Senate Committee on Business and Commerce Interim Report to the 88th Legislature — Texas Senate, January 9, 2023

Issuer: Congressional materials
Document type: Report
Case: Archive Interim Report C510 Interimreport 2022

Summary

The Texas Senate Committee on Business and Commerce Interim Report to the 88th Legislature, dated January 9, 2023 and submitted to Lieutenant Governor Dan Patrick by Chairman Charles Schwertner and committee members. The report addresses six interim charges: broadband and telecommunications, supply chains, blockchain and virtual currencies, electricity, cybersecurity, and the state workforce. It lists interim hearings held May 18, 2022, June 29, 2022 and November 17, 2022. The broadband discussion covers House Bill 5, House Bill 1505, $500.5 million appropriated through Senate Bill 8 and the Texas Universal Service Fund. The report closes with the state workforce charge and recommendations on telework and remote work, including tying eligibility to job classification.

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“Senate Committee on Business and Commerce Interim Report to the 88th Legislature — Texas Senate, January 9, 2023.” Original at senate.texas.gov. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/archive-interim-report-c510-interimreport-2022/, SHA-256 480f3a09706f3b571769169481cb908647b825482f1cdc8ed56ab716680e2587.

Full text

SENATE COMMITTEE ON

BUSINESS AND COMMERCE

Interim Report to the

88th Legislature
Senate Committee on Business & Commerce
January 9, 2023

The Honorable Dan Patrick
Lieutenant Governor
Members of the Texas Senate
PO Box 12068
Austin, Texas 78711

Dear Governor Patrick:

In response to your interim charges assigned to the Senate Committee on Business & Commerce, this
report contains the recommendations of the committee. We appreciate your leadership and the
opportunity to inform legislation to be proposed in the 88th Legislative Session that may address issues of
utmost importance to the state.

Respectfully submitted,

Senator Charles Schwertner, Chairman

______________________
Senator Robert Nichols, Vice-Chair ______________________
Senator Donna Campbell

______________________
Senator Brandon Creighton ______________________
Senator Nathan Johnson

______________________ _____________________
Senator Lois Kolkhorst Senator José Menéndez

______________________ ______________________
Senator Angela Paxton Senator John Whitmire
Table of Contents

Interim Charges …………………………………………………………………………… 2

Senate Committee on Business and Commerce Interim Hearings ………………………...3

Charge No. 1………………………………………………………………………………..4

Charge No. 2……………………………………………………………………………….12

Charge No. 3……………………………………………………………………………….14

Charge No. 4……………………………………………………………………………….19

Charge No. 5……………………………………………………………………………….33

Charge No. 6……………………………………………………………………………….38

1
SENATE BUSINESS AND COMMERCE INTERIM CHARGES

The Senate Committee on Business and Commerce was charged with six interim charges by the
Lieutenant Governor. The Committee held interim hearings on the following charges:

1. Broadband and Telecommunications: Study broadband and other telecommunications related issues
impacting Texans, including:

• Monitoring the implementation of House Bill 5 and House Bill 1505, 87th Legislature; discuss
anticipated federal infrastructure funding dedicated to broadband initiatives;
• Reviewing the Texas Universal Service Fund and reporting what, if any, changes should be made
through a review of both the fund's contributions and disbursements, as well as the impact of
technology on the long-term stability of the Texas Universal Service Fund; and;
• Monitoring the implementation of House Bill 2911, 87th Legislature, relating to next generation
9-1-1 service and the establishment of a next generation 9-1-1 service fund.

2. Supply Chains: Examine the causes and impacts of recent supply chain disruptions on the Texas
economy and individual industries. Study the factors that weaken links in the supply chain and the extent
the pandemic has exposed those vulnerabilities. Recommend actions to strengthen the supply chain in
Texas and mitigate disruptions in the future.

3. Blockchain and Virtual Currencies: Study current state and federal regulations surrounding
blockchain and virtual currencies. Examine how these technologies impact industries such as banking,
business, and electricity. Make recommendations to protect consumers while encouraging innovation.
Monitor the implementation of House Bill 1576 and House Bill 4474, 87th Legislature.

4. Electricity: Assess the electricity market in Texas. Study issues impacting the Texas electric grid,
including weather preparedness, transmission planning, maintenance scheduling, and the natural gas
supply chain. Study the consequences of increased electric vehicle usage and charging on the generation,
transmission and distribution, and retail sectors of Electric Reliability Council of Texas (ERCOT) and
evaluate their potential impact on increased electric demand and reliability of the grid. Evaluate potential
benefits of real-time transparency of the intrastate gas market with respect to the functions of ERCOT and
the Texas Energy Reliability Council. Examine the growth of renewable energy generation in the state
and evaluate its impact on grid reliability. Make recommendations to strengthen the reliability of the grid,
and meet the future generation needs of ERCOT through new and existing dispatchable generation.
Assess plans to expeditiously add new dispatchable generation. Monitor the implementation of Senate
Bill 2 and Senate Bill 3, 87th Legislature.

5. Cybersecurity: : Review current state and federal laws regarding cybersecurity protections and
requirements for local governments, state agencies, and critical industries of our state. Make
recommendations for legislation to improve resilience and protection against cybersecurity attacks and
ensure the privacy protection of the citizens of Texas.

6. State Workforce: Study where state employees are located and the benefits and drawbacks of remote
working. Evaluate the impact of the potential growth of remote work and proximity of employees to their
place of employment on traffic studies over the next 10 years. Study and make recommendations for
establishing uniform statewide standards for remote work. Study possible implications and standards for
statewide recruitment and employment of remote state employees from all parts of the state.

2
SENATE COMMITTEE ON BUSINESS AND COMMERCE INTERIM HEARINGS

May 18, 2022, Senate Chamber
The Committee took invited and public testimony on Charge Nos. 2, 5, and 6.

June 29, 2022, Senate Chamber
The Committee took invited and public testimony on Charge Nos. 1 and 4.

November 17, 2022, E1.012
The Committee took invited and public testimony on Charge Nos. 3 and 4.

3
INTERIM CHARGE DISCUSSIONS AND RECOMMENDATIONS

CHARGE NO. 1

Broadband and Telecommunications: Study broadband and other telecommunications related issues
impacting Texans, including:

Testimony

The Senate Business & Commerce Committee held a hearing on June 29, 2022, dividing the charge
amongst the three subtopics, and heard testimony from witnesses.

Background

Broadband

Broadband expansion has long been a topic of discussion in the state, especially given the ever-growing
"digital divide" as technology has advanced in recent years. The U.S. Census Bureau's American
Community Survey (2019) estimated that Texas fell behind the national average of households with
broadband access on any type of device - 81.9 percent compared to 82.7 percent. 1 In a society where
access to education, medical care, and many economic opportunities rely on access to the Internet, Texans
are falling behind. As such, the Legislature took action last session to close these gaps during an
opportune time while the Federal Communications Commission (FCC) began to update their access
mapping methodology to provide a more accurate view of household connections across the nation. These
federal maps will provide more granular data and transparency. The state's maps will likely mirror the
federal maps, but if not, a challenge process provides an opportunity to review and revise for accuracy.

In the 87th Regular Session, Texas passed HB 5 to set the framework for broadband expansion in the
state. Specifically, the bill established the Broadband Development Office (BDO) within the Comptroller
of Public Accounts which is tasked with the following: developing a state broadband plan, statewide
availability map, and federally-compliant grant program, conducting outreach and digital literacy
programs, and making recommendations regarding areas eligible for funding. This structure, in
combination with $5 million in general revenue appropriated for its purposes, enabled Texas to start the
process. Later in 2021, the state further appropriated $500.5 million in Coronavirus Capital Projects Fund
(CPF) from the federal American Rescue Plan Act (ARPA) through Senate Bill 8 (87-3) administered by
the U.S. Treasury. This was allocated on top of forthcoming funds from the Infrastructure Investment and
Jobs Act (IIJA.) The IIJA, administered by the National Telecommunications and Information

1
Texas Comptroller of Public Accounts, TexIndex,
https://comptroller.texas.gov/economy/texindex/texindex.php?metric=shareofHouseholdswithBroadbandInternetSub
scriptions2018

4
Administration, will distribute funds in accordance with multiple programs, the major two being the
Broadband Equity, Access, and Deployment Program (BEAD) which will disburse $42.5 billion
nationwide and Digital Equity Programs which will disburse $2.7 billion nationwide. BEAD, will provide
states with at least $100 million in planning dollars. The latest estimates of Texas's full allocation are
anywhere from $1 to $4 billion - the final amount depends on the new FCC maps.

Each of these funding sources will have varying requirements. Furthermore, the requirements will differ
from those pertaining to expenditures tied to CPF. Robust planning that builds on the state's existing
broadband plan as required by BEAD intends to ensure the state meets all of the varying requirements for
participant procurement and program administration2. Such planning should include information
regarding the federal agencies with which the state must work for the different tranches and programs.
Earlier this year, the NTIA released the Notice of Funding Opportunity (NOFO) for this program for the
planning grant funds. While helpful in developing the state's grant plan, there are some requirements
included in the guidance that have proven to be areas of concern; primarily, the definition of broadband as
it pertains to different modalities and standard speeds, and project priorities. On June 21, 2022,
Comptroller Hegar directed a statement to NTIA outlining the state's concerns regarding these conflicts in
hopes that the agency will work with Texas, as well as many other states with similar concerns, as the
program rolls out 3.

The next step the state must take to receive and disburse these funds is to submit a five-year action plan to
NTIA no later than 270 days after receipt of initial planning funds. After the release of the FCC's new
maps and NTIA receives states' plans, they will issue a Notice of Available Amounts for each state by the
end of 2022 or early 2023. Throughout 2023, states will then submit proposals, challenge available
amounts, and move forward with their grant administration and subgrantee selections. If all is done in
accordance with NTIA guidance and expectations, they will release 20 percent of the state's funding in
anticipation of the final proposal and disbursement of funds in 2024-2025. As for the Digital Equity
programs under IIJA, states are now developing their plans and will begin implementation by mid-2024.

In developing the five-year action plan, private sector stakeholders have provided insight on questions
relating to how the state may choose to handle grant administration, project selection, and ongoing
maintenance and technical assistance for broadband projects. A significant outstanding question in
dealing with this effort is the long-term sustainability of these projects. The state's broadband plan
specifically notes local governments' concerns surrounding maintenance and technical assistance and how
this may be addressed by public-private partnerships. One proposed solution brought forth by
stakeholders is the creation of an ongoing maintenance and operations fund, paid for by state dollars.
Those opposed to this idea contend private companies who receive funding for capital costs should
themselves be responsible for ongoing cost of operations.

Some stakeholders chose to further emphasize implementing such partnerships in favor of government-
owned networks, which have long been a point of contention in the state. Federal guidance places
emphasis on price transparency and public disclosure of rates, suggesting ongoing subsidies to promote
broadband adoption similar to a USF model; however, this could discourage private investment in

2
Texas Comptroller of Public Accounts - Broadband Development Office, Texas Broadband Plan 2022,
https://comptroller.texas.gov/programs/broadband/plan.php
3
Texas Comptroller of Public Accounts, Statement to NTIA - June 21,2022,
https://comptroller.texas.gov/about/media-center/news/20220621-texas-comptroller-glenn-hegar-statement-on-new-
broadband-grant-rules-released-by-national-telecommunications-and-information-administration-1655759740516

5
maintenance. Another issue of note is right-of-way access. In order to build out their service, providers
are often required to access both public and private rights-of-way; but access must be requested and
approved by the entity under whose jurisdiction it falls. Stakeholders have suggested streamlining the
permitting process to request right-of-way access or creating a standard to follow where none exists
locally. In bolstering this process, it may also provide for an opportunity to better map out existing
infrastructure. Multiple stakeholders from rural areas assert that our state's forthcoming maps and project
prioritization should somehow account for customer density revenues, speeds, and consistency or
reliability of service to better understand regional needs. In many cases, these smaller providers are
already established and trusted in the community - larger companies should not have projects funded to
overbuild.

HB 1505 established the Texas Broadband Pole Replacement Program to be administered by the Public
Utility Commission. The intent of the program is to create a standardized, transparent framework for the
affixture of a pole attachment by a broadband provider to a pole owned and controlled by an electric
cooperative, including an application process and contracts, procedures related to make-ready activities
and attachment specifications, and cost sharing of pole modifications and replacements. This legislation
was funded at $75 million as part of the total $500.5 million appropriated through Senate Bill 8.
However, BDO recently received information from U.S. Treasury indicating that this may not be
considered an allowable use. Texas must consider how to best proceed in a manner that, no matter how
the state choose to respond or reallocate funds, ensures it remains possible to meet expenditure deadlines.

Both HB 5 and HB 1505 were drafted and passed with knowledge that the aforementioned federal
funding and associated guidance were imminent, but without any detail of how it might be structured.
BDO continues to work through areas where state law conflicts with federal guidance and may uncover
issues that require further state action in concert with the Committee's interim studies. To date, the two
primary areas of concern relate to the defined standard download and upload speeds and qualifying
technologies. In House Bill 5, the state chose to define these minimum speeds as 25 Mbps download/3
Mbps upload, matching IIJA requirements, but defer to the Federal Communications Commission (FCC)
should they choose to increase these as many stakeholders have urged for years. To further complicate
matters, the minimums are defined differently in different federal programs - projects utilizing CPF funds
must establish connections at 100/100. In drafting last session's legislation, the state also intentionally
chose to take a 'technology neutral' stance, meaning that one modality should not be prioritized over the
other in order to grant flexibility in future expansion projects; however, there is ongoing conversation
about some federal programs prioritizing fiber. As such, the intent behind this charge is not only to
monitor the implementation of landmark legislation passed last session, but to identify what steps the
Legislature may take to ensure thoughtful, appropriate implementation of broadband expansion efforts
and begin to explore how ongoing maintenance may be designed. In addition, as reiterated throughout
witness testimony to the Senate Business and Commerce Committee, ensuring the success of broadband
expansion in the state requires the BDO having the resources it needs to administer such an expansion and
landmark funding program.

Texas Universal Service Fund (TUSF)

In 1987, the Texas Legislature established a Universal Service Fund (TUSF) mechanism 4. The current
rules concerning universal service in place at the Public Utility Commission of Texas complement the

4
Chapter 56, Texas Public Utility Regulatory Act

6
federal universal service rules and are appropriate for the changes in the telecommunications industry
toward a competitive market. The federal Telecommunications Act of 1996 expanded the traditional
definition of universal service - affordable, nationwide telephone service to include, among other things,
rural health care providers and eligible schools and libraries.

After deregulation, the TUSF was established to provide support for companies serving customers in low-
density, high-cost regions where it would be otherwise unaffordable to build and maintain the
infrastructure to serve those customers. The state was broken into geographic regions based on the
incumbent local exchange carrier (ILEC) that existed in the area. In areas where an ILEC receives USF
support, competitive local exchange carriers (CLEC) can also apply to be an Eligible
Telecommunications Provider (ETP) and receive USF support.

The Texas Universal Service Fund (TUSF) is financed by an assessment of all taxable
telecommunications receipts on Texas’ telecommunications providers reporting taxable
telecommunications receipts under Chapter 151 of the Texas Tax Code. Telecommunications providers
are allowed to pass the costs of the TUSF through to residential and business customers on their monthly
bills. Currently, the TUSF funding sources include wireline, wireless, certain interexchange carriers
(IXC), and paging. It does not include assessments on Voice over Internet (VoIP) or cable.

Funding Challenges

As technology changes, the TUSF has struggled to maintain the necessary funding levels to support its
programs. In March 2019, PUC staff determined the USF was falling short by $5 million to $7 million per
month and made a recommendation that “an increase in the assessment rate is appropriate to allow for
funding of expenditures through August 2021 5." To that end, PUC staff made a recommendation to the
Commission to raise the USF assessment from 3.3 percent to 6.4 percent to prevent the USF from
depleting its fund balance in June 2020. This increased assessment would help close the gap created by a
shift from traditional landline phones to internet-based phones, which cut into company billings and the
related tax proceeds. Ultimately, the PUC Commissioners opted not to adopt staff recommendations,
given the timing of the COVID-19 pandemic and ongoing concerns over the fund's appropriateness.

Meanwhile, in September 2020, major carriers decided to recalculate what percentage of customer
services was actually dedicated to voice versus data. Because the TUSF assessment is specific to voice
and not data, this significantly reduced the amount these companies paid into the fund, which further
complicated the fund's solvency issues.

The federal government operates its own USF and many Texas providers receive funding from both the
state and federal government. Beginning in 2011, the federal government began planning to reduce and
eventually phase out funding for a number of its USF programs and instead focus on broadband
expansion to cover high-cost areas. However, the state has a provision in statute 6 that requires the Texas
USF to make up for any lapse in federal dollars, which has further diluted the available Texas USF dollars
since the FCC finally began reducing funding in 2022.

The combination of these factors led to funding shortfall and required the PUC to reduce the disbursement
amount provided to each TUSF recipient.

5
Project 50796, Filing 15. Review of TUSF Rate. Public Utility Commission.
6
Section 56.025 (c), Public Utility Regulatory Act

7
Legal Challenges & Resulting Public Utilities Commission Action

As a result of a reduction in TUSF disbursements, USF providers filed a series of lawsuits against the
PUC. In July 2022, the Texas Third Court of Appeals ruled against the PUC in two separate cases 7, 8
stating that the agency had acted outside its legal authority by failing to maintain the solvency of the
TUSF, by implementing a hierarchy of funding among TUSF programs and by failing to fully pay all
disbursements required by the Public Utility Regulatory Act and the Commission’s existing TUSF orders.
In specific, the court found that while the PUC has the legal authority to determine the means by which it
funds the TUSF, it does not have the ability to underfund it and therefore fail to meet its obligations to
providers. Following the court rulings, the PUC opted to temporarily increase the TUSF assessment
amount from 3.3 percent to 24 percent in order to backfill the amount owed to providers and maintain the
fund moving forward. While the Commission has indicated plans to reduce the assessment at some point
in the future, it has not indicated the timeframe of when this change will occur.

Long Term Solutions

Aside from raising the assessment, stakeholders have offered a number of different solutions for fixing
the fund, but to date, none of these solutions have been implemented.

The USF was created to provide a subsidy to telecommunications companies providing services in high-
cost areas of the state where no business case exists to build or otherwise maintain networks. However,
concerns have been raised that there are areas of the state that may have been considered rural or
underserved at the time when the USF was instituted but have now seen enough population growth to
sustain competitive networks and should no longer be USF areas. To address these concerns, interested
parties have sought to redefine what constitutes a high-cost, rural or underserved area. While the PUC
currently has the authority to make these changes, the proposed definitions have not been able to properly
capture the appropriate areas of the state.

As a means to address the fund's solvency, the Legislature passed HB 2667 9during the 87th Legislative
Session. The bill proposed adding VoIP lines to the assessment pool and took steps to define who could
receive USF dollars. However, this definition only eliminated 10 exchanges. Citing concerns over the
impact of new assessments, Governor Abbott vetoed the bill 10.

NextGen9-1-1

Background

The statewide deployment of next generation 9-1-1 service will replace the existing narrowband, circuit
switched 9-1-1 system, using modern software to enable transmission of data currently not supported by
the legacy 9-1-1 system. NextGen9-1-1 supports Text-to-9-1-1, geolocation mapping to locate within feet
of a caller, and the ability to transmit rich data like images and videos to emergency responders. House
Bill 2911 establishes a target date of September 1, 2025 11 for full statewide NextGen9-1-1 service. The
current analog 9-1-1 system only supports voice calls, and relies on physical infrastructure that is outdated

7
Tex. Tel. Ass'n v. Pub. Util. Comm'n of Tex., No. 03-21-00294-CV (Tex. App. Jun. 30, 2022)
8
Pub. Util. Comm'n of Tex. v. AMA Commc'ns, No. 03-21-00597-CV (Tex. App. Aug. 10, 2022)
9
HB 2667, 87th Texas Legislative Session
10
HB 2667 Veto Statement, Governor Greg Abbott, Issued June 18, 2021.
11
Health and Safety Code § 771.059

8
and susceptible to failure in cases like high-volume call load or power outages during a natural disaster.
House Bill 2911 addresses the need to operate 9-1-1 service using the more reliable, interoperable, and
automatically responsive system. The Commission on State Emergency Communications (CSEC) is the
authority overseeing the transition to statewide NextGen9-1-1 Service.

9-1-1 Service in Texas

9-1-1 emergency service is provided by an overlapping network of entities that work in partnership and
consist of two key groups: The first are the Regional Planning Commissions, also known as Councils of
Government (COGs), which are the groups of counties that voluntarily participate in the State 9-1-1
Service Program, run by the Commission on State Emergency Communications (CSEC). The Regional
Planning Commissions cover 75 percent of Texas counties but serve just 18 percent of the state's
population. The second group are the Emergency Communications Districts (ECDs) and Municipal
Emergency Communications Districts (MECDs), which are the 57 independent districts that provide 9-1-
1 service to the rest of the state and the Emergency Communications Districts primarily cover urban areas
of the state.

9-1-1 service in Texas is funded by fees assessed on landline and wireless telephone line subscriptions in
the state. 9-1-1 Service Fees are remitted to the Texas Comptroller into dedicated accounts, and funds are
appropriated to CSEC through the biennial appropriation process for use by participating RPCs in
accordance with approved regional plans and statutory formulas.

House Bill 2911, 87th Legislative Session

House Bill 2911 directed the state to implement a new and modernized 9-1-1 service system called Next
Generation 9-1-1 (NextGen9-1-1). Because Texas' emergency service is coordinated through several
entities on both state and local levels, the task of moving the state away from the existing system
(dependent on physical networks) to a new system that is primarily internet-dependent requires
methodical coordination efforts and significant funding to fully convert the state. Thus, HB 2911 widens
CSEC's mandate by charging the Commission to organize and oversee that all 9-1-1 entities successfully
replace their emergency service technology.

HB 2911 also created the NextGen 9-1-1 Service Fund within General Revenue-Dedicated Account No.
0195 and appropriated $150M in Coronavirus State and Local Fiscal Recovery Funds (CSFRF) for use
by all 9-1-1 service entities to replace the legacy emergency service system with Next Generation 9-1-1
service. 12 The funds in the NextGen account must be spent by December 31, 2024 and the fund is set to
eventually expire on September 1, 2025 13.

The benefits attributable to NextGen9-1-1 are only accessible if the entire state is operating the same
system at the same time. The timely and coordinated implementation is necessary to fully retire the old
system and make sure no area of the state is left out of access to NextGen9-1-1.

In April 2022, the Office of the Governor designated CSEC as the administrator and recipient of the grant
funds. The OOG also designated the RPCs, ECDs, and MECDs as subrecipients and thus must submit
applications to and organize efforts with CSEC in order to ultimately be reimbursed by the federally

12
Health and Safety Code § 771.0713(b)
13
Health and Safety Code § 771.0713(g)

9
funded grant. CSEC work closely with the entities to provide support and expertise as needed, especially
given the complexities of navigating the federal grant system.

The NextGen9-1-1 deployment process requires significant capital investment in new equipment,
software and database services, and de-commissioning existing infrastructure to complete the transition
and ongoing funding structures to ensure long-term maintenance. All 9-1-1 entities will require sufficient
staffing and long-term revenue sources to support implementation of NextGen9-1-1. Several emergency
communications districts, especially smaller entities, have raised concerns about the implementation
timelines, the availability of future funds to support increased operation expenses, and ability to hire
experienced staffers to support the transition to the technical and specialized systems 14.

In addition, the 9-1-1 Service Program (Account No. 5050) 15 also faces significant long term funding
challenges. The 9-1-1 Service Program Account generates funds to support statewide 9-1-1 service
through fees collected on wireless and landline service lines in Texas. Currently, wireless usage far
exceeds landline use: CSEC reports in 2021 that 84.2 percent of 9-1-1 calls were made on wireless
phones, versus 33 percent in 2002 16. However, the current wireless fee rate, is insufficient to support the
long-term fund balance. With no changes, the State 9-1-1 Service Program Fund will become insolvent
after FY 2024 and be completely depleted by FY 2027 17. The Commission was required in Rider 9 of the
agency's bill pattern in the General Appropriations Act to submit options for methods to maintain the fund
balance and provide a predictable source of revenue to support statewide 9-1-1 service.

Conclusion and Recommendations

Broadband

Texas has an incredible opportunity to take advantage of an unprecedented amount of federal funds to
ultimately close the digital divide in the state through robust broadband expansion. The Legislature can
help the state build upon the groundwork laid by House Bill 5 in the following ways:

• Determine any legislative action necessary to address conflicts between state law and federal
guidance.
• Ensure the Broadband Development Office has the necessary staffing and resources to manage
the administration of federal grant dollars.
• Determine options to replace the federal dollars previously allocated to HB 1505 (87R).

Texas Universal Service Fund

In order to address both the short and long-term viability of the Texas Universal Service Fund, the
Committee recommends the Legislature consider the following changes:

• Evaluate the appropriateness of qualifying eligible providers based on density.

14
NextGen9-1-1 Charge: Hearing Before the S. Comm. on Business and Commerce, 87th Interim (Tex.
2022)(written testimony of Chip VanSteenberg, Montgomery County Emergency Communication District).
15
Health and Safety Code § 771.0711(b)
16
Commission on State Emergency Communications. (2022). Agency Strategic Plan Fiscal Years 2023-2027.
https://csec.app.box.com/s/fyy3a3o1b8z9ho0ojonyxla9veytsfdg
17
Commission on State Emergency Communications. (2022). Plan For Continued Funding of Statewide 9-1-1
Services. https://csec.app.box.com/s/a3fpgw1cf4irb922yneun2e7mbu8ad5y

10
• Conduct a holistic study of the fund to evaluate ways to increase transparency, determine
eligibility requirements, and identify long-term funding options.
• Consider the appropriateness of maintaining the federal make-whole provision.
• Establish a workgroup between the Broadband Development Office and Public Utility
Commission to coordinate broadband infrastructure development in USF-covered areas.

NextGen9-1-1

The transition to NextGen9-1-1 requires the ongoing and intensive coordination between CSEC and all
Texas 9-1-1 entities, and the Legislature may consider the following recommendations.

• Consider amending the date by which the NextGen9-1-1 allocated funds must spent to August 31,
2025, instead of December 31, 2024, in order to better align the spend deadline with the target
implementation deadline for statewide NextGen9-1-1 deployment.
• Consider extending the target date for implementing NextGen9-1-1 and the expiration of the Next
Generation 9-1-1 Service Fund past Sept. 1, 2025, allowing the Commission to create a second
phase timeline to ensure that all 9-1-1 entities implement NextGen9-1-1 in a timely fashion and
most importantly that none of the funds dedicated to deployment are left unspent should the grant
subrecipients face any delays outside of their control including supply chain issues. Without a
timeline extension, CSEC advises that some allotted funds risk being unspent by the target
deadline.
• Consider options included in the Rider 9 plan to support the long-term fund balance of GR-D
Account 5050, 9-1-1 Service Fees, in order to the accomplish the Commission's mission of
providing Texans with reliable emergency communication service.

11
CHARGE NO. 2

Supply Chains: Examine the causes and impacts of recent supply chain disruptions on the Texas
economy and individual industries. Study the factors that weaken links in the supply chain and the extent
the pandemic has exposed those vulnerabilities. Recommend actions to strengthen the supply chain in
Texas and mitigate disruptions in the future.

Testimony

The Senate Business & Commerce Committee held a hearing on May 18, 2022 and heard testimony from
the witnesses.

Background

While Texas plays an integral role in the global supply chain as the ninth largest economy in the world
and our share of exports accounting for 20 percent of the country's total 18, we are also uniquely sensitive
to disruptions. Over the last three years alone, there have been a multitude of challenges that resulted in
sharp increases in demand met with simultaneous decreases in supply - further exacerbated by labor
shortages. Although many issues can be traced back to the COVID-19 pandemic, through further study,
there are many private business decisions made prior to the pandemic that inadvertently impacted the
global supply chain. Of those, the most notable are outsourcing, offshoring, and strategies that may
compromise resilience such as maintaining lean inventories. These decisions were made with no
inclination of challenges to come. In addition, there is ongoing conversation as to what changes in
consumer behavior are short-term or long-term and whether potential solutions are only needed in the
immediate future rather than an ongoing basis. Texas, and the United States as a whole, is not alone in
grappling with the effects of all of these factors combined, and the opportunity to discover what solutions
may be available is welcomed by the state.

Recently, the Texas Comptroller for Public Accounts conducted a Good For Texas Tour to evaluate the
supply chain challenges facing various sectors important to the Texas economy, including
semiconductors, chemical manufacturing, rare earths, and food 19.

While each industry faces its own challenges, many are similarly impacted by trade disputes, geopolitical
tensions, geophysical events, and cyberattacks. To combat these issues, there are renewed targeted efforts
to increase domestic production, onshore operations, and regionalize and diversify supplier bases. Rare
earth elements (REE) face some unique restrictions by way of federal environmental regulations as well
as reliance on foreign countries to process raw materials, which in turn further impacts industries down
the line. These materials are involved in a highly segmented supply chain of their own, from sourcing, to
processing, all the way to product manufacturing. REEs are used in a variety of high-tech components
that are ultimately used in consumer electronics, military operations, and renewable energy technology.
There is currently no domestic supply for these materials, but plans to establish an operation in Texas are
underway. Beginning in 2023, USA Rare Earth is set to both mine and process REE on 950 acres of state
land at the Round Top deposit in Sierra Blanca. The company estimates that this project is likely to yield

18
Written Testimony, Texas Comptroller of Public Accounts (on file with the committee)
19
Texas Comptroller of Public Accounts, Good For Texas Tour: Supply Chains,
https://comptroller.texas.gov/about/media-center/media-kit/good-for-texas/supply-chains/

12
16 of the 17 REEs, produce roughly $400 million in economic impact (not including an additional $200
million from magnet production) and bring up to 195 direct, full-time permanent jobs to the state 20.

As it is commonly known, demand for goods increased while production capacity lowered and logistics
capacity stagnated. To mitigate future issues, there is a need for increased transparency and resiliency in
supply chains, but also the need for innovative solutions in the trucking industry and automation to fill
less desirable jobs 21. Consideration should also be given to the environmental impacts of larger scale
production due to onshoring and reshoring overall, especially in terms of adhering to federal regulatory
rules.

The state has taken proactive measures from a transportation and logistics perspective to alleviate
chokepoints in the supply chain. One way this has been accomplished is through the Texas Department of
Transportation's Texas Ports Advisory Committee. Texas ports are privately owned and operated, which
limits the state's ability to assist, which is why the public-private stakeholder engagement process is
essential. Having a privately-owned port system in the state provides Texas ports with increased
flexibility compared to ports in other states. While other areas have struggled to accept increased
capacity, more suppliers have been redirecting shipments to Texas as the port system has been able to
adapt more efficiently to the ongoing supply chain issues.

One of the most significant supply chain issues was brought to light during the hearing related to labor
shortages. Stakeholders noted that even if all disruptions were addressed, products cannot make their way
to any destination along the supply chain without a workforce to move them. To mitigate this issue, some
industry leaders, such as Sysco, have dedicated resources to maintaining their trucking fleet through the
development of an internal trucking academy and reevaluating the type of long-haul trips employees take
to advance a better work-life balance 22. Workforce concerns were echoed across a wide variety of
industries, including semiconductors and manufacturing industries, especially as more companies look to
onshore operations. According to these stakeholders, investing in workforce training and apprenticeships
to full positions across a spectrum of education and skill levels is essential to alleviating this issue in the
future.

Conclusion and Recommendations

While this is a global issue, the Committee recognizes the importance of examining it in a localized
manner to determine any steps the State of Texas can take to address it. As such, it is recommended that
the Legislature consider the following:

• Structure of existing, or any potential new, economic incentives for onshoring, reshoring, and
regionalizing supply chains.
• State contributions to workforce initiatives related to public education, higher education, and
those available for private businesses; and
• Support the onshoring of facilities through strengthening the Texas electric grid and support
probusiness regulatory environment.

20
Texas Comptroller of Public Accounts, Rare Earth Elements Supply Chain,
https://comptroller.texas.gov/economy/economic-data/supply-chain/2021/rare-earth.php
21
Written Testimony, Dr. Edward Anderson, University of Texas (on file with committee)
22
Senate Business and Commerce Committee Hearing, May 18, 2022

13
CHARGE NO. 3

Blockchain and Virtual Currencies: Study current state and federal regulations surrounding blockchain
and virtual currencies. Examine how these technologies impact industries such as banking, business, and
electricity. Make recommendations to protect consumers while encouraging innovation. Monitor the
implementation of House Bill 1576 and House Bill 4474, 87th Legislature.

Testimony

The Senate Business & Commerce Committee held a hearing on September 29, 2022 and heard testimony
from witnesses.

Background

Blockchain technology and virtual currencies continue to pose challenges to state and federal regulators:
The high rate of public adoption and un-tested market conditions evolve faster than regulators can react to
best protect the public while ensuring policies do not hinder technological innovation. The following
sections will provide an overview of Blockchain and Virtual Currencies, the state of Texas' regulatory
approach and recommendations for possible legislative solutions.

Blockchains 101

Simply put, a blockchain is a type of database that is decentralized and distributed across a network of
computers where additions to the blockchain are cryptographically linked, forming a chain of blocks that
comprise the whole of the blockchain. Blockchain technology is a kind of distributed ledger technology
(DLT) but the cryptographic way information is linked together distinguishes blockchains from other
distributed ledgers 23. Blockchains should be understood as an evolution of existing technology.
Blockchains have a huge range of applications, and one of the most well-known uses are
cryptocurrencies.

Cryptocurrency 101

Cryptocurrency generally refers to digital coins created, transmitted through and maintained on a
blockchain. The term 'crypto' refers to the nature of blockchains, which cryptographically link new
blocks together (i.e., make an addition to the ledger) 24. The most well-known cryptocurrency is Bitcoin,
which is a helpful way of distinguishing the difference between blockchains and cryptocurrencies. Bitcoin
is the virtual currency created on the Bitcoin Blockchain. If a blockchain is like an ecosystem,
cryptocurrency is like a species of coin native to that blockchain ecosystem 25. Bitcoin (BTC) the
cryptocurrency is native to the Bitcoin Blockchain. Another example is the Ether Blockchain (the
ecosystem) and Eth (the cryptocurrency).

23
Texas Blockchain Council and Chamber of Digital Commerce. (December 2020). Legislator's Toolkit for
Blockchain technology Texas Edition. https://texasblockchaincouncil.org/legislators-toolkit-for-blockchain-
technology
24
Texas Work Group on Blockchain Matters 2022 Report. (November 2022) https://portal.bcwg.texas.gov/General-
Documents/Texas-Work-Group-on-Blockchain-Matters-Report/wbtp-2m5k
25
Meshulam, Deborah R., and Michael Fluhr. “Introduction to Blockchain-Based Assets.” Cryptocurrency and
Digital Asset Regulation: A Practical Guide for Counsel, American Bar Association, Tort Trial and Insurance
Practice Section, Chicago, IL, 2022, pp. 3–4.

14
Unique Risks: Volatile Market Exposure

The rise in popularity of virtual currency has not translated to increased market stability and the
fluctuations in the value of cryptocurrencies have exposed consumers to significant losses in investments.
During the period dubbed 'Crypto Winter' starting in May 2022, the cryptocurrencies lost roughly $2
trillion in value 26, wiping out life savings and triggering the collapse of major crypto lenders, exchanges,
and investment funds. This period of volatility erased many customers' asset values in part due to risky
business practices including overleveraging, co-mingling customer funds without proper discourse, and in
some cases illegal activity. The cryptocurrency crash also revealed the extent to which other
cryptocurrency-based businesses were intertwined, thus magnifying the effects of each subsequent firm
that collapsed 27.

House Bill 1576 by 87th Legislative Session

House Bill 1576 (87R) 28 created the Texas Work Group on Blockchain Matters (Work Group) and
charged the workgroup to study the blockchain industry and present a report with recommendations to the
Legislature designed to grow the presence of the blockchain industry in the state. The Work Group
consisted of 16 members appointed by the Governor, Lieutenant Governor, and the Speaker of the House
to develop a master plan to support the growth of blockchain industries in Texas. The Texas Work Group
on Blockchain Matters Report 29 provides 21 policy recommendations which are broken down into eight
subgroups. The sub-group subject areas are: (1) Commercial Contracts, (2) Digital Identity, (3)
Decentralized Autonomous Organizations (“DAOs”), (4) Education, (5) Energy, (6) Finance, (7)
Government, and (8) Official Record Keeping Systems.

One of the report sub-groups that the Senate Business and Commerce Committee focused on was the
Commercial Contracts subgroup which examined and provided recommendations based upon Texas'
current legal framework for transactions involving blockchain technology and the recognition of property
rights for digital assets, like cryptocurrency (i.e. a digital asset maintained on a blockchain) 30. The
Commercial Contracts report section considers changes to address existing gaps in statute which currently
do not provide clear property rights to cryptocurrencies and certain digital assets, like Non-Fungible
Tokens. Currently, Texas law does not say how the owner of certain blockchain-based digital assets can
use the asset for the purpose of securing a loan with a lender 31.

House Bill 4474 by 87th Legislative Session

House Bill 4474 (87R) 32 represented a significant change by giving 'virtual currency' legal recognition in
Texas Business & Commerce Code and amended Texas' Uniform Commercial Code (UCC) relating to
transactions involving virtual currency 33. HB 4474 was designed to be a placeholder for amendments to

26
https://www.cnbc.com/2022/07/14/why-the-2022-crypto-winter-is-unlike-previous-bear-markets.html
27
https://www.washingtonpost.com/business/2022/07/06/voyager-bankruptcy-three-arrows/
28
Tex. H.B. 1576, 87th Leg. (2021). https://capitol.texas.gov/tlodocs/87R/billtext/pdf/HB01576F.pdf#navpanes=0
29
Texas Work Group on Blockchain Matters 2022 Report. (November 2022) https://portal.bcwg.texas.gov/General-
Documents/Texas-Work-Group-on-Blockchain-Matters-Report/wbtp-2m5k
30
Blockchain and Virtual Currencies Charge: Hearing Before the S. Comm. on Business and Commerce, 87th
Interim (Tex. 2022)(written testimony of Patrick Hatfield, Locke Lord LLP).
31
Id.
32
Tex. H.B. 4474, 87th Leg. (2021). https://capitol.texas.gov/tlodocs/87R/billtext/pdf/HB04474F.pdf#navpanes=0
33
Business and Commerce Code § 12.

15
Uniform Commercial Code that were expected to be published after the 87th session 34. The now-
published new UCC Article 12 and amended Article 9 deal with property rights and transactions and
provide needed clarity for property rights involving certain digital assets.

State Banking Regulations

Texas Department of Banking's primary mission is to regulate the state's banking industry and financial
services industry 35; in total the Texas Department of Banking charters and oversees 213 banks with $420
billion in assets. The agency also licenses and regulates 198 money service businesses, such as Western
Union, PayPal, and MoneyGram 36. The introduction of virtual currencies into the financial industry
presents a question as how to categorize and regulate digital assets, like cryptocurrency, that in many
cases, lack intrinsic value but nevertheless can be purchased with money and have value to the holder of
the virtual currency.

Regulated Activity: Money Service Businesses (MSBs) and Money Transmission Licenses

Businesses engaging in money transmission services or currency exchange trigger a requirement to obtain
a money transmission license in Texas 37. To constitute money transmission, the activity must involve a
third-party receiving money or monetary value and promising to make the money available at a later
time 38. Determining whether a transaction involving cryptocurrency triggers money transmission
licensing requirements depends on whether the cryptocurrency should be defined as 'money' or having
'monetary value' 39. Cryptocurrency is not considered 'currency' as defined in the Texas Money Services
Act because currently, a unit of cryptocurrency or virtual currency is not 'money', unless the virtual
currency is issued by a government as legal tender 40. However, some cryptocurrency businesses like
crypto-exchange Binance and Coinbase conduct money transmission and require licensure as those
businesses engage in activity that involves (1) the receipt fiat currency a buyer; (2) the promise to hold the
money until the transaction is settled; and (3) the release the funds to a seller at the agreed upon time.

Crypto-exchange businesses requiring licensure as a Money Service Business (MSB) must meet
minimum requirements to demonstrate financial ability to fulfill their obligations to their customers,
including maintaining minimum net worth requirements and demonstrating financial security41.
Additionally, all MSBs must also comply with federal laws, including compliance with Bank Secrecy
Act/Anti-Money Laundering provisions (BSA/AML) and Know-Your-Customer (KYC) requirements,
just as traditional financial institutions are required.

Future Banking Policies - Money Transmission Modernization Act

34
Blockchain and Virtual Currencies Charge: Hearing Before the S. Comm. on Business and Commerce, 87th
Interim (Tex. 2022) (Personal Statement by William Henning, Professor of Law at the Texas A&M University
School of Law, a Member of the Texas Working Group on Blockchain Matters).
35
Blockchain and Virtual Currencies Charge: Hearing Before the S. Comm. on Business and Commerce, 87th
Interim (Tex. 2022)(written testimony of Commissioner Charles G. Cooper, Texas Department of Banking).
36
Id.
37
Texas Finance Code §151
38
Texas Finance Code §151.301(b)(4)
39
Texas Department of Banking (Rev. April 2019) Supervisory Memorandum - 1037.
https://www.dob.texas.gov/public/uploads/files/consumer-information/sm1037.pdf
40
Id.
41
Texas Finance Code §151.302- §151.309

16
Because Texas Money Services Act regulating MSBs was passed in 2005, the current statute does not
capture the changing landscape of money transmission businesses. In addition, these standards were
modeled after nationally-proposed standards, but that were ultimately not adopted uniformly across all
states. In order to promote a more harmonious treatment of money transmission activity across different
state jurisdictions, the Conference of State Bank Supervisors (CSBS) published in September 2021 an
updated model law for state adoption to clarify the treatment of money service businesses called the
Money Transmission Modernization Act (MTMA) 42. The model law gives states flexibility to modify the
Act to best fit their state statutes while enacting a consistent set of requirements to ensure comparable
treatment of Money Service Businesses across all 50-states.

State Securities Regulations

Whether activity involving virtual currency triggers application of both state and federal securities
regulation depends on whether the investment product meets the long-held set of criteria known as the
Howey Test 43. Howey holds that a scheme constitutes a security if there is: (1) an investment (2) in a
common enterprise (3) with the expectation of profits (4) based on the efforts of others. The enforcement
of the state's securities laws is overseen by Texas State Securities Board (TSSB), the agency charged with
overseeing the registration of securities and licensing all agents involved in selling securities in the state
as outlined in the Texas Securities Act.

Regulated Securities Activity

The Texas Securities Act 44 requires that any security sold in the state be registered with the TSSB and
that the agent or seller of a security be also a registered agent. The TSSB has been a leader in identifying
and protecting Texans from illegal and risky cryptocurrency investment schemes by unregistered agents
or sellers. In 2017, TSSB became the first state securities regulator 45 to take enforcement action against a
cryptocurrency firm, USI-Tech Limited 46. Since the Board began monitoring cryptocurrency-based
security transactions, the agency has investigated and entered enforcement action against some of the
largest industry players, including FTX US 47 BlockFi Lending LLC, Voyager Digital LLC and Celsius
Network, Inc 48.

Federal Laws and Regulations

The Currency and Foreign Transactions Reporting Act of 1970, most known as the Bank Secrecy Act
(BSA) 49 is the set of federal regulations that establish requirements for U.S. financial institutions. The
collective framework of anti-money laundering measures required by the Bank Secrecy act are often

42
Blockchain and Virtual Currencies Charge: Hearing Before the S. Comm. on Business and Commerce, 87th
Interim (Tex. 2022)(written testimony of Commissioner Charles G. Cooper, Texas Department of Banking).
43
The four-prong Howey test was established by the 1946 Supreme Court decision in the case of the Securities and
Exchange Commission v. W. J. Howey Co.
44
Texas Government Code §§ 4001.001-4008.105
45
Blockchain and Virtual Currencies Charge: Hearing Before the S. Comm. on Business and Commerce, 87th
Interim (Tex. 2022)(written testimony of Commissioner Travis J. Iles, Texas State Securities Board).
46
https://www.ssb.texas.gov/news-publications/bitcoin-promoter-usi-tech-hit-emergency-order
47
https://www.coindesk.com/policy/2022/11/29/sam-bankman-fried-called-to-ftx-hearing-by-texas-securities-
regulator/
48
https://www.coindesk.com/policy/2021/09/17/texas-securities-regulator-adds-celsius-to-its-crypto-lending-
crosshairs/
49
31 U.S.C. §5311 et seq.

17
referred to as BSA/AML compliance. Bank Secrecy Act requires a wide range of AML measures,
including reporting daily cash transactions that exceed $10,000 daily. The Bank Secrecy Act requires
Money Service Businesses (MSBs) to follow Anti-Money Laundering procedures 50, just as traditional
financial institutions are required.

Conclusion and Recommendations

• Consider and enact the proposed 2022 Amendments to the UCC dealing with technological
changes, including a new Article 12 and amendments to Article 9, as recommended by the Texas
Work Group on Blockchain Matters.
• Establish an innovation center within Department of Information Resources (“DIR”); and direct
DIR to develop a decision model to assist agencies in deciding if blockchain technology is
appropriate for infrastructure consideration.
• Consider and enact the 2021 model law published by the Conference of State Bank Supervisors
(CSBS) called the Money Transmission Modernization Act (MTMA). The model law seeks to
establish a common baseline of regulatory standards to be used across the country for money
transmitters, making it easier for companies to operate across state lines, enable efficient
cooperation among states to work together in licensing and supervision of money transmitters,
and strengthen consumer protection through enhanced prudential standards and disclosure
requirements.

50
31 U.S.C. §§ 5318(a)(2) and 5318(h); 31 C.F.R. § 1022.210.

18
CHARGE NO. 4

Electricity: Assess the electricity market in Texas. Study issues impacting the Texas electric grid,
including weather preparedness, transmission planning, maintenance scheduling, and the natural gas
supply chain. Study the consequences of increased electric vehicle usage and charging on the generation,
transmission and distribution, and retail sectors of Electric Reliability Council of Texas (ERCOT) and
evaluate their potential impact on increased electric demand and reliability of the grid. Evaluate potential
benefits of real-time transparency of the intrastate gas market with respect to the functions of ERCOT and
the Texas Energy Reliability Council. Examine the growth of renewable energy generation in the state
and evaluate its impact on grid reliability. Make recommendations to strengthen the reliability of the grid,
and meet the future generation needs of ERCOT through new and existing dispatchable generation.
Assess plans to expeditiously add new dispatchable generation. Monitor the implementation of Senate
Bill 2 and Senate Bill 3, 87th Legislature.

Testimony

The Senate Business & Commerce Committee brought this charge up for discussion at both the June 29,
2022 and November 17, 2022 hearings and heard testimony witnesses.

Background

In 2021, the Legislature passed SB 3(87R) 51 to substantively reform the Texas power grid in the aftermath
of a series of major winter storms that left many Texans without power for several days. These changes
included requiring the weatherization of critical power generation, natural gas, and electrical transmission
infrastructure; instituting an emergency alert system to notify Texans about extended power outages; and
reforming the electric market to increase generation capacity and improve the reliability of the state’s
power grid.

Since last session, the Public Utility Commission (PUC), Electric Reliability Council of Texas (ERCOT),
the Railroad Commission of Texas (RRC), and other entities and stakeholders have worked together to
make significant improvements to the oversight, management, and coordination of the Texas electric grid.
The results of these efforts have positioned the state to respond to weather emergencies and other events
more effectively than before. However, there is still work to be done to ensure the Texas electric grid is
prepared to meet the energy demands of the future. As such, the Senate Business and Commerce
Committee (Committee) held two hearings to discuss several key issues, beginning with a discussion on
the efforts undertaken by regulatory agencies to implement new weatherization requirements.
Recognizing the vital link between natural gas production and pipelines to power generation, the
Committee also reviewed ways to increase transparency and improve functionality between these
industries.

The Committee also evaluated different proposed solutions to managing the impacts of intermittent
generation resources on grid reliability to determine the best option to incentivizing new dispatchable
generation while maintaining and strengthening our existing fleet. Finally, the Committee studied ways to
improve transmission planning and resiliency, as well as gained insight into how to plan for emerging

51
SB 3 (87R), capitol.texas.gov, Retrieved May 31, 2022.

19
challenges to the transmission system from future demands brought on by large flexible loads and electric
vehicles.

Weatherization and Critical Designation Rules

Many of the power generation and natural gas-specific issues experienced during Winter Storm Uri were
a symptom of operational problems. For example, during Winter Storm Uri, power was shut off to key
natural gas facilities because they were not registered as critical load serving electric generation, which
impacted the natural gas supply to these facilities and further compounded the ongoing power emergency.
In response, the Legislature took action to correct these issues by requiring new weatherization
requirements for both natural gas operators and natural gas generators. It also formalized the Texas
Energy Reliability Council (TERC) and established Texas Electricity Supply Chain Security and
Mapping Committee to identify what pieces of the natural gas supply chain are directly tied to electric
generation and requiring these facilities to be designated as critical as a means to avoid service
interruptions to natural gas and power generation facilities during a future energy emergency.

Public Utility Commission Weatherization Rules

The PUC adopted its Phase I weatherization rules in October 2021 52. By breaking the weatherization rules
into two phases, the PUC was able to quickly adopt standards ahead of this past winter while continuing
to develop more robust rules for Phase II. Phase I requirements required generators to implement winter
weather readiness recommendations identified in the 2012 Quanta Technology Report on Extreme
Weather Preparedness Best Practices (2012 Quanta Report) and to fix any issues that arose from winter
weather conditions during the 2020-2021 winter weather season. The rules also required Transmission
and Distribution Utilities (TDUs)s to implement key recommendations contained in the 2011 Report on
Outages and Curtailments During the 2011 Southwest Cold Weather Event, jointly prepared by the FERC
and NERC, and to fix any issues that arose during the 2020-2021 winter weather season.

Phase II rules included a more comprehensive, year-round set of standards informed by the weather study
conducted by ERCOT in consultation with the Office of the Texas State Climatologist 53. The rules also
adopted specific temperature standards for ten geographically distinct areas of the state and establishes
minimum and maximum temperatures at which owners of electric generation and transmission entities
need to prepare their facilities to be able to operate. These temperature standards go into effect in 2023.

Railroad Commission of Texas Weatherization Rules

SB 3 directed the Railroad Commission to adopt weatherization rules within six months of the natural gas
supply chain map being published. The Commission adopted these rules in August 2022. To develop
these rules, the Commission contracted with two outside firms to advise on the best practices and
standards that should be included within the rules. The rules will work in conjunction with the critical
designation rules previously adopted by the Commission 54.

Natural Gas Supply Chain Transparency

52
Project 51840. Electric Weather Preparedness Standards - Phase I.
53
Project 53401. Electric Weather Preparedness Standards - Phase II.
54
16 Tex. Admin. Code § 3.66 (2022).

20
Overview of Railroad Commission of Texas Gas Pipeline Regulations

Chapter 121 of the Utilities Code and Chapters 101 through 105 the Gas Utility Regulatory Act provide
the Railroad Commission (Commission) the ability to regulate transportation rates. The Railroad
Commission has interpreted these two codes to limit this ability to Local Distribution Company (LDC)
services outside the city gates. This interpretation is based on the "negotiated rates" provision included in
Section 104.003(b), Gas Utility Regulatory Act, that allows pipelines and their customers to negotiate gas
transportation rates 55.

Under this provision, pipelines are able to negotiate rates with customers, provided the rates that are
offered are "just and reasonable." A rate is considered "just and reasonable" if neither the gas utility or
customer had an unfair advantage in negotiating the contract; the rate is substantially similar as the rate
between gas utilities and other "similarly" positioned customers; or competition does not exist with
another pipeline company, gas supplier, or other energy source 56.

Pipelines typically include a notation on every tariff filed with the Commission stating the filed tariff
meets this standard. The Commission has determined that the "just and reasonable" standard only applies
when there is a contract in place. Ostensibly, these provisions apply to agreements with affiliates, but
beyond a rule requiring pipelines to keep separate books for affiliate agreements, there is a limited
amount of oversight on these arrangements.

There are no agency resources dedicated to providing oversight of contractual commercial activity such as
tariffs, rates, or capacity transactions. It is the Commission's position that the agency has limited oversight
authority of contracts between shippers and transporters, including breach of contract disputes arising
from force majeure claims, as these matters are more appropriately settled in the Texas court system 57.

The Commission oversees contracts through a complaint-driven process, and only steps in if there is an
allegation that a contract is unreasonable, discriminatory, or when there has been a potential overcharge58.
In the event the Commission determines a contract is in violation of statute, the agency maintains it only
has the authority to provide relief prospectively instead of retroactively.

Third-Party Marketers

Gas utilities in Texas are allowed to offer bundled services that include both gas supply and transportation
services. At times, the gas supply contract is executed by a third party marketing company that is an
affiliate company of the pipeline company. In this case, the Commission contends its oversight authority
extends only to gas utilities and not to gas rates set by the terms of a contract executed by the third party
marketer, even if the marketing company is an affiliate of the pipeline. Rather, the Commission states it
only has authority over gas rates over gas that is owned and resold by the pipeline company on the basis
that third-party marketing companies are not gas utilities 59. However, concerns have been raised that in
actuality, some affiliated third-party marketers control a pipeline's commercial and operational decisions
regarding open capacity for shippers. It has been suggested this relationship gives pipeline companies and

55
Texas Utility Code, Section 104.003(b).
56
Texas Utility Code, Section 104.003(b).
57
Christian, Wayne. Letter to Senate Business and Commerce Committee. March 21, 2022. (on file with
committee).
58
Texas Utility Code, Section 104.003(a) and (c).
59
Railroad Commission of Texas vs. City of Austin, 524 S.W.2d 262. 280-81 (Texas 1975).

21
their affiliates access to information no other market participant has in cases where the pipeline and/or its
affiliate holds both the supply and transportation contracts.

Fuel Supply: Upstream to Midstream/Downstream

The fuel supply contract is the contract for the actual molecules of natural gas. For the purposes of
commercial uses, the contract starts wellhead with the producer either selling their supply directly to an
end user, a pipeline company, or a marketing affiliate of the pipeline company. Gas is then sent through a
Gathering line to a Gathering and Processing facility. This facility is connected to one or more
transmission lines. Once the gas is processed, it is either put into storage, sent to a pooling area, or
shipped to end users.

An end user or 'shipper', such as a power generator, will enter into a gas supply contract with the entity
that owns the title of the gas, whether that is the producer, marketer, or pipeline company. Supplies are
purchased on the daily physical spot market, monthly spot market, or via long-term contracts. In the event
a force majeure notice is issued on the firm supply contract, a shipper would be required to purchase gas
on the spot market unless there is a duty to mitigate in the contract, which is not a standard term for
intrastate contracts.

Transportation: Midstream to Downstream

An end user, or the shipper, contracts with a pipeline company for the amount of capacity it needs to ship
its gas supply. In basic terms, there are two main categories of transportation contracts: firm or
interruptible. Firm capacity is based on a shipper agreeing to purchase a specific amount of capacity that
is sourced from certain receipt points and delivered at certain delivery points. Firm shippers pay a
reservation fee for the capacity for which they have contracted. This fee “reserves” their right to use this
capacity with the highest scheduling priority of all transportation transactions.

However, intrastate firm transportation contracts can have any number of variations on the terms and
conditions of the contract, the tariff assessed to the shipper, allowable minimums and maximums,
operational flow order provisions, imbalance fees, and force majeure clauses. Tariffs, which include
delivery information and other contract terms, are filed with the Railroad Commission, but provide little
public information that would allow for more market transparency 60.

To utilize reserved capacity, a shipper will make a nomination to transport gas within the terms of the
contract before one of the four daily deadlines for nominations. Among other things, nominations include
the requested receipt and delivery point, the quantity to be transported, the upstream party providing the
gas and the downstream party receiving the gas. All nominations received by the pipeline operator must
be compared to available capacity. If the nominated quantities exceed the available transportation
capacity in the pipeline, reductions are made to the nominations until they match the available capacity. If
a shipper uses more or less than the amount of gas it has nominated, it can be assessed an imbalance fee.

Importantly, capacity and supply have separate contracts, but because these contracts work in tandem
with each other, a disruption to either the supply or transportation system can have implications on the
other. For example, if there is a weather-related drop in production, this limitation on supply can result in
the issuance of an operational flow order or force majeure. Stakeholders have suggested the best way to

60
Customer and delivery point information contained in negotiated rate tariffs has been deemed confidential
information by the Texas Office of Attorney General. Texas Attorney General ORD-552 (1990).

22
mitigate these type of issues is to also contract for storage space, which can result in a high cost to
generators.

Ratable Service vs. "Just-in-Time" Generator Needs

Generally, firm transportation service provided by the pipelines on a 24-hour flow basis and is generally a
“ratable” service, meaning steady hourly flow rates through the day with only minor variations allowed.
From the pipeline perspective, ratability is important to its ability to balance supply and demand on its
pipelines. Meanwhile, as the electricity market becomes more and more reactive to the intermittency of
renewables, the needs of generators can fluctuate significantly during the 24 hour day, which makes it
more conducive for generators to operate on a 'just-in-time' fuel delivery model.

The need for predictability on of the part of pipelines, juxtaposed against the need to react to market
variabilities on the part of generators, have created challenges for both industries. This fundamental
mismatch between generator and pipeline needs, and the implications on transportation contracts, is a
major barrier to the long-term reliability of the Texas grid, especially as electric market moves toward
adding more quick fired, fast-ramping natural gas units to balance intermittent resources.

Market Design

While Texas has some of the most competitive electricity prices in the country, the events of Winter
Storm Uri highlighted the need to rebalance the market to incentivize greater reliability through additional
availability of dispatchable power generation. To that end, SB 3 directed the PUC to establish a reliability
standard for the Electric Reliability Council of Texas (ERCOT) market and use this standard to develop
and procure a new ancillary or reliability services in order to ensure enough dispatchable generation to
meet this goal. 61 In addition, the bill also directed the PUC "to modify the design, procurement, and cost
allocation of ancillary services for the region in a manner consistent with cost-causation principles and on
a nondiscriminatory basis 62."

To achieve these objectives, the PUC began holding work sessions in Fall 2021 with market participants
in order to discuss various changes to the ERCOT market design. The PUC took action to make changes
to the ERCOT market in two phases. Phase I, adopted in late 2021, included a number of key changes to
ERCOT operations and ancillary services, many of which had previously been proposed. The most
significant of these changes included shifting the Operating Resource Demand Curve to compensate
dispatchable resources before times of scarcity, implementing the ERCOT Contingency Reserve Service
(ECRS), and establishing a new Firm Fuel Ancillary Service 63.

In December 2021, the PUC approved its Phase II Market Design Blueprint to identify potential options
for new changes to the ERCOT market in line with the following principals64:

• Ensure adequate supply of electricity at all times, especially during periods of high demand;
• Incentivize construction of on-demand electricity generation resources; and
• Keeps costs low through a competitive retail electric market.

61
Section 18, SB 3 (87R).
62
Section 14, SB 3 (87R).
63
Project 52373 at 333. Review of the Wholesale Market Design. retrieved February 16, 2022.
64
Project 52373 at 336. Approval of Blueprint for Wholesale Electric Market Design and Directives to ERCOT.
retrieved January 13, 2022.

23
In June 2022, the PUC awarded a request for proposal to Energy and Environmental Economics, Inc. (E3)
to study options for market design adopted by the PUC in its Phase II blueprint 65. E3 issued its report to
the PUC in November 2022. This report included an evaluation of the Phase II blueprint proposals, as
well as a new Performance Credit Mechanism (PCM) proposal. Because the PCM was not included in the
initial blueprint, the PUC voted to open a request for comment on the Performance Credit Mechanism
option at its November 10, 2022 Open Meeting to solicit feedback from stakeholders on the feasibility of
this option 66.

As part of this interim charge, the Senate Business and Commerce Committee also reviewed the E3
report, hearing from various stakeholders, the PUC, and ERCOT about the report's merits as well as
raising questions about E3's data and analysis 67. Concerns raised during the hearing centered around the
assumptions used by E3 in its evaluation of the various proposals. In particularquestions were raised
concerning the E3 report's conclusion that the current ERCOT structure, combined with the continued
penetration of renewable generation resources, would result in a loss of 11 gigawatts of dispatchable
generation resources due to retirements by 2030 - a number which many stakeholders and the ERCOT
Independent Market Monitor (IMM) felt was greatly overstated. Additionally, the Committee raised
questions on whether or not the preferred options recommended by E3 and the PUC, including the
Forward Reliability Market (FRM) and Performance Credit Mechanism (PCM) options, align with the
directives in SB 3. Given the administrative complexities and lengthy timeframes associated with
implementing either option, the Committee also questioned the impact either proposal could have on short
term investments in the ERCOT market 68.

Meanwhile, the ERCOT Independent Market Monitor (IMM) also questioned the report's analysis of the
impact the changes made previously by the PUC to the Operating Reserve Demand Curve, which the
IMM identified as having increased real-time revenues in ERCOT by over $1.7 billion in 2022 69. Because
ORDC revenues are only paid to resources that are performing during tight conditions, the majority of
these revenues are paid to dispatchable resources. In the IMM's estimation, Phase I changes, including the
ORDC, coupled with a new ancillary service product that values resources that can be deployed to
provide reliability when operating conditions depart from expected conditions, would be enough to
incentivize new dispatchable generation within an energy-only market construct 70.

Transmission Overview

The ERCOT transmission system connects over 52,700 miles of transmission lines and 1,030 generation
units throughout the majority of the state of Texas 71. A Transmission and Distribution Service Provider

65
Energy And Environmental Economics, Inc. (E3). November 2022. Assessment Of Market Reform Options to
Enhance Reliability of the ERCOT System.
66
Project 54335. Review of Market Reform Assessment Produced by Energy and Environmental Economics, Inc.
(E3). retrieved November 11, 2022.
67
Senate Business and Commerce Committee Hearing, November 17, 2022.
68
Letter to the Public Utility Commissioners, November 30, 2022. on file with Senate Business and Commerce
Committee.
69
Project 54335 at 64. Review of Market Reform Assessment Produced by Energy and Environmental Economics,
Inc. (E3). retrieved December 15, 2022.
70
Project 52373 at 6-7. Review of the Wholesale Electric Market Design.
71
ERCOT, "About ERCOT," 2022, accessed online November 15, 2022, https://www.ercot.com/about.

24
(TDSPs), or Transmission and Distribution Utility (TDUs), is the utility company that owns and operates
the infrastructure needed to transmit and deliver electricity to customers through either transmission or
distribution level service. Transmission lines in Texas are considered power lines carrying 60 kilovolts
(kV) or more, while distribution lines carry less than 60 kV 72. TDUs are regulated by the Public Utility
Commission of Texas (PUC) and are required to provide non-discriminatory access to the grid.

Transmission Cost Allocation:

In ERCOT, customers pay for all electric transmission facilities. Generators typically do not pay for any
transmission costs as consumer-funded interconnections and upgrades act as an incentive to do business
in ERCOT.

Twice per year, Texas TDUs submit a filing with the PUC to update their tariffs to account for the
changing costs of transmission. These costs are then passed -through to consumers by their REPs or
utility. Outside of ERCOT, wholesale transmission service rates are set by the Federal Electric Reliability
Council (FERC) 73.

Transmission Planning Overview:

ERCOT's transmission planning process typically spans a six-year planning horizon, with years one
through five representing the near-term and year six representing the long-term. ERCOT collaborates with
various utilities at Regional Planning Group meetings to develop its annual Regional Transmission Plan
Report, which identifies region-wide transmission needs and potential deficiencies over a six-year period.
For a new transmission project to be built, it must first be approved by the RPG and included in the
Regional Transmission Plan Report. Any entity or individual can submit a project for consideration and
approval through the process outlined under ERCOT Nodal Protocol 3.11.4.

In addition, ERCOT also performs a long-term planning assessment to determine future infrastructure
needs over a 10 to 15 year planning horizon. ERCOT publishes its findings biannually in its Long-Term
System Assessment (LTSA). The report specifically focuses on extra high-voltage system needs, defined
as 345-kV. This report helps to guide the projects included in the Regional Transmission Plan Report, but
focuses more on various scenarios that may impact the electric grid in the future, such as greater adoption
of electric vehicles.

Currently, transmission projects are evaluated based on reliability need and economic benefit.

• Reliability Needs: These are projects that are required to reliably serve load (as per NERC standards
and ERCOT protocols). Reliability projects resolve situations where there are no possible generation
alternatives to reliably serve load. In certain instances, ERCOT can prioritize and expedite critically
necessary reliability projects.
o The most recent example of a critically essential project is the 350-mile Rio Grande Valley
Transmission Reliability Project 74, which is a joint project between AEP Texas, Electric

72
16 Texas Administrative Code, Title 16, Part 2, Chapter 25, Subchapter A, Sections 25.5(31) and 25.5(138)
(Public Utility Commission of Texas, Definitions).
73
16 U.S. Code Section 824t(a); FERC, “Formula Rates in Electric Transmission Proceedings: Key Concepts and
How to Participate,” July 5, 2022, accessed online November 2, 2022, https://www.ferc.gov/formula-rates-electric-
transmission-proceedings-key-concepts-and-howparticipate.
74
Rickerson, W. (2021, December 9-10). Item 20: Lower Rio Grande Valley (LRGV) System Enhancement Regional
Planning Group Project [PowerPoint Presentation]. ERCOT Board Meeting.

25
Transmission Texas and South Texas Electric Cooperative. The project was expedited by ERCOT
because it qualified as a critical to overall system reliability. It is anticipated it will be completed
by 2026 and will cost $1.28 billion. Without the project moving forward, ERCOT found it would
be in violation of several key NERC and FERC reliability planning metrics.
• Economic Benefit: ERCOT currently evaluates projects based on production cost savings (fuel costs
and other variable costs). Economic projects resolve situations where there are possible generation
solutions, but only from higher-cost units.
Prior to the passage of SB 1281 (87R) 75 last session, ERCOT evaluated projects based on production cost
savings (fuel costs and other variable costs). Economic projects resolve situations where there are
possible generation solutions, but only from higher-cost units. SB 1281 enabled ERCOT to utilize a
congestion cost savings test to measure the consumer benefit of a transmission project.

Cost of Transmission Congestion

Congestion costs occur when more power is flowing over a transmission line than it is able to carry,
resulting in the line becoming overloaded. When this arises, ERCOT will shift generation to higher-cost
generators in locations without congestion restraints to serve load. This results in consumers paying
higher costs in certain areas, which is reflected in the nodal price.

According to the ERCOT Independent Market Monitor, the cost of congestion in ERCOT’s real-time
market in 2021 was $2.1 billion, up 46% from 2020. The majority of this amount was a result of Winter
Storm Uri. Other factors leading to the increase included higher gas prices and generic transmission
constraints (GTCs).

As defined in the ERCOT Nodal Protocols, a GTC is a transmission constraint made up of one or more
grouped transmission elements that is used to constrain flow between geographic areas of ERCOT for the
purpose of managing stability, voltage, and other constraints that cannot otherwise be modeled directly in
ERCOT’s power flow and contingency analysis applications.

A GTC is a mechanism ERCOT uses to place limits on generation output so that transmission lines do not
exceed their capacity. An example of a GTC is a limit placed on wind generation from West Texas
exported to the rest of the state. ERCOT has seen an increase in stability constraints in recent years,
particularly in West Texas and South Texas due to the prevalence of inverter-based resources such as
wind, solar, and energy storage, which has led to an overall increase in the number of GTCs. According to
the IMM, this increase has resulted in congestion costs growing from $190 million in 2020 to $400
million in 2021.

While the cost of GTCs can be detrimental to consumers, it is important to note that reducing the number
of GTCs can actually have a negative impact on overall reliability. This is because thermal generation
benefits from GTCs because they limit the amount of renewables that are available in the market and
therefore allows these resources to generate revenue.

Interested parties have proposed authorizing a second Competitive Renewable Energy Zones (CREZ)
program in order to alleviate congestion in areas with existing or proposed renewable generation

https://www.ercot.com/files/docs/2021/12/02/20_Lower_Rio_Grande_Valley_System_Enhancement_Regional_Pla
nning_Group_Project.pdf
75
Senate Bill 1281, Regular Session, 87th Texas Legislature, 2021 (effective September 1, 2021).

26
resources that lack corresponding high-capacity transmission infrastructure to connect this generation to
centers of use. In testimony to the Senate Business and Commerce Committee, ERCOT notes that more
and more generation is being built further from load centers, necessitating more transmission 76. However,
concerns have been raised about the potential transmission infrastructure costs to consumers, and whether
or not the Legislature should consider more prudent ways to incentivize better project siting decisions on
behalf of developers, such as limiting the amount of capital costs that can be socialized to ratepayers.

ERCOT 4-Coincident Peak (4CP) Program

In order to avoid high transmission costs, some qualifying commercial entities, such as large industrials
receiving transmission level service, participate in ERCOT's 4CP program. The 4CP is a tariff set by the
PUC each year based on a customer's integrated 15 minute kW (or kVA) demands at the time of the
month when ERCOT hits its peak during the months of June, July, August, and September 77. These
entities minimize their exposure to high 4CP costs by taking actions such as changing scheduled
maintenance periods, coordinating shift changes, turning off or reducing non-critical loads, or shutting
down altogether. If a facility has cogeneration onsite, the facility may also choose to utilize that resource
and send power back to the grid as a means to lower transmission costs.

According to the ERCOT Independent Market Monitor (IMM), consideration should be given to whether
or not the 4CP program continues to meet its purpose of allocating transmission costs to the main cause of
transmission build 78. To address these changes, the IMM suggests the consideration of moving to a
monthly, or 12-CP, calculation.

Electric Vehicle Planning

Texas currently has the third most registrations of electric vehicles (EVs) in the country, with 80,900
registered EVs as of 2021 79. While today this number represents approximately one percent of registered
vehicles, this number is expected to grow exponentially in line with national trends. According to the
Edison Electric Institute, the stock of EVs (i.e., the number of EVs on U.S. roads) is projected to reach
26.4 million in 2030, up from 2.4 million at the end of 2021. This is more than 10 percent of the 259
million vehicles (cars and light trucks) expected to be on U.S. roads in 2030.

On the state level, ERCOT estimates that under current economic trends, including projected demand and
fuel prices, Texas will reach 885,000 EVs on the roadway in 2029 80. Meanwhile, ERCOT also included
an analysis of the impact of EVs in its most recent Long-Term System Assessment (LTSA), which looks
at the future conditions of the ERCOT system up to 15 years in advance using different scenarios 81. While
ERCOT's Current Trends scenario would see this number increasing to 3.6 million cars and light-duty
trucks by 2037, ERCOT estimates this number could be as high as 5.2 million by 2037 under the Demand

76
Senate Business and Commerce Committee Hearing, November 17, 2022.
77
16 Tex. Admin. Code §25.192. Transmission Service Rates;
http://www.puc.texas.gov/agency/rulesnlaws/subrules/electric/25.192/25.192.pdf
78
Potomac Economics (May 2022). 2021 State of Market Report for the ERCOT Electricity Markets. Independent
Market Monitor for ERCOT. https://www.potomaceconomics.com/wp-content/uploads/2022/05/2021-State-of-the-
Market-Report.pdf
79
United States Department of Energy. (n.d.). Texas Transportation Data for Alternative Fuels and Vehicles.
https://afdc.energy.gov/states/tx
80
Senate Business and Commerce Committee Hearing, November 17, 2022.
81
ERCOT System Planning: 2022 Long-term System Assessment for the ERCOT Region, December 2022.
https://www.ercot.com/gridinfo/planning

27
Side Evolution scenario, especially given the availability of new federal tax subsidies included in the
2022 Inflation Reduction Act. Serving this level of EV adoption will necessitate an influx of charging
infrastructure. From a grid perspective, this equates to significant planning challenges from both a
transmission infrastructure and load demand perspective.

One of the biggest barriers to adoption of electric vehicles is lack of charging infrastructure available for
travel outside of cities and along interstates. To address this issue, the 2021 Federal Infrastructure
Investment & Jobs Acts (IIJA) created a $5 billion National Electric Vehicle Infrastructure (NEVI)
Formula Program, as well as a $2.5 billion Discretionary Grant Program to establish a network of 500,000
Electric Vehicle (EV) chargers throughout the country by 2030. Of these dollars, Texas will receive $408
million in NEVI funding between FY 2022-2026, which is specifically targeted to building charging
stations every 50-70 miles along interstates in Texas 82.

The Texas Department of Transportation (TxDOT) will award IIJA funding to private entities through a
competitive grant process in line with the agency's EV infrastructure plan as required under federal
rules 83. In developing this plan, TxDOT collaborated with ERCOT and industry stakeholders to identify
the potential impact of deploying the charging stations funded under this program on the grid. As
identified in the report, the max energy consumption of the plan's proposed EV charging network is
estimated to be 666.7MW. While this number will likely have a minimal impact on the grid, it does not
include charging infrastructure funded by private entities. Most notably, TxDOT identified the greatest
challenges would be in installing charging stations in rural areas that lack the updated transmission
infrastructure necessary to service these stations.

Future Impacts on ERCOT Grid

According to ERCOT's most recent LTSA, the assumed increase in electric vehicles by 2037, combined
with the increase of solar generation, is expected to have a significant impact on when scarcity hours are
most likely to occur. While these hours are predicted to mostly occur during the summer in 2027, almost
all of these hours are predicted to occur in the winter by 2037 84. Meanwhile, ERCOT also anticipates the
scarcity hours shifting later in the day to the hour ending 7:00pm to the hour ending 1:00am by 2037, in
large part due to electric vehicle charging, which is expected to have a peak charging demand of over
9,300MW at midnight by 2037.

Currently, 80 percent of EVs are charged at home. The unintended consequences of this is that many EV
users have the tendency to charge their vehicles upon returning home, which typically coincides with the
grid's daily peak demand. Households are located on distribution-level feeders, which have a greater
potential to get overloaded very quickly if there are several cars charging at the same time. One way to
mitigate this problem is through managed charging programs where customers are incentivized through
electricity pricing or other mechanisms to charge at off-peak times. A number of utilities are currently
operating pilots to explore consumer willingness to adopt such a program. Meanwhile, creating more
visibility for ERCOT into the distribution level transmission system could allow for a better

82
TxDOT. (March 22, 2022). Texas Electric Vehicle Planning. https://www.txdot.gov/projects/projects-
studies/statewide/texas-electric-vehicle-planning-03-22-22.html
83
TxDOT. (July 8, 2022). Texas Electric Vehicle Infrastructure Plan. https://ftp.txdot.gov/pub/txdot/get-
involved/statewide/EV%20Charging%20Plan/TexasElectricVehicleChargingPlan.pdf
84
ERCOT System Planning: 2022 Long-term System Assessment for the ERCOT Region, December 2022.
https://www.ercot.com/gridinfo/planning

28
understanding of the impact on electric vehicle charging on the grid, especially in terms of forecasting
system demand.

Battery storage can also play a key role in smoothing out load profiles, especially in rural areas where the
impacts of EV chargers are more acute. The battery would be able to charge during off-peak times and the
stored power could then be leveraged later to prevent high demand charges. However, some stakeholders,
including charging companies, have expressed reservations about battery usage for several key reasons,
including difficulty in the ability to scale in size; commercially available space to locate the battery; and
battery cost.

Long-term, studies are being conducted to determine the value of vehicle-to-grid (V2G) charging for
large fleets using customer-sited batteries to store and sell energy to the grid while charging fleet vehicles
to reduce peak-consumption costs. This technology is currently being tested on school bus fleets
nationally. In Texas, Toyota and Oncor recently announced a pilot program to test V2G charging to
determine the impact of this type of emerging technology on the grid 85.

Cost of Charging Station Infrastructure

Utilities across the country have taken steps to become a player in the EV space beyond system planning
by owning and operating charging stations, providing incentives for businesses and residential customers
to install charging stations, or offering "make-ready" programs.

In Minnesota, for example, Xcel Energy recently filed a plan with the state's PUC to build 730 fast-
charging stations for $300 million, the cost of which would be socialized across all ratepayers over the
next four years. Under the plan, Xcel would operate the stations and serve as the power provider. In other
states with similar proposals moving forward, the utilities operating these stations are utilizing a
specialized rate, which is not available to operators of privately-owned stations. New York has invested
$601 million in a "make-ready" program where utilities build the EV infrastructure beyond the meter and
a private entity manages ongoing operations. This type of program is becoming more widely adopted and
in most cases allow for the utility to recoup costs through rate recovery.

In a recent rate filing at the PUC, Entergy Texas included a rider request for rate recovery to build electric
vehicle charging stations, raising the question of whether a vertically integrated utility should be allowed
to own electric vehicle charging facilities or other transportation electrification equipment 86.

Large Flexible Loads

The Texas electricity market's low prices, lucrative demand response programs, interconnection process,
and ability to obtain transmission at little to no cost make the state an attractive location for the digital
services and cryptocurrency industries to continue to grow in Texas 87. Beginning in 2021, ERCOT began
to see a significant increase in the number of interconnection requests for facilities associated with these
industries, such as data centers and Bitcoin mining facilities. In testimony to the Senate Business and

85
Toyota News Release. Toyota Announces Collaboration with Oncor to Accelerate EV Charging Ecosystem.
December 15, 2022.
86
Entergy Texas, Inc. Statement of Intent and Application. July 1, 2022. Public Utility Commission Docket Number
53719. https://interchange.puc.texas.gov/Documents/53719_3_1219367.PDF
87
Texas Comptroller of Public Accounts (2021). Cryptocurrency in Texas: Opportunities and Challenges in Mining
Digital Coins. https://comptroller.texas.gov/economy/fiscal-notes/2022/aug/crypto-tx.php

29
Commerce Committee, ERCOT noted there are approximately 1500 megawatts of facilities considered to
be large flexible load in operation, with an additional request for up to 37 gigawatts in the ERCOT
interconnection queue, the majority of which is related to cryptocurrency mining operations 88. While it is
unlikely all of these applications will come to fruition, serving even a portion of this load will require
substantial transmission planning and construction resources.

Unlike a traditional manufacturing or industrial facility, the operational facilities of these industry
segments have unique attributes that create associated challenges for ERCOT from a planning and
reliability perspective. For example, the number of megawatts required for operations, combined with the
speed at which these facilities are needing to interconnect to the grid, has created significant challenges;
transmission systems cannot make the necessary updates in time to serve this load. In addition, the
flexibility and speed at which these facilities can turn on or off also creates the need for greater control
from a reliability standpoint.

Despite these challenges, advocates stress the value these types of facilities can provide to the grid. For
example, in testimony to the Committee, Lancium, an energy technology company located in the
Woodlands, highlighted its ability to provide grid stability services by instantaneously ramping up or
down customer facilities at the direction of ERCOT 89. Because bitcoin miners are 'location agnostic' they
can often locate in areas where there is stranded or excess generation90.

Because power costs are the largest ongoing expense for these high-capacity facilities, loads like
cryptocurrency miners are naturally incentivized to turn down or go offline during times of peak demand.
For example, Bitcoin mining and hosting company Riot Blockchain reported making $9.5 million in
power credits in July 2022 from curtailing load at its facility in Rockdale, TX, which was significantly
more than the company made in its actual mining operations 91.

Given unique attributes of cryptocurrency mining loads and the impact on the grid, ERCOT issued a
directive in March 2022 requiring additional information from large-scale load seeking to interconnect to
the ERCOT grid 92. As part of this process, TDUs were required to submit studies on the impact of these
loads to ERCOT prior to bringing these facilities online. In conjunction with ERCOT staff directives to
TDUs, the ERCOT Board voted to form the Large Flexible Load Task Force (LFLTF) to bring
stakeholders together to discuss long-term solutions for integrating large scale loads into the grid93.

The LFLTF's discussions focused on several key areas including, how to better incorporate existing and
future large flexible loads in ERCOT planning studies; defining interruptible vs. firm loads; determining
the suitability for loads to register as controllable load resources (CLRs); and consideration of a modified

88
Senate Business and Commerce Committee Hearing, November 17, 2022.
89
Written Testimony, Mike McNamara, Founder and Chief Executive Officer, Lancium. Submitted in response to
Senate Business and Commerce Committee, November 17, 2022. (on file with the committee)
90
Texas Workgroup on Blockchain Matters Report (2022). https://portal.bcwg.texas.gov/General-
Documents/Texas-Work-Group-on-Blockchain-Matters-Report/wbtp-2m5k
91
Riot Blockchain News Release. Riot Produces 318 Bitcoin in July 2022 While Contributing to Power Grid
Stability in Texas and Further Strengthening Financial Position, Generating Estimated Power Credits of $9.5
Million. August 3, 2022.
92
ERCOT, March 25, 2022. Interim Large Load Interconnection Process (W-A032522-01).
https://www.ercot.com/services/comm/mkt_notices/detail?id=fc84b65f-72fe-4704-9974-b52974cdb81e
93
ERCOT, Large Flexible Load Task Force Committee, 2022. https://www.ercot.com/committees/tac/lfltf

30
transmission interconnection process to better align with the construction timelines of large flexible load
facilities.

As a result of the task force's work, ERCOT recently announced a voluntary curtailment program
beginning January 1, 2023 94. Under the new program, ERCOT will provide participating loads with a
directive to curtail consumption during periods of low Physical Responsive Capability (PRC) 95. While
this change is a first step in addressing the grid reliability concerns with LFLs, ERCOT stated in the
market notice it intends to continue its development of a permanent regulatory framework in the future.
As part of this framework, interested parties have suggested providing ERCOT with greater ability to
mandate LFLs to reduce consumption when necessary. This could be achieved by requiring LFLs to
register as a controllable load resource or an interruptible load resource 96. Currently, participation in
equivalent demand response programs are voluntary.

In addition, concerns have also been raised about the volatility of the cryptocurrency industry, especially
given that the cost of new transmission to serve these loads is socialized across ratepayers. Like all
transmission-level customers, LFLs only have to put down a security deposit, which is then paid back.
LFLs also heavily participate in the 4CP process and pay very little overall for transmission. As
mentioned previously, large flexible load facilities can be built quickly and require a significant
investment in transmission. By the same token, however, these facilities can shutdown just as quickly,
raising the potential of leaving stranded transmission costs. It is also unclear whether mining operations
incent new generation to be built as is the case when a new manufacturing or industrial facility is
constructed. Theoretically, the high level of electricity demanded by mining operations should send the
market signals to build new power supplies. However, there is little data to determine whether mining
operators have the type of long-term contracts with electricity providers to incentivize new investment.

Conclusion and Recommendations

Natural Gas Supply Chain

The events of February 2021 brought to light the inexorable link between the state's natural gas pipeline
and power generation systems. While the changes made during last session, including requiring facilities
to designate as critical and formulizing the Texas Energy Reliability Council, have made significant
improvements to the coordination and communication efforts of state regulators and industry
stakeholders, there is more work to be done to improve reliability of gas-fired power plants. To this end,
the Committee recommends consideration of the following actions:

• Continue to encourage more collaboration between industries, including ways to construct a
contracting scheme that accounts for the unique needs of gas-fired generators in a competitively
balanced manner;
• Consider extending similar provisions included in HB 3273 (2007) which eliminated certain
confidentiality clauses between producers and gathering pipelines;

94
ERCOT News Release. ERCOT Creates Voluntary Curtailment Program for Large Flexible Customers During
Peak Demand. December 6, 2022.
95
ERCOT, December 6, 2022. Notice of Interim Voluntary Curtailment Program for Large Flexible Loads (M-
A120622-01). https://www.ercot.com/services/comm/mkt_notices/M-A120622-01
96
Senate Business and Commerce Committee Hearing, November 17, 2022.

31
• Evaluate the need for more oversight and regulatory authority of pipeline affiliates and third party
marketing companies; and
• Support efforts at the PUC to implement a Phase II Firm Fuel Ancillary Service to compensate
for offsite firm fuel resources while ensuring proper oversight and transparency into Firm Fuel
contracts.
Market Design

As the PUC and ERCOT continue their implementation of the Phase I Market Design changes, as well as
their deliberation of the Phase II Market Design proposals, the Committee recommends taking the
following actions:

• Direct the PUC to set a reliability standard for the ERCOT region in line with SB 3;
• Ensure that any changes to the ERCOT market design reflect the allocated costs based on the
principles of cost-causation, including the consideration of firming requirements on intermittent
resources and penalties for nonperformance; and
• Consider the value in incentivizing new dispatchable generation resources through alternative
solutions such as a low-interest loan program or creation of an ancillary service product targeted
towards new quick starting natural gas units. Ensure any market design changes protect the
integrity of the competitive retail market.
Transmission Planning
In order to better plan for the future needs of Texas and increase the resiliency of the transmission system,
the Committee recommends the consideration of the following items:

• Evaluate the benefits of providing ERCOT with more visibility into the distribution system,
including as a means to create more opportunities for demand response programs on the
distribution-level;
• Consider limiting the amount of capital costs passed on to consumers for generation resources in
order to incentivize better siting decisions closer to centers of load;
• Review options for increasing resiliency in the transmission system in a manner that does not
over burden ratepayers;
• Review the 4 Coincidental Peak program to determine whether any changes are necessary;
• Consider requiring large flexible loads to register as interruptible or controllable load resources;
• Direct ERCOT to form an electric vehicle planning task force to prepare for the impact of electric
vehicle charging on the electric grid; and
• Consider the appropriateness of regulated utilities owning or operating electric vehicle charging
stations.

32
CHARGE NO. 5

Cybersecurity: Review current state and federal laws regarding cybersecurity protections and
requirements for local governments, state agencies, and critical industries of our state. Make
recommendations for legislation to improve resilience and protection against cybersecurity attacks and
ensure the privacy protection of the citizens of Texas.

Testimony

The Senate Business & Commerce Committee held a hearing on May 18, 2022 and heard testimony from
the witnesses.

Background

During the past several session, the Texas Legislature has taken significant steps to enhance cybersecurity
protections at state agencies and institutions. In 2017, the Legislature passed HB 8, known as the Texas
Cybersecurity Act, to protect sensitive and confidential data and strengthen the cybersecurity readiness at
state agencies and institutions 97. The bill requires agencies to develop and implement specific data and
cybersecurity procedures and strategies, as well as report breaches to Department of Information
Resources (DIR) within 48 hours. Prior to HB 8, state agencies were only required to have general data
security policies in place and had no reporting requirements. HB 9 98, the Texas Cybercrime Act, passed in
conjunction with HB 8 to create a modern legal framework for law enforcement to investigate
cybercrimes.

In 2019, the Legislature built on the reforms included in HB 8 with the passage of SB 64 99, which
required agencies to take more proactive steps to protect against cyber attacks. The bill also enhanced
agency reporting requirements following an event and directed DIR to submit a biennial cybersecurity
needs report.

DIR Cybersecurity Overview 100

The Department of Information Resources (DIR) is the state entity responsible for the state's
cybersecurity rules and policies. However, Texas agencies follow a federated model, meaning each
agency is responsible for their own IT operations and security of their systems. DIR helps support and
coordinate with agencies through a variety of programs, security services, and technology support
services. Agencies can also outsource a significant portion of their IT needs, especially cybersecurity
needs, to DIR for an annual cost. These services include legacy systems modernization, shared
technology services, technology planning, and information security services.

DIR also established the Texas Cybersecurity Council as a means to increase collaboration between
private industry and public sector organizations. The Council focuses on developing strategies to protect
critical infrastructure and sensitive information, as well as evaluating mitigation and response best
practices. To help assist agencies, DIR developed the Texas Cybersecurity Framework (TCF) in

97
HB 8, 85th Texas Legislature (2017).
98
HB 9, 85th Texas Legislature (2017).
99
SB 64, 86th Texas Legislature (2019).
100
Written Testimony, Department of Information Resources. Submitted in response to Senate Business and
Commerce Committee, May 18, 2022. (on file with the committee)

33
collaboration with other government entities and the private sector to identify and manage cybersecurity
risk at agencies in a cost-effective way. The framework was developed to align with the National Institute
of Standards and Technology (NIST) guidelines and is divided into five concurrent and continuous
functions: Identify, Protect, Detect, Respond, and Recover. The TCF is intended to help an organization
better understand, manage, and reduce its cybersecurity risks using 42 total security control objectives. To
assess the cybersecurity health of various entities, DIR determines the maturity, or degree of
implementation, of the security control objectives.

Cybersecurity Insurance

Cybersecurity insurance, or cyber liability insurance, is an emerging insurance product that has grown in
popularity over the past several years. According to the National Association of Insurance Commissioners
(NAIC), the number of cyberinsurance policies in the market place increased by 21.3 percent from 2019
to 2020 101. Cybersecurity policies can change from one month to the next, given the dynamic and
fluctuating nature of the associated cyber risks. Unlike well established insurance plans, underwriters of
cybersecurity insurance policies have limited data to formulate risk models to determine insurance policy
coverages, rates and premiums.

State Office of Risk Management Cybersecurity Insurance Overview102

The State Office of Risk Management sponsors a number of insurance lines, essentially acting as a pass
through between insurance companies and state agencies. This allows the state to utilize its bargaining
power to purchase plans to meet the needs of the state in a more affordable manner. SORM also works
with agencies that purchase insurance lines to conduct frontend training, assessments, and mitigation
planning to avoid claims from arising in the first place.

Recently, SORM and DIR have begun looking into the state sponsoring a cybersecurity insurance line.
According to SORM, about 30 state agencies currently purchase some form of cyberinsurance. However,
SORM has also noted that most market policies are focused on providing coverage for addressing third-
party concerns after an event, such as crisis communication services, customer credit rehabilitation, and
credit monitoring services. However, the type of policy needed by the state is a first-party policy to help
address the direct costs incurred by a breach.

While this type of policy is not readily available in the market, SORM has the ability to develop a
statewide master insurance program for Network Security and Privacy Liability insurance coverage.
Should SORM sponsor a cyberinsurance line, the agency could partner with DIR to develop frontend best
practice policies similar to what is currently done by SORM on all other lines.

In addition to the appropriateness of the standard market plan, there are concerns that these plans contain
provisions that limit an agency from coordinating with DIR or other state entities following an event.
These policies may also prevent agencies from utilizing state resources to help with the post-event
resolution, which could provide a more cost-effective alternative to an insurer's preferred vendor.

101
National Association of Insurance Commissioners. Report on the Cybersecurity Insurance Market. October 20,
2021. https://content.naic.org/sites/default/files/index-cmte-c-Cyber_Supplement_2020_Report.pdf
102
Written Testimony, State Office of Risk Management. Submitted in response to Senate Business and Commerce
Committee, May 18, 2022. (on file with the committee)

34
Finally, many of the standard market policies include coverage for paying cyber extortion demands or
payments, which some industry stakeholders suggest could encourage more ransomware attacks on
government entities. Recently, North Carolina passed legislation preventing state entities from paying
ransom on cyber events.

Texas Department of Insurance Overview

In response to several major data breaches involving large insurance companies, the US Department of
Treasury directed states to adopt uniform data security regulations for insurance companies or it would
direct federal regulators and Congress to step in. As a result of this directive, the National Association of
Insurance Commissioners (NAIC) proposed an Insurance Data Security Model Law 103. The model
requires insurers and other entities licensed by the department of insurance to develop, implement and
maintain an information security program, investigate any cybersecurity events and notify the state
insurance commissioner of such events. To date, 22 states and Washington, DC have adopted a version of
this law.

ERCOT Cybersecurity Overview

ERCOT has a highly sophisticated cybersecurity operation with multiple layers of redundancies and
based on the National Institute of Standards and Technology (NIST) Cybersecurity Framework, which is
considered best in class. ERCOT also complies with all NERC requirements as well. ERCOT regularly
collaborates with other grids, state and federal law enforcement and security partners, federal agencies,
and national cybersecurity labs both on a strategic and real-time information sharing level.

From a grid management standpoint, ERCOT takes a proactive approach to managing market
participants. While NERC requires certain qualifying utilities to meet cybersecurity standards, the vast
majority do not meet the NERC thresholds. However, ERCOT has extended several protocols, including
breach reporting requirements, to all market participants.

Critical Infrastructure Protection Working Group (CIPWG)

The ERCOT Critical Infrastructure Working Group (CIPWG) serves as a vehicle to facilitate and enable
ERCOT entities to secure their critical assets, achieve compliance with relevant security standards, and
maintain their compliance. The CIPWG will likewise apprise members of the ERCOT Reliability and
Operations Subcommittee (ROS) on matters being considered by NERC CIPC or CIP standards approved
by FERC which require regional action. These meetings typically include 70-80 stakeholders at the open
portion and 25-30 stakeholders in closed session, all of whom are required to sign a NDA.

Texas Grid Security Council

Established by SB 475 (86R) 104, the Texas Grid Security Council makes recommendations regarding
education programs to promote grid security and the development of a grid security workforce as well as
grid security best practices, preparations for events that threaten the grid and amendments to state

103
National Association of Insurance Commissioners. Insurance Data Security Model Law.
https://content.naic.org/sites/default/files/inline-files/MDL-668.pdf
104
SB 475, 86th Texas Legislature.

35
emergency plans. The Council is headed by the Chair of the PUC, ERCOT President, and Governor's
office representative.

Cybersecurity Rick Information Sharing Program (CRISP)

ERCOT works with the Department of Energy to participate in CRISP, which is a public-private
partnership, co-funded by DOE and industry and managed by the Electricity Information Sharing and
Analysis Center (E-ISAC). The purpose of CRISP is to collaborate with energy sector partners to
facilitate the timely bi-directional sharing of unclassified and classified threat information and to develop
situational awareness tools that enhance the sector's ability to identify, prioritize, and coordinate the
protection of critical infrastructure and key resources.

Public Utility Commission Texas Cybersecurity Monitor Program

In 2019, the Texas Legislature passed SB 936 105, which directed the Public Utility Commission of Texas
(PUC) and ERCOT to contract with an entity to act as the PUC’s cybersecurity monitor. The
cybersecurity monitor is tasked with managing a cybersecurity outreach program, communicating
emerging threats and best business practices, reviewing cybersecurity self-assessments, researching and
developing best business practices for cybersecurity, and reporting to the PUC on cybersecurity
preparedness. In addition to monitored utilities, non-ERCOT utilities may elect to participate in the Texas
Cybersecurity Monitor Program. The fee for a non-ERCOT utility to participate in the Texas
Cybersecurity Monitor Program for the 2022 calendar year is $4,046.00. It is important to note this
program is completely voluntary. According to the PUC, there are 58 out of 140 eligible utilities that
participate in the program. Of those 58, 28 utilities submitted a self-assessment for review by the Cyber
Monitor.

The PUC also has begun holding cybersecurity "Tabletop Exercises" with utilities through a pilot
program funded by the Department of Energy. The program will be expanded this year to a three day
conference in conjunction with ERCOT with both exercises and experts to provide best practices to
utilities. The PUC also holds quarterly meetings between stakeholders and the cybermonitor to share
information and provide guidance over emerging threats.

In response to this charge, ERCOT and the PUC identified several areas of concern related to
cybersecurity:

• Non-NERC regulated market participants - Smaller operators, such as smaller municipal utilities and
electric cooperatives, are often the least sophisticated when it comes to cybersecurity protocols, but
there are really no state mandated requirements beyond breach reporting requirements. While most of
these entities interface with the actual grid through a QSE that tends to have better cybersecurity
hygiene, their potential risks to customers should still be considered.
o Both the PUC through its Cybermonitoring program and the Department of Homeland Security
have free cyber assessment tools that organizations can utilize to identify how they can better
protect their organizations. However, they are voluntarily programs. Of the 140 organizations
eligible to participate in the program, 28 have completed a self-assessment for review.
• Natural Gas Supply Chain - While many of the major requirements and cyber initiatives on the
utilities industry are driven by the federal NERC regulations, there is no similar mechanism for the oil

105
SB 936, 86th Texas Legislature.

36
and gas sector. Given the interdependence of both systems, the federal government is looking at
potentially expanding NERC and DOE regulations to include the natural gas supply chain.
• Global Conflict - While the Russian War in Ukraine raised concerns about the threat of cyberattacks
from Russia, the majority of foreign cyberattacks are coming from China and have only increased
significantly since February 2022.
• Supply Chain (Technology) - This area of concern gained more prominence following the Solarwinds
attack. While NERC requires regulated entities step up oversight of the vendor supply chain, some
software vendors push back on complying with requirements, while some companies are better at
managing contracts than others. This is similar to a problem DIR faces on the state agency level.
ERCOT is extremely proactive in working with counterparts and market participants to disseminate
information on software patches, but not every market participant is required to follow the same
standards as NERC entities.
• Supply Chain (Physical Assets) - Many parts of a grid unit, especially wind and solar resources, are
supplied from China, which can pose a risk when that piece of equipment is maintained or can be
remote operated by the manufacturer or a manufacturer's subsidiary.

Conclusion and Recommendations

Over the course of several sessions, the Legislature has taken decisive actions to become a leader in
cybersecurity best practices. However, as technology and global threats continue to evolve, so must the
state. As such, the Committee recommends the Legislature continue to support a proactive approach to
cybersecurity management in the following ways:

• Prevent governmental entities from paying ransomware in order to reduce the incentive for nefarious
actors to target public domains.
• Prevent governmental entities from entering into contracts that would prohibit or limit information
sharing with DIR or requiring agencies from utilizing specific vendors for remediation.
• Support efforts by the State Office of Risk Management and Department of Information Resources to
collaborate on a state-sponsored cybersecurity insurance line.
• Support the modernization and hardening of state agency information technology systems.
• Encourage state agencies to partner with private industry as a means to foster information sharing
about potential threats and best practices. Ensure regulated entities who engage with the state
maintain strong cybersecurity protections.

37
CHARGE NO. 6

State Workforce: Study where state employees are located and the benefits and drawbacks of remote
working. Evaluate the impact of the potential growth of remote work and proximity of employees to their
place of employment on traffic studies over the next 10 years. Study and make recommendations for
establishing uniform statewide standards for remote work. Study possible implications and standards for
statewide recruitment and employment of remote state employees from all parts of the state.

Testimony

The Senate Business & Commerce Committee held a hearing on May 18, 2022 and heard testimony from
the witnesses.

Background

Texas, alongside the entire nation, continues to contend with the consequences of the recent years'
unprecedented events and challenges that have resulted in an ever-changing landscape for both employees
and employers across the public and private sector. A growing number of workers chose to leave the
workforce entirely, find other opportunities, or begin working from home. At its peak in April 2020, the
unemployment rate reached 14.7 percent; although, it has since leveled out to 3.8 percent as of February
2022 106. Throughout both extremes the nation's economy has experienced since 2020, the issues that
remain pertain to workplace behaviors. Employers were required to find ways to ensure employee
satisfaction and simultaneously guarantee protection of their health and safety - primarily though the
offering of remote work and salary increases. To this day, over half (59 percent) of U.S. workers are
working from home all or most of the time 107. What was once a necessity is now left to individual
preference and whether companies chose to reopen their office doors. However, in considering flexible
work models as a means to improve recruitment and retention, the state should keep a few ancillary issues
in mind: availability of technology and equipment, connectivity, and cybersecurity. Working from
locations outside of the office require consistent and secure Internet access, which may not be feasible in
some areas. Broadband expansion will eventually assist, but short-term solutions should be explored.

Historically, jobs within the state may not enjoy as many similar flexibilities and face salary constraints in
comparison to the private sector. While the state offers an attractive benefits package, it is no longer
significantly competitive. When considering total compensation of state employees, the average value is
reported to be $78,146 ($50,090 in average annual salary and $27,556 in average annual benefits) 108. If
potential employees can now receive similar benefits in the private sector combined with a higher salary,
Texas stands to lose out on many qualified candidates. This presents a unique challenge when it comes to
recruiting for technical positions in high demand. In the same vein, the Capitol region has become much
less affordable. Without offering a competitive salary, many state employees can no longer afford to live
close to work. These challenges present an opportunity to explore methods of recruiting statewide -
specifically in areas where the cost of living compared to salaries does not lead to candidates self-

106
Bureau of Labor Statistics, Monthly Labor Review - July 2022, https://www.bls.gov/opub/mlr/2022/article/the-
great-resignation-in-perspective.htm
107
Pew Research Center, COVID-19 Pandemic Continues To Reshape Work in America,
https://www.pewresearch.org/social-trends/2022/02/16/covid-19-pandemic-continues-to-reshape-work-in-america/
108
State Auditor's Office, Report No. 22-705: A Report on State Employee Benefits as a Percentage of Total
Compensation for Fiscal Year 2021 - June 2022, https://sao.texas.gov/Reports/Main/22-705.pdf

38
selecting out of job opportunities. In turn, these efforts could be a means of economic development for
other regions of the state.

In taking a comprehensive look at the state's workforce and the increased adoption of work-from-home
employment models, the state may develop innovative ways to recruit and retain employees across all
state and local government, as well as ensure the state of Texas continues be a highly sought after place to
work. The Committee intended to examine the issue in a holistic manner by providing an overview,
considering impacts on employees' quality of life, and hearing the perspective of state agencies and how
they have adapted.

The State Auditor's Office provided an overview of state employee demographics and satisfaction through
the lens of their Fiscal Year 2021 FTE Report 109 and Employee Turnover Report 110. To provide more
context to the decrease of 2,162.6 FTEs compared to the average in fiscal year 2020, it was reported that
the fiscal year 2021 statewide turnover rate had risen to 21.5 percent. Of those separations, 78.2 percent
were voluntary - a significant increase of 20.4 percent from fiscal year 2020. The top three reasons that
employees reported in exit surveys for leaving state employment during fiscal year 2021 were retirement,
better pay/benefits, and poor working conditions/environment. SAO also provided testimony surrounding
their work on the State Position Classification Plan.

The Texas A&M Transportation Institute provided insight into how remote work models impact traffic
congestion, specifically for state employees in the Capitol Metropolitan Statistical Area (MSA) given
their high concentration in the region. While their 2014 study 111 undoubtedly demonstrates that state
employees greatly contribute to congestion in the area, they propose a few solutions agencies may pursue
to alleviate some of the issues: Travel Demand Management (TDM) plans, ridematching, and telework.
By reducing time on the road or stuck in traffic, this may increase satisfaction and retention for state
employees and be less of a barrier to recruitment.

Both the real estate and apartment industries provide feedback on the rising costs of living in the Austin
area, further reiterating the notion that state employees are facing many factors that may lead them to seek
out other opportunities. While the market is now normalizing to a degree, the median sales price was up
30.8 percent to $450,000 by the end of 2021. The combination of increased prices and increased
competition led to properties being on the market an average of 25 days less than 2020 112. Similarly,
Austin's rental market has continued to outpace other MSAs across the state, even surpassing the U.S.
average of $1,600 monthly. Additionally, the gap between Austin and other MSAs continues to widen,
making it far more expensive to live in the Capitol region than anywhere else in the state 113.

Currently, several state agencies including the Texas Health & Human Services Commission (HHSC) and
Texas Workforce Commission (TWC) allow agency employees to utilize telework and remote work, and
have found for the right category of employee, these strategies can increase employee satisfaction without
compromising work quality and outcomes. These models are also considered a useful recruitment and

109
State Auditor's Office, Report No. 22-703: A Summary Report on Full-time Equivalent State Employees for
Fiscal Year 2021 - March 2022, https://sao.texas.gov/Reports/Main/22-703.pdf
110
State Auditor's Office, Report No. 22-702: An Annual Report on Classified Employee Turnover for Fiscal Year
2021 - March 2022, https://sao.texas.gov/Reports/Main/22-702.pdf?
111
Texas A&M Transportation Institute, Austin State Agency Congestion Footprint - April 2015,
https://static.tti.tamu.edu/tti.tamu.edu/documents/PRC-14-32-F.pdf
112
Written Testimony, Brandy Guthrie, Texas REALTORS Association (on file with the committee)
113
Written Testimony, Sam Tenenbaum, Cushman Wakefield, (on file with the committee)

39
retention tool as many applicants are seeking this flexibility when seeking new opportunities. Agencies
recognize that they are not only competing with the private sector for talent, but other states 114,115.While
the intent of the charge was to gain knowledge about how agencies put these policies into place, it was
also suggested to explore how to standardize telework and remote work processes. Agencies currently
appreciate the flexibility provided in how they implement telework and remote work. Each agency has a
different population of employees and different activities that would make creating statewide standards
difficult.

Conclusion and Recommendations

Information gathered suggest the need to improve recruitment and retention amongst agencies to ensure
the State remains a competitive employer. This includes, but is not limited to, building out strong
telework and remote work programs as appropriate. It is imperative that the state strikes the appropriate
balance of affording flexibilities while simultaneously ensuring all objectives and metrics are met within
the workplace. The Committee recommends the Legislature consider the following:

• Feasibility of tying telework and remote work eligibility to job classification;
• Required approval requirements and/or written agreements for managers and their team members;
• State investment in proper equipment allowing maintenance of cybersecurity requirements for
offsite locations;
• Economic incentives for rent or purchase of state buildings either relocating or establishing new
locations outside of Austin, easing the cost of living burden on employees and providing for
economic development outside of the Capitol region;
• Bolster information gathering by SAO and agencies through their audits, exit surveys, and State
Employee Engagement (SEE) surveys to better inform these efforts and obtain accurate
comparison to the private sector; and
• Create more internship opportunities for agencies that lead to full-time positions, as well as any
other potential pipelines to state employment.

114
Written Testimony, Cecile Erwin Young, Executive Commissioner at Texas Health & Human Services
Commission (on file with committee)
115
Written Testimony, Ed Serna, Executive Commissioner at Texas Workforce Commission (on file with
committee)

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Senate Committee on Business and Commerce Interim Report to the 88th Legislature — Texas Senate, January 9, 2023

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