Panda case raises concerns about local power plant

Michael Hutchins, Herald Democrat
The Fifth Circuit Court of Appeals recently denied a motion to end a stay on the trial between ERCOT and Panda Power. In the case, Panda contends that false estimates for power demand by ERCOT led the company to build new power plants, including the Sherman facility. (Drew Smith / Herald Democrat)

Disputed estimates of future power usage are at the heart of an ongoing court case between Panda Power Generation Funds and the Electric Reliability Council of Texas. The lawsuit comes as one Panda-affiliated power plant has declared bankruptcy while the future of other plants, including the one in Sherman, remains uncertain.

“One of the Panda appellee project companies has already been forced into bankruptcy during the pendency of this suit, with more distress looming,” Panda said in a court motion to continue proceedings in August. “Every day of delay brings the other project companies one step closer to bankruptcy.”

Panda is one of Grayson County’s largest taxpayers.

False numbers spur development

The case, which was filed in February 2016, relates to information and power estimates that were released by ERCOT, which oversees the flow of electric power on the state electric grid for 24 million Texas customers. In the suit, Panda contends it and other companies used that data in their decisions to build additional power plants in an effort to take advantage of a favorable market. During this time, Panda built the Sherman power plant and two power plants in Temple.

It was later revealed the ERCOT data was inaccurate and the power shortfalls that were originally anticipated were unfounded. This revelation, which meant that Panda would not see its anticipated return on its investment, came only after Panda had begun work on the new facilities. Ultimately, instead of facing an energy shortfall when the plants came online, Panda found itself in a saturated market.

“As discussed more fully in the lawsuit, Panda Power Funds believes the CDR reports sponsored by ERCOT, and other statements made by them, prior to the construction of the Temple I, Sherman and Temple II facilities were false and misleading and, as a result, Panda has asserted claims against ERCOT for negligent misrepresentation, fraud and breach of duty,” Bill Pentak, Panda Power Funds investor relations and public affairs vice president, said in an emailed statement. “ERCOT’s actions have caused Panda to suffer significant damages.”

Initially, Panda sought to have the case heard in October of this year so it could use damages or settlements it may win to meet some of the financial obligations it faces, it says, due to the inaccurate estimates that ERCOT presented.

Among the obligations and debts that Panda faces is the bankruptcy of the Temple I plant. Officials for Panda noted the Temple power plant was a separate legal entity from the Sherman plant, and said Sherman was in better shape financially.

“Sherman is in a better place than Temple I, but it still suffers from the same market pressure that took Temple 1 to bankruptcy,” Pentak, said in a phone interview.

Pentak said the Sherman plant was “holding its own” and making debt payments. However, he said he was uncertain about the future of the plant considering the current market conditions.

In its arguments about the case, Panda is accusing ERCOT of fraud and negligence related to its posting of energy use and supply estimates. Through these numbers, which were known to be false, ERCOT induced Panda to build the three power plants, attorney Werner Powers, who is representing Panda in the lawsuit, said. In total, Panda invested nearly $2.2 billion in the construction of the three plants, he said.

In an email, representatives for ERCOT said the situation is based on a misunderstanding of ERCOT’s role and reporting.

“This lawsuit is based on a misunderstanding of the purpose of ERCOT’s Capacity, Demand & Reserves reports, how the reports are prepared in accordance with the methodology in the ERCOT Protocols, and the open and public stakeholder discussion ERCOT goes through before changing components of the CDR,” ERCOT Communications Manager Robbie Searcy said via email.

Does ERCOT have sovereign immunity?

During a hearing on July 13, Powers presented testimony from Calvin Opheim, who previously worked with ERCOT and was involved in the creation of the estimates for future power demand. During the testimony, Opheim said he approached the ERCOT Board of Directors after he noticed the data was incorrect and asked permission to rerun his calculations and correct the data. Opheim said his request was denied.

Panda opened its 758-megawatt combined cycle natural gas power plant in Sherman during the summer of 2014. The next year, the power company announced plans to add a third gas-fired turbine and a second steam turbine that would add an additional 450 to 500 megawatts of generation capacity.

It was during the July hearing that the idea of sovereign immunity — a legal standing that holds a state or sovereign is immune to civil suit or criminal prosecution — was first discussed. Attorney Hampton Skelton argued that as ERCOT was acting as an agent of the Public Utility Commission, which is a part of the state, these protections and special considerations would be imparted to ERCOT during its duties, Skelton said.

As an example, Skelton compared ERCOT in its duties to the NASDAQ or New York Stock Exchange. Despite the potential for someone to be damaged by information released by the agencies, it has protections due to fulfilling a government duty that it has been tasked to do.

Citing another case related to signage and road construction done by an independent construction firm, Powers argued that this protection does not always hold true for independent actions. Powers argued that the misconduct by the agent must be done at the direction of the state in order to gain protection.

Appeals and maneuvers prior to trial

On Aug. 9, Judge James Fallon ruled on motions made by council representing ERCOT during the July hearing. In the ruling, Fallon denied a motion to reconsider a motion by ERCOT that the 15th state district court does not have the proper jurisdiction for the case. Additionally, Fallon dismissed an alternative motion seeking dismissal based on sovereign immunity.

In response to a separate denied motion to reconsider the plea to the jurisdiction and an alternative amended jurisdictional plea, ERCOT filed an appeal with the Fifth Circuit of Appeals in Dallas.

Along with the appeal, ERCOT filed a motion for emergency relief and a stay on the ongoing trial until the appeal can be resolved. On July 28, the Fifth Court granted the stay.

In a motion to reconsider the stay, Panda argued that there was no emergency as claimed by ERCOT, and the delays over the past year and a half were prolonging the troubles faced by Panda.

Ultimately, the motion to reconsider the stay was denied on Aug. 24 by the Fifth Circuit of Appeals.

The value in Panda

For Grayson County, the city of Sherman and other stakeholders, Panda represents a major source of property tax income and revenue.

In 2013, nearly a year before the power plant was completed, the Grayson Central Appraisal District valued the incomplete plant at $27.71 million. Since completion, the values of the plant hit a peak in 2015 at $374.05 million. However, prices have dropped for two consecutive years, with the 2017 appraisal valuing the plant itself at $261.02 million.

Shawn Coker, chief appraiser for the Central Appraisal District, said Panda has multiple accounts with the appraisal district that cover the value of the plant, the land itself and pollution control accounts that carry specific exemptions.

Coker said the value of one of these account is currently disputed and has led to a lawsuit between the appraisal district and Panda on 2014 valuation of $68.71 million. The lawsuit relates to exemptions for pollution control that were denied by the Texas Commission on Environmental Quality, and thus not included in the district’s valuations.

In 2015, the account was valued at $22.06 million, but was not included in the tax roll due to the litigation. Since the 2015 peak, the value of the account has dropped to $15.16 million in 2017. Coker said the county and Sherman have agreed to keep these values off the roll until the dispute can be resolved.

For the land itself, the Central Appraisal District has consistently valued the 146-acre property at $1.28 million since 2013. Coker attributed the consistent price to few sales of properties of this size. As such, it is harder to value and judge shifts in prices for a niche property, he said.

When asked about the shifting values, Coker said the decreases in value could be attributed to shifts in the energy market and changes in restrictions to competing energy producers who utilize fossil fuels, including coal. Coker also said the region has experienced mild winters and summers that have likely led to lower than anticipated energy use by customers.

A boon to Grayson County

Among the people interested in the development of the Panda plant, Bill Magers is unique. He helped ink the original deal in 2012 while serving as mayor of Sherman and now represents the entire county as the Grayson County judge.

Magers said he wasn’t concerned about the value of the plant dropping, noting that the plant will devalue over time. However, if something were to happen to the plant, or if ownership changed, the facility would still continue to be a benefit to the county.

“I do not know what the short term may hold, but I am certain the plant will remain an asset to Grayson County in the future,” he said. “At the end of the day, the market will decide.”

Currently, the county receives about $600,000 in tax revenue each year from the plant. When its tax abatements conclude, Magers said this is expected to nearly double. With this, Magers said the county has been able to lower its tax rate in recent years as the county prepares for growth.

“Really what Panda has allowed us to do is offset operational costs to capital projects,” Magers said.

The largest property taxpayer

In 2017, the city of Sherman was abating property taxes of $151.03 million of the value of the Panda power plant itself. Even with this abatement, City Manager Robby Hefton said Panda is currently the largest property taxpayer in the city. Panda alone has the same property tax impact as 1,000 residential households, Hefton said.

“Really, across all aspects of the city, the impact of Panda has been a positive one and we appreciate them being in town,” Hefton said.

Since Panda started development, Hefton said the city has signed several incentive agreements, including tax abatements and a 380 agreement that will provide a tax rebate in years to come. Hefton said the abatement will decline over the course of 10 years and ultimately will then transition into a five-year rebate agreement.

“It is really a 15-year deal that is an abatement and then a tax rebate,” he said.

With the addition of Panda to the tax rolls, Hefton said the city has been able to add personnel and new city staff without the need to increase its tax rates and revenues. The city has also been able to purchase needed equipment that had been deferred following the economic recession in 2008 and 2009.

When asked about any concerns following market shifts and a drop in Panda’s property value, Hefton attributed the loss to the market, but added the city has worked to offer services as cheaply as possible so that the plant can maintain peak profitability.

As an example of this, Hefton said the city provides Panda with raw, untreated water for use in power generation and steam. Through this, he said the plant is able to purchase water at about one-fifth of the cost it would otherwise.

“There are a whole lot of market factors that we can’t control,” Hefton said. “But we do something to keep costs low to help business.”

In addition to the raw water, Hefton said the city also ran a second water line along the southwest side of town as a redundant source for Panda. While Panda was the primary beneficiary and focus with this effort, Hefton said other businesses at the nearby industrial park have also been able to make use of this water.

A tool for recruitment

Alongside the city, the Sherman Economic Development Corp. also played a role in recruiting and bringing Panda to Sherman through incentives and grants, SEDCO President John Plotnik said. Plotnik explained SEDCO is also helping support the development of the next expansion, which would see between $250 million and $300 million of investment in the plant.

Plotnik noted that he was not with SEDCO when the original deals and development for the plant first took place.

Despite the recent loss in value at the plant, Plotnik said he did not feel there was any concern and that the plant has always been a good corporate partner with the city. Given expected growth within the city and the region, Plotnik said he didn’t see any reason why Panda would not be successful.

“I would imagine with the demand for power, and the growth from Sherman, there wouldn’t be any reason to think there would be,” he said.

As SEDCO draws its funding primarily from the city’s sales tax, Plotnik said, SEDCO did not gain directly from the successes at Panda. However, Plotnik said its existence was a bargaining chip when recruiting other businesses to Sherman.

With the power plant nearby, Plotnik said, he was in talks with many larger industrial employers who are looking for land in areas with ample power generation at lower rates. As an example of this in action, Plotnik referred back to the Cassini Gateway I deal; a proposed $1 billion data center development within the city’s Progress Park industrial area. The development will focus on computer servers for internet storage and will require ample power to operate, Plotnik said.