence requirements.
2.4 - Rep. Hunter to Deloitte Principals - Authority
Legislation filed by Chairman Schwertner was passed by both the Senate and the House, confirmed by the public of Texas in a November election.
There are issues in the process related to attendance and management, not by legislators but by others responsible for executing the process.
Rep. Hunter questioned if the Deloitte representative had full authority to speak and act without needing further approval.
The Deloitte representative admitted they could speak on the contract but required approval for signing and full authority was with two other individuals.
Deloitte was hired by the State of Texas, specifically the Public Utility Commission of Texas, for a project with an initial four-year contract worth up to $170 million, currently scoped at $74 million.
Deloitte admitted to making errors and omissions in their process, particularly in not contacting applicants early enough and has acknowledged a mistake.
Rep. Hunter pressed on whether Deloitte informed their errors and omissions company, suggesting they report back to their general counsel.
2.5 - Chair Spiller to Rod Kleinhammer - Executing Agreement
Chair Spiller questioned Deloitte's willingness to execute an agreement requested by the Public Utility Commission of Texas regarding a 10% penalty or reduction.
Deloitte's representative, Rod Kleinhammer, indicated that while they are close to an agreement, they cannot execute it yet.
Discussion ensued about who at Deloitte has the authority to sign contracts with the necessary approval.
There was a focus on Deloitte's responsibility in screening applicants and their failure to contact certain applicants, specifically regarding NextEra.
Chairman questioned whether Deloitte should be paid for work perceived as incomplete due to the lack of communication with applicants like NextEra.
Modifications were made to Deloitte's processes following their failure to contact certain companies.
The discussion included implications should Deloitte not respond appropriately, including possible termination of the contract.
There was acknowledgment of external pressures and the legislative consequences if Deloitte fails to comply.
2.6 - Sen. Johnson to Rod Kleinhammer - Initial Objective
There were 72 applications for the TEF loans.
The initial objective was to comply with the vision communicated by the PUC, focusing on having the right generation in the appropriate places.
Programs and projects fitting the vision were prioritized before assessing the viability of said projects and participants.
The process of narrowing down applicants from 72 to 20 should have included more thorough research.
Regret was expressed over a lack of thorough vetting prior to announcing the final 17 projects.
Searches for sponsor names during the application process did not reveal any issues.
Future processes need to ensure more thorough vetting at earlier stages.
There are three more programs pending: a bonus program, a battery backup program, and a non-ERCOT program.
$1.8 billion and $1 billion portions are to be engaged similarly in the future.
An ethical wall exists between teams to prevent conflicts of interest in determining projects.
Emphasized the importance of communication and ensuring legislative confidence in the process following recent missteps.
2.7 - Sen. Huffman to Rod Kleinhammer - Investment from the State of Texas
Deloitte has secured over $1.32 billion in contracts with the state of Texas since 2016, averaging about $250 million annually.
Sen. Huffman acknowledged that Texas is one of Deloitte's largest customers.
Current contracts discussed involve a minimum of $74 million over four years, with a maximum potential spend of $107 million.
There was acknowledgment of a mistake by Deloitte and emphasis on the need for the firm to address and rectify it.
Discussion highlighted the gravity of financial responsibilities and fiduciary duties owed to the public.
Senator called for common sense in managing the significant impacts of these contracts on Texas citizens.
Emphasis on the importance of resolving the issues to ensure long-term grid stability and reliability for Texas.
Senator expressed frustration with past legislative challenges and urged Deloitte to uphold its reputation by resolving the issue.
2.8 - Rep. Hunter's comments to Deloitte Principals
Rep. Hunter requests Deloitte to prepare a detailed memo for both chairs due in 1 week.
Deloitte is asked to address how they will gain confidence moving forward.
The memo should include guardrails and checklists to reassure the legislature.
Rep. Hunter emphasizes the need for detailed specifics rather than a one-page report.
The report should outline changes from prior procedures and how they will protect the integrity of the Texas Energy fund.
2.9 - Chair Hernandez's comments to Deloitte Principals
Chair Hernandez expressed disappointment at Deloitte's response concerning recent errors, highlighting the lack of an adequate apology to taxpayers.
There was an expectation for more comprehensive documentation or presentation, beyond the brief one-page submission provided.
The discussion included plans to refund misappropriated taxpayer dollars.
The need for written documentation was emphasized to ensure trust and transparency in Deloitte's work.
Concerns were raised about the adequacy of due diligence, referencing a simple investigation into Aegle Power, LLC and its manager Kathleen Smith, who has a criminal record.
The simplicity of the process to uncover these issues was contrasted with Deloitte's substantial fees, suggesting better outcomes should be achieved for such taxpayer expense.
2.10 - Chair Schwertner to Rod Kleinhammer - Integrity
Rod Kleinhammer has been with Deloitte for 32 years and considers it a reputable firm with high integrity.
There is a discussion regarding Deloitte's relationship with NextEra Energy Resources LLC, represented by Mr. Ross, who was present during the meeting.
Kleinhammer hopes clients maintain their trust in Deloitte and believes they will resolve current issues to continue serving Texas effectively.
The conversation highlights the importance of Deloitte's reputation, especially concerning how they are perceived by both large and smaller states if issues with Texas are not addressed satisfactorily.
Chair Schwertner emphasizes the expectation for Deloitte to address and resolve issues promptly, mentioning an anticipated written response within a week.
Rep. Hunter addressed PUC's admission of mishandling communication.
Emphasized the importance of communication by the Public Utility Commission.
Supported the notion that the program is fundamentally good, with agreement from Senator Schwertner.
Stressed the need for PUC to be transparent and communicate openly with the legislature.
Asserted the independence of the Texas grid from federal jurisdiction.
Inquired about the progress with Deloitte regarding the $7.3 million return, indicating it stands at 10% currently.
3.4 - Sen. Huffman to Connie Corona - Plan for Megawatts
Initial project submission was $74 million; finalized to around $73 million.
Approval from LBB is not required to exceed $74 million.
Base contract was envisioned to be no less than $73 million, with a potential 10% deduction considered.
PUC has plans for the funds from a project that is not moving forward; approximately 1500 MW can be allocated to new loans or completion bonus grants.
Sen. Huffman prefers bringing more power online and providing opportunities for additional companies.
PUC acknowledges the gap caused by a major project dropping; they plan to finance 10,000 MW with a combination of completion bonuses and loans.
Completion bonuses and loans run on the same timeline, and projects must meet specific criteria for bonuses.
PUC uses a mix of methods and prioritizes new loan projects over completion bonus grants.
There is an emphasis on rapidly adding new dispatchable generation to the Texas grid, aiming for at least 10 gigawatts.
3.5 - Sen. Johnson to Connie Corona - Windfall for Generators
Discussion on the concept of headroom related to completion bonuses versus loans.
Senator Johnson expressed concerns about the market signals sent to generators and potential new entrants.
The program's goal was to introduce more gas-fired generation to the grid quickly.
Concerns about whether completion bonuses for fast-tracking projects represent a windfall for generators.
Discussion on the potential of using a hybrid approach, including both loans and grants, to complete projects.
Clarification that grants applications could open in January 2025, with informal interest from companies.
Emphasis on original plans including diverse generation types and transmission benefits.
A 1.2 gigawatt project dropped, but there wasn't a complete collapse of original vision.
The program aims to enhance grid resilience through diverse locations, project sizes, and generation technologies.
Confirmation that the purpose was not the building of new plants for new loads but rather stabilizing existing grid adequacy.
Acknowledgement of potential outcomes such as inadvertently incentivizing generation for new entrants.
Existing market mechanisms allow for power sales to new entrants, emphasizing the necessity of the program.
Assurance that new generation projects might not require additional transmission infrastructure.
ERCOT analyzes project applications to address transmission constraints and consider consumer pricing impacts.
3.6 - Senator Johnson - Questions for Thomas Gleeson
Hyperscale AI data centers are a significant new load in Texas, potentially adding a gig and a half of power demand.
Market reforms by the Public Utility Commission (PUC) are crucial to address the integration of these data centers.
AI data centers are having private discussions with ERCOT about bringing their own generation to meet their power needs.
A toured facility had a load of around 1400 MW, highlighting the large power demand of these centers.
If AI data centers bring their own generation, it may reduce the need for new transmission infrastructure.
AI data centers prioritize speed in their operations and may bring their own power generation to expedite market entry.
3.7 - Rep. Hunter to PUCT Chair & Exec. Director - Complying with TEF Application Process
Questions were asked about compliance with the TEF loan application process; Aegle did not fully comply.
PUC confirmed confidentiality of the TEF loan application data in mid-August, except in cases of fraud.
Discussion on potential conflicts of interest related to Deloitte being a client of NextEra; PUC plans to conduct internal checks and understand policies better moving forward.
Negotiation strategies discussed for compensating companies when amounts owed exceed recoupable amounts, preferring reduction in future payments for administrative ease.
Confidence expressed in other viable applicants within the application process portfolio.
Rules for backup power package and out-of-ERCOT region projects have been drafted and are in process, but not fully finalized.
Acknowledgment of ongoing work on the backup power package and appreciation for efforts in moving forward with these projects.
Patrick Engineering was hired by the PUC to assist with the project.
An initial report identified 30,000 critical facilities statewide.
The challenge is determining which facilities should qualify for funding.
There's $1.8 billion allocated for the project, with potential for another $5 billion tranche, or $900 million in the meantime.
The committee involved various members, including legislative and private industry representatives.
There are unresolved decisions around the allocation of grants vs. loans.
Backup power availability is a primary goal for financially unable entities.
ERCOT may use backup power packages as a grid load management tool during emergencies.
The PUC and ERCOT are working on mechanisms for the use of backup power packages in emergencies.
Contentious issues include backup power package ownership and whether they should be vendor-owned with long-term contracts.
Discussions among PUC, private industry, and committees are ongoing and productive.
Preference for technologies providing more than 48-hour backup power is being considered.
Senator Middleton and Representative Hernandez represent areas affected by grid issues and are keen on extended backup power solutions.
Public testimony was welcomed, with individuals like Larry Linenschmidt and Madeline Highsmith providing input.
4 - Panel 4 - Larry Linenschmidt, Hill Country Institute - Testimony
Larry Linenschmidt introduced himself as the executive director of the Hill Country Institute and a former vice president of a major bank.
Texas has an opportunity to lead in clean energy with new natural gas plants potentially becoming the cleanest electric generators in the world.
The state's air pollution problem was highlighted with issues like ozone action alerts and climate change impacts leading to economic consequences.
The natural gas industry contributes significantly to air pollution and global warming due to methane leaks and emissions.
Recommendations included using state-of-the-art pollution control technologies and carbon capture for new plants, and updating technologies every three years.
Suggested siting gas-fired plants at least 3 miles away from residential areas.
Encouraged enhancement of the Texas Energy Fund to include zero-emission technologies, energy efficiency, and demand response incentives.
Recommended contracting a lending organization to administer loan funds, separating lending from regulatory functions to avoid conflicts of interest.
Emphasized the importance of strong credit backing for assets and promoting short-term loans.
