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How a Texas electric co-op rebuilt for reliability | Sponsored content from Rayburn Electric
00:45:26
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- [00:00]
Ed Crookes
Texas is growing fast and Rayburn Electric Cooperative is ready. Serving more than 625,000 North Texans through its four member co ops, Rayburn is investing in locally controlled dispatchable power to strengthen grid reliability as demand rises. With one major natural gas plant to co out in 2023 and a second facility coming in 2028, Rayburn is putting large scale power in place with long term performance in mind. These investments are about reliability where it matters most and affordability for local communities. Rayburn Electric Cooperative member focused, member driven.
- [00:35]
Chris Addison
Winter Storm Yuri it was more risky to own generation in the ARCOT market post Erie. It was even more important and less risky for us to now own generation and it was more risky to rely on the market solely.
- [00:48]
David Naylor
Winter Storm Yuri was what they called a one in a 100 year event. Well, we can ignore the one in 100 years event, but obviously we do it at our own peril. We need to be prudent with our members money, but we also need to re evaluate and recognize that from time to time the market is going to have its bumps and its challenges. Instead of leaning heavily on the market, we're going to lean less on the market and have steel in the ground. And ultimately we ended up acquiring a power plant and then we'll build another one. These are probably the most exciting times we've ever had in the power industry.
- [01:26]
Ed Crookes
Hello and welcome to the Energy Gang, a discussion show from Wood Mackenzie about the fast changing world of energy. I'm ID Crookes and today we're going to be bringing you a special episode of the Energy Gang focused on Texas and on the lessons from the deadly winter storm Uri in 2021. That storm, which killed at least 276 people, exposed deep vulnerabilities in the Texas power system. It also became a turning point for some Texas utilities which decided that they couldn't rely on the market alone any longer. One of those was Rayburn Electric Cooperative which is based in Rockwall to the east of Dallas. And today we're going to be talking about how Rayburn responded from financial innovation to supporting legislative change to acquiring and building new large scale generation capacity. And they're going to be asking what their experience tells us about reliability and resilience in electricity systems and how to meet the challenge of rapid load growth in the years ahead. To do that, I'm joined by David Naylor, who's Rayburn's president and chief executive. Hello David. Welcome to the show.
- [02:24]
David Naylor
Good morning. Thank you.
- [02:26]
Ed Crookes
And also by Chris Addison, who's Rayburn's General Counsel. Hi, Chris.
- [02:29]
David Naylor
Good morning.
- [02:30]
Ed Crookes
So now, as you know, whenever we get new people on the show, we'd like them to get to talk a little bit about their careers in energy, how they got to the positions they now hold. And I was wondering if you could both do that for us. I mean, maybe David, to start with you, what's your story? How did you get to the role you now hold?
- [02:45]
David Naylor
So I originally started out as a consultant in the power industry, got a background in electrical engineering and worked primarily with electric cooperatives, particularly the generation and transmission cooperatives like Rayburn. Rayburn was a client. And then about 15 years ago they made me an offer I couldn't refuse. And so I came on board as the executive vice president. And then in 2017 I took over as the President and CEO at Rayburn. So I've been in the space about 30 years, a little over 30 years now, and it's been quite a road.
- [03:20]
Ed Crookes
So having spent a long time telling other people how to do it, you started having to do it for yourself.
- [03:25]
David Naylor
It's easier to tell people how to do it than it is to.
- [03:29]
Ed Crookes
Indeed, indeed. Tell me about it.
- [03:31]
David Naylor
Go ahead.
- [03:32]
Ed Crookes
And then Chris, what about you? What's your story?
- [03:33]
Chris Addison
Well, David made me an offer I wouldn't refuse. Three years ago I had retired from an investor owned utility in northern Minnesota. I'd been there for 27 years and made a brief stop in the mining industry. After some policy changes by the federal government, I found myself looking for new opportunities and I found excellent opportunity here in Rock Paul.
- [03:55]
Ed Crookes
Yeah, absolutely. Very exciting times in the industry and for Rayburn specifically, as we'll come on to talk about. Also then I was hoping you could just tell us a little bit about Rayburn. I think perhaps also particularly for the benefit of listeners outside the US who might not be familiar with the idea of electric cooperatives, could you talk a bit about what it means to be an electric cooperative and what Rayburn is in particular?
- [04:19]
David Naylor
Our customers are our owners, so we call them members. So Rayburn as a cooperative, and this is a cooperative in general, we're a not for profit organization and we have no investors. So if you think of somebody who owns stock such as an Amazon, they can be an owner of Amazon, don't necessarily have to be a customer, vice versa, you can buy products from Amazon and be a customer, but not own stock. So you're not an owner. But in a co op standpoint, from a cooperative standpoint, they're one and the same. So if you buy electricity from a cooperative, you are also an owner of the cooperative. And so what the benefits of that are is then you get a voice and you get to elect their board of directors, you get to participate in the process. And it's a lot more of a local control. So Rayburn as a cooperative, and we're a generation and transmission cooperative, so we're a wholesale provider of electricity. We buy electricity, we generate electricity and then we deliver it to, in our case, we have four distribution electric cooperatives who then turn around and ultimately sell it to the retail consumer and their members. So that's who Rayburn is and what a cooperative is. As far as our territory, we serve about 16 counties north and east of the Dallas Metroplex. That's roughly 625,000 Texans that ultimately get served by Rayburn and its and its members.
- [05:46]
Ed Crookes
And probably a lot of people will have heard of ercot, the Texas grid, Texas grid operator there. How do you work with ERCOT then? How does it fit together?
- [05:54]
David Naylor
So ercot, essentially they're the clearinghouse, if you will. They're also the monitor and the, the operator of the grid. So while Rayburn has generation facilities and we have transmission facilities, ercot, they're the ones who tell us how much to run, we'll submit bids, they clear the market. They'll also make sure they do whatever needs to be done to keep the grid operational. So when it comes to reporting outages, they approve the outages to make sure that the grid stays safe and reliable so you're not losing electricity. But that's, they're essentially the police cop and then the clearinghouse for the market.
- [06:32]
Ed Crookes
So as I was saying, I really want to talk about winter storm Bury and everything that followed.
- [06:37]
David Naylor
That.
- [06:37]
Ed Crookes
That was obviously a terrible disaster. Really kind of put a spotlight on the power system in Texas and everything connected with it. We're now just coming up on the five year anniversary, aren't we? It was February 2021 when it happened. So very much, I think, in people's minds at the moment. Can you talk a bit about what that storm meant for you? How did that affect Rayburn? What was the impact on you and what lessons do you think you learned from it?
- [07:11]
David Naylor
So I think, I mean, for Rayburn, this was certainly a seminal moment in our history. I think it's been the biggest event that we have seen basically since we started. We incurred three years of power cost in a five day period. So you don't talk about us having a significant financial impact on us. That was, I mean, that was about as bad as it can get. We had our processes in place two weeks out and ended up being a lot colder than projected for a lot longer than expected. And the market kind of went kind of went crazy a little bit there. And then you had regulators step in. And so for us, it was a huge event that really required us to just refocus and reshift how we do business.
- [07:59]
Ed Crookes
Just to be clear then about that financial impact, that's because you're sort of caught between wholesale market prices on the one hand and as you say, the distribution utilities that are serving individual customers on the other. And those wholesale market prices just went through the roof. Right. They hit. Is it. I think it's at $5,000amegawatt hour is the cap. And it went up to that cap for a protracted period of time. And as you say, that's how you can incur three years of cost in five days.
- [08:29]
David Naylor
Yeah. So I'll put some actual numbers to it. The market cap was $9,000amegawatt hour. So that's $9 a kilowatt hour. And most of us are paying normally some, you know, maybe 15, 20 cents at most per kilowatt hour at our homes. So, you know, just extremely high, high prices. And the Public Utility Commission of Texas set that cap to and had it stay at that cap for, you know, essentially that was five days. And so in Rayburn's case, you know, we ended up being 50, only 50% hedged or covered. And so we had a, you know, again, 50% exposure to those market prices. And Ed, ironically, we were pretty well covered during the on peak periods. I mean, we're 80% covered and that, you know, during the day when normally prices are highest, but we're only 40% covered in those off peak periods overnight. And with the price being capped and staying at that cap, we got hammered during those, you know, overnight hours that normally or when your prices are the lowest. And so for Rayburn, we incurred about almost a billion dollars worth of cost. And our choice was, do we pass that on to our members who are going to pass it on to their members, because again, we have no outside investors, no other place to recover those costs. And so we just felt like we were going to. If we passed it on and kept passing on, we're going to put our members and those ultimate consumers in an untenable position. And so we made the decision internally and with our board. We're going to keep those costs up at Rayburn. We're going to do what we can to figure out how to pay for Those costs. And then once we have it resolved now, we'll disperse it amongst our members and then onto their members. And that's what we end up doing, right?
- [10:19]
Ed Crookes
Yeah. And so that's really what I want to get into then is sort of your response to the storm and what changed after it. I was looking at your book the other day, Status Quo is not Company Policy, which is very interesting book actually. It's well worth a read if people are looking for a management book. And maybe we'll talk a bit more about that in a moment. But was it an event then that made you think the status quo is no longer tenable?
- [10:44]
David Naylor
Yeah. So I mean, Status quo is not company policy. It was kind of born out of is one of those accidents that. Well, that's exactly what applies here. But I don't know that I sat and thought long and hard about that particular phrase. It just kind of popped out and I was like, hey, I like that. Let's pull that back here and use it elsewhere too. But you know, Ed, there were two pieces that we had to solve with Winter Storm Yuri. One is how do we pay the bills? And you know, we went through, I mean, Look, a Chapter 11 bankruptcy was on the table. That was an option that we had to consider. We did not like it. And ultimately we ended up doing a securitization which had never been done before by a cooperative. And it required us working with the Texas legislature to even get that approval to occur. So we ended up doing that. And I can talk a bit more about the securitization and what that means in just a minute. But then the other side of things was looking back and taking some lessons learned. What are some things we need to do different? And we really shifted, recognizing that, you know, you have to be mindful of the extremes. And winter storm Uri was what they called a one in 100 year event. Well, we can ignore the one in 100 years event, but obviously we do it at our own peril. And so it became we need to be prudent with our members money, but we also need to reevaluate and recognize that from time to time the market is going to have its bumps and its challenges. And so we pivoted to a position where instead of leaning heavily on the market, we're going to lean less on the market and have steel in the ground. And ultimately we ended up acquiring a power plant and then we're building another one.
- [12:33]
Ed Crookes
So can you talk a bit about exactly how you did that? And as you said, there was Actually legislative change needed to make it possible. How did you manage to persuade lawmakers that that was the right thing to do?
- [12:47]
David Naylor
Yeah, well, persuade the lawmakers the right thing to do was fairly easy because it meant they didn't have to use state funds to pay for their bill. So that one became fairly easy. It's just a matter of getting it done. But securitization is a concept that had been used by investor owned utilities for storms from time to time, but had never been applied to cooperatives and cooperatives have never had never used that. And so as we were working with our financial advisors, this became an option that we looked at and said, well you know what, we really don't want to file bankruptcy. This is a way for us to be able to pay the bills. And so the securitization is essentially, it's like a mortgage. And so we were able to take those costs, spread them out over 28 years and make those payments smaller, if you will, because I mean, like I said, we're spreading them out over 30 years. So it become a very much easier to pay than paying that, you know, that billion dollars all at once. We were able to find, I mean we basically issued bonds that paid for this, the power costs that we owe at ercot and then the bondholders get that payment over the next 28 years. And we ended up with a great response from the market. Folks were very much interested in those bonds and we were the first co op in the nation to securitized, has been very successful. And in fact, I mean Rayburn paid off. We paid everybody that we owed every cent. So nobody was shortchanged. And then on top of that, our members, because of some of our other decisions to be able to lower their power cost as well as some things they did on their side, none of our members had to raise their rates to accommodate these increased costs.
- [14:29]
Ed Crookes
Wow, that is amazing. I hadn't realized that. Because those bonds get a very good credit rating, right? Because you're a very stable, secure business, you're not going anywhere. People can be pretty sure that if they are buying those bonds, the revenues are going to be there in the future to pay them back.
- [14:44]
David Naylor
Exactly. I mean they ended up being. Moody's rated them for us. They were AAA rated. So it was again very well received. And like you said, electricity is a pretty inelastic demand, particularly nowadays, of course.
- [14:56]
Ed Crookes
Even more so I guess at the moment. We'll come on to that in a little bit. So anyway, going back to the story then. So after the securitization the next step, as you say, is to look at physical assets, steel in the ground and just to kind of talk through the strategic thinking here. This is what essentially to provide a kind of natural hedge. Is it that? So if you have your own generation capacity times when prices go up a lot in the wholesale market, you are not so exposed to those prices. Is that right?
- [15:27]
Chris Addison
Yeah, David can expand on this, but the way I think about it, so I came to the company post Yuri. I was part of David's view of let's look at things differently. And I guess maybe I'm the different one he gets to look at to help solve some of those problems. But when I think of what Yuri meant to Rayburn as I came into the company, prior to Winter Storm Uri, it was more risky to own generation in the ARCOT market. For Rayburn post Yuri, it was even more important and less risky for us to now own generation. And it was more risky to rely on the market solely. And so they had been doing generation studies and been looking at this different opportunities over time. But Yuri helped tip that balance.
- [16:10]
David Naylor
You know, prior to Yuri, we had not had very many extremes in the market. And so the market prices were pretty stable, pretty low. And it just did not incentivize generation. You just couldn't recover your cost. Post Winter Storm Uri, you know, again, we've had, we've had a lot more winter storms that have come up. In fact, I don't even know that I knew that winter storms were named until Yuri came around. But you know, you think about it from Rayburn's standpoint, we're load, we're going to buy from the market and whatever that market price is, but we have no say, no way to influence what that market price is going to be when we own generation. Well, now we're bid. I mean, that's what's kind of helping set the market prices is what's the cost of generation generators bidding in saying, hey, I'm willing to sell at this price. Whereas load is essentially just a price taker. And so when we went through Winter Storm yearing, we looked back and said, all right, what lessons learned can we take? Well, we have a better shot of controlling our own destiny if we can help set whatever that price is or at least be able to capture what that price is. So now when the market prices are really high, well, not only are we buying the power from the market like we were in the past, we're also now being able to sell and get the revenues from the market on that so it became a again, Winter Storm Murray really shifted our focus to risk. It exposed the risk element that we had and we recognized that, yeah, it may cost us some additional money up front to own generation. But the downside is a lot worse because we don't want to have to securitization anymore. We don't want to have to do it look at a chapter 11 anymore or have that option. And so that's where having steel in the ground, owning those assets just made more sense for us right now.
- [18:03]
Ed Crookes
That's really interesting. And just going back to something that you were saying then, Chris, in terms of the way that sort of risk calculation shifted. So you're saying kind of pre Uri the calculation would have been that it was riskier to own generation assets. What? Just because you're tying up a lot of capital there, as you say, that's a big expenditure to have in steel in the ground. And then now, as you've been saying, David, that calculus has shifted. Am I thinking about that the right way?
- [18:29]
Chris Addison
I think so. Yeah, exactly.
- [18:31]
Ed Crookes
Right.
- [18:31]
David Naylor
Yeah, I agree. I mean, Raymond was about a $400 million company prior to Winter Storm Uri. And then once we've decided to pivot and start owning generation, we eclipsed a billion dollars in assets. So I mean it was a very big impact on our balance sheet. But a very, I mean again, when we started factoring in risk became a very positive for us.
- [18:53]
Chris Addison
And one of the things then when I came into the company then is we also with using Winter Storm URI in the rearview mirror. Okay, what does risk mean to the company in total? So we've instituted an enterprise wide risk management program. So not only are we looking at potential market risks on the energy market side, but now what kind of discipline can we enforce internally within the company to look at risk of all levels of our operations? So we actually build from the ground up and have employees self identify their own business risks. And what are the worst case scenarios and what steps do they need to take or can they anticipate taking if things start to go haywire? And so that helps prepare you for tariffs and trade wars and Covid and other things. You begin to look at your business in an entirely different way when you go through a threshold moment like you did with Erie.
- [19:52]
Ed Crookes
Right. All of that very useful in the past few years, I'm sure.
- [19:55]
David Naylor
And Ed, I think the other thing, I mean we've been, we've been focusing in on the, on the asset side and the generation. You know, the other thing I got to Add here is we really took a look at our employee mix as well. And we decided we needed some additional expertise in house. And we brought, you know, we brought some power supply guys in. In house, we, we added some additional IT guys to help us with the data collection that we have. And then of course, I mean, Chris, good, bad, indifferent, we added some legal. That's always a mixed bag. But I mean, we really increased the expertise that we had in house. I mean, we were probably about 75 employees during winter storm Uri. And I mean, here we are five years later and we're over 100 employees.
- [20:42]
Chris Addison
And then you go further with that. The linemen that we added more boots on the ground. But then we also started to look at what else is going on around us. You know, there's wildfires. What are you doing to reinforce your system? Do you, you know, how do you do your pole inspections, how you do vegetation management, how do you anticipate weather and other events impacting your system and where you place people, what kind of mobile generators can you put in, you know, acquire in advance so that you're ready for an emergency? So those are the types of things that David and the team really instituted to now. What makes Rayburn better and more well positioned for an event that can have some of the, maybe not the same breadth of impact of Erie, but still be significant impacts on Rayburn and its members.
- [21:28]
Ed Crookes
Right. Very interesting. And I think a lot of other people across the industry have been thinking along similar lines that as you say, a lot of these kind of issues about physical risk and so on have really risen up the agenda in the past decade or so as things that people are very concerned about. Rayburn Electric Cooperative is planning for the future of power in North Texas. As electricity demand continues to climb, Rayburn is investing in large scale generation resources that give its members more control over supply and system reliability. By pairing existing generation with new capacity arriving in 2028, Rayburn is building a stronger backbone for reliable power. These investments help fast growing communities keep pace with demand and ensure the lights stay on during periods of high demand. Beyond power plants, Rayburn also engages in grid planning, policy development and market design efforts that help electric co ops participate in statewide programs like the Texas Energy Fund. This work ensures that co ops remain part of the solution as Texas builds the next generation of energy infrastructure. Rayburn Electric Cooperative, member focused, member driven. So just going back then to the question of acquiring physical assets. So you bought this 758 megawatt natural gas plant. This is now, this is it's. Res 1 Right. There's that Rayburn Electricity station. Rayburn Energy.
- [22:49]
David Naylor
Rayburn Energy Station.
- [22:51]
Ed Crookes
Rayburn Energy Station. Right, thanks. So that was quite a departure for you. As we've been saying. It was presumably just kind of coming into the time when natural gas power plants were pretty hot properties, probably even more so now. But even back then there was presumably quite a bit of competition from other companies, other kinds of investors to buy that asset. How did you manage to be successful at that in as I say, what was effectively your first time out trying to acquire that kind of generation capacity?
- [23:27]
David Naylor
I think what really captured the bid for us was, I mean one, we had a fair price for the product, we evaluated it correctly. The second is the attraction that Rayburn and its cooperatives bring is we're load serving entities and so we don't have to worry about what's the market going to do to justify the asset. We say look this is something that we can use to serve our load. And again for us, I mean look, we're not for profit. That doesn't mean that we want high cost or that we want to lose money, but we can take certain risk with the idea of hey, this is going to impact our members in a positive way. And so it's less about the profit and loss statement and more about what makes sense for our members. And so by being a load serving entity I think that really attracted the counterparty of that plant to say look, these guys have some certainty into it. There's not a lot of, of risk market things that they're not likely to come back and do these other things. And so I think we just made a better counterparty and then ultimately we closed in July of 23rd.
- [24:41]
Ed Crookes
Got it. So you mean. So again it's really back to that point about having a natural hedge that by having both electricity supply and electricity demand, if you like, that having that hedge kind of reduces the risk on both sides of the equation that the, the demand has more, has guaranteed supply, the supply has guaranteed demand if you like.
- [25:00]
Chris Addison
It's more than just the asset, it's the people, you know. So one of the things in due diligence, you know, we talk about how did that asset perform during winter storm Yuri and what kind of people are operating that unit. So as if we buy that asset and we need to keep the people on board are those good people and, and you know they, they did a fantastic job during the storm to make sure that that plant operated. And when we went to the plant and met the folks that operate that Run and operate it. You know, we saw quality, quality people that we wanted to be associated with and be part of Rayburn as well.
- [25:35]
Ed Crookes
Right. So you saw the good people, you like the asset, as we've been saying, it was in large part a risk reduction strategy that led you to do that deal. What were the risks still that you worried about at the time and how did you minimize them? I mean, were there concerns you had about things that could have gone wrong with it?
- [25:59]
David Naylor
Yeah. So, I mean, look, we're just, in some ways, we're changing one set of risk for another set of risks because now we own a power plant and now we need to make sure. I mean, it's natural gas fired. So what's the natural gas supply situation for the plant? We talked about the people. We wanted to make sure we retained all the people, and we did. We got to make sure that maintenance is done because some of the utilities in Texas that got hurt hard and either other cooperatives that got hurt hard during winter Storm uri, they had power plants, but they didn't run. And so we wanted to make sure that, you know, hey, guys, in talking to our board and let's make sure we're performing the maintenance, certainly in our due diligence phase of acquiring that plant, we went through and checked all their maintenance records to make sure things were done. We talked to the manufacturer of the equipment, make sure all the agreements and everything are in order. So, you know, that's where we shifted from one set of risk to another. But we were very confident with the gas supply at the plant. Again, knowing, based on the performance during Winter Storm uri, the gas suppliers that were there, we already had some relationships with, so we were able to talk to them as far as the due diligence process. And, you know, we got our board comfortable with, hey, when a maintenance item comes up, we're going to pay the cost to make sure this thing is maintained because we need it to perform when. I mean, when it needs to perform, it needs to perform. So, you know, those are some of the concerns that we had. Certainly a new set. And then as I mentioned before, Ed, I can't. I mean, there was some risk from Rayburn jumping from essentially a $450 million asset to over a billion dollars. And what's that going to do to our finances? How's our balance sheet going to be able to handle that? Talking to our rating agencies, talking to the lenders, just making sure that all those pieces fit together. And that's ultimately, obviously, we decided it was worth Those change in risk and certainly looking back, it's been a great decision for us.
- [28:02]
Ed Crookes
And what about changing corporate culture? Is that also something you had to drive?
- [28:06]
David Naylor
So that was certainly part of it. I guess I looked at that as just being part of our normal growth process, if you will. I mean, yeah, we've got some, now some employees that are, some people that are not necessarily here in our Rockwall campus. But you know, a lot of the things that we try to do from a culture standpoint, you know, we try to maintain a flat organization here. And so those guys at the power plant are authorized to take care of what they need to take care of, just like the folks are here, you know, you know, Chris and I, and especially we don't need, we don't need to be involved in the day to day stuff. That's not our, not our role. You know, I don't need somebody calling me up and saying, hey, I had a screwdriver that busted, can I go buy another one? That's just, I mean, let's, let's go do that. So, you know, but people are empowered here to take care of the problems and recognize the challenges and implement solutions. And so that's something we always had to do. Certainly as we added staff and new expertise. You know, now we're trying to mesh these people into the culture. And I mean, we get, you know, people coming in from out of state that, you know, have to get used to what Texas means and you know, so we have all these things moving at the same time and, but, you know, and that's great. That's the other part that makes Rayburn, I think, makes our culture even better, is you get that diversity and ultimately you get rid of the pieces that don't make sense. And what you have left over is even better than what was before.
- [29:31]
Ed Crookes
Right. So we talked quite a bit about the past, about how Rayburn got to where it is today and the key steps that have been taken. Now let's think a little bit about the future. Of course, all the debate in the power industry in the US right now is dominated by new data centers for AI. The implications of that for power demand. Texas is one of the key locations in terms of tech companies wanting to add new data center capacity, lower growth expectations. What is that going to mean for Rayburn, do you think?
- [30:05]
David Naylor
One of the things that's good about, I think for us is we're already used to growth. I mean, we're 90% residential currently, so that's something that's kind of been in Our mix. But the Dallas area where we serve, we've been averaging 10% average annual growth for several years. And so it's just been a continual process. I mean, this is just, it's organic. It's not these, not these data centers. But we're used to that pace, used to having to make those changes. And I mean, our organic growth, I think over the next five to 10 years, we're expecting another 25% growth on that. So now you drop these data centers in and. Yeah, okay, I'll call them lumpy because they're really big loads that come in all at once. But we're already used to handling that. And now if the data centers that we're talking to come on board, I mean, Rayburn is going to. As far as the load serve, we're going to quadruple in size. You know, we're certainly talking to you about the power needs and what have you, but we feel this is something that is very doable and frankly, we look forward to the partnerships with those guys.
- [31:10]
Ed Crookes
Right. And to be clear about that, you're expecting 25% load growth over the next decade without any contribution from data centers. So data centers would be on top of that, Correct?
- [31:19]
David Naylor
Exactly. Wow.
- [31:20]
Ed Crookes
Okay. Right. So. And so where does that 25% growth come from then?
- [31:23]
David Naylor
So, you know, we've got a lot of folks that, you know, corporations have, I mean, not too many years ago, Toyota moved their headquarters to the Dallas area. And so you've got. As the Dallas metroplex continues to expand, it's coming into Rayburn's territory and the areas that our members serve. So we've got a lot of new developments, new subdivisions that are coming in. I mean, they're dropping 10,000 homes in an area just here, all over. Some of the areas that we serve are among the fastest growing in the nation. And so it's just people coming in and moving to the area.
- [32:04]
Ed Crookes
And so with demand growing, then you're planning to add new supply capacity as well. So you have Res 2, Rayburn Energy Station 2, which is what? So this is a new natural gas power plant that you're going to be building, correct?
- [32:16]
David Naylor
Yeah, Res two. So one of the attractions when we bought the Rayburn Energy station was it was originally sited for another plant on that same location. So a lot of the initial infrastructure was really already there. So when we, I mean, again, just with this growth, we anticipated it'd be a few years down the road before we start adding another power plant. But with the growth that we've had, we had to move that up. And so we now have are working on Rayburn Energy Station 2 or RES 2 and we did pivot. I mean the Rayburn Energy station is a combined cycle unit. Whereas these are going to be peaking units. They're dispatchable resources that will better meet the market and the needs of our, of our system. But we're talking about 570 megawatts of these peaking units, be 10 individual units there. And again it's just to help us with that growth and be able to capture some of the benefits of the existing infrastructure we have.
- [33:20]
Ed Crookes
And how is that project progressing? You hear a lot about problems in the supply chain. It's hard to get the skilled staff you need to put these plants up. It's hard to get crucial bits of equipment. The turbines sometimes seem to be in short supply. Is everything proceeding the way you'd like it to be?
- [33:38]
David Naylor
Yeah. So what we did is we actually decided and locked down the turbines and the transformers back in late 2024 and got those locked down. So that way we have the firm commitment for those, those key pieces of equipment.
- [33:53]
Ed Crookes
One of the other things I wonder about is then the attitude of your members to this. Obviously the question of power affordability is huge right now. It's very much risen up the agenda for everybody over the past year or two. And the question of the implications of rising demand for power prices is very much at the forefront of everyone's thinking in the industry I think. And clearly there is this argument that says, well if we add more capacity, if we have to make these investments that then need to be paid for, that's going to put upward pressure on prices. And so you find people sometimes pushing back against that. What have your members thought about that and how have you talked to them about the reasons why you're doing what you're doing and what the benefits are for them.
- [34:41]
David Naylor
So again that's one of the benefits of being a cooperative is the people who are paying the bills are the ones sitting on our board and sitting on our members board. So when we're having these conversations at the Rayburn level in our board meetings, we're talking about hey, here's the risk that we have. I mean, and frankly they all went through the Winter Storm URI as well. So they're very much aware of what Winter Storm URI meant. And plus they went through the Elliot's and the Heathers and the other storms that we've had subsequent to that which we've seen, hey this has been great and have added on to the Exact reasons of why we acquired the Rayburn energy station and why we want to have the Rez2. So, you know, we're talking about all that. We certainly have our cost projections that we provide and you know, we're looking at, hey, here's what we do if, you know, here's what we do with if we have RES2, here's what the costs are if we don't have RES2. And then, you know, Ed, one of the things that we're really starting to look at is probabilities. And you know, we're looking from, and I'm going to get way past my math background but, you know, we're looking at, instead of just, you know, what is the expected value, we're looking at a stochastic analysis of where the 5th and 95th percentiles and you know, what the ranges are, if you will, of if this happens, then costs may go here and if that happens, costs may go here. And we want to be somewhere in the middle. So all that being said, we have those discussions regularly. We'll go in and talk to our members and their boards as well to make sure that, hey, we got a strong buy in of this does make sense and we're all in agreement. You know, one of the other things that is a little unique to the ERCOT market is outside of the co op cooperative and muni spaces, you do have customer choice. And so we follow those costs of what those are in the competitive areas. And so that gives us a little bit of a benchmark as well. And I can tell you our members are killing it. And we feel that we can continue to be that way with the addition, even though we're having to spend these costs up front. It protects us on the backside with the risk and then it also gives us some cost certainty that we frankly didn't have before. So all that comes into play. I mean, we're very mindful of the affordability and we want to make sure that that is, you know, we address that and we, I mean, again, look, it's for Rayburn, it's our members money and we have to be good stewards. And ultimately that, because that's, ultimately, that's going to be our, I mean, that's our metric. But we feel that all these, it checks all those boxes. And again, the board was very much supportive of this decision.
- [37:32]
Chris Addison
To me, what David's answer highlights for what Raeburn is unique amongst cooperatives is, is the close alignment of the G and T Rayburn with its members. And so, you know, as David indicated, the people around the board room table that are making decisions for Rayburn are also the people that are paying the costs. And so there's a strong alignment between the members objectives and Raeburn spearheading what those objectives are and executing on those objectives. Objectives. So the strategy is really being set at the board table and the people who are making the decisions are the ones that are also accountable for the results as well. And so I think that's one thing that's very unique about Rayburn. And again, that's forged through a crisis. Yuri showed how that leadership team, both the members and the general managers of the members, working with David, working with stakeholders regionally and statewide at the legislature, that alignment then pays those dividends in terms of achieving business objectives in the right way.
- [38:47]
Ed Crookes
Right, got it. So what's next for Rayburn then? What should we be looking out for from you?
- [38:52]
David Naylor
The thing that we always want to be is opportunistic. I think that's kind of our, our mantra, if you will. You know, we were Winter Storm URI was. I mean, it was a crisis of epic proportions, but we were able to emerge from that. We were opportunistic in terms of, hey, securitization. Well, it's never been done by a co op before, but let's don't let that stop us. You know, we come out of that, the Yuri process, and we're looking to add generation and we have power plant that is up for auction, which historically we would have just walked away from, said, no, we don't want to mess with it, especially if you got private equity coming after it. There's no way that a cooperative is going to be able to do that. But no, we said, look, we can be opportunistic. This is an opportunity for us. Let's take it on. And boom, there we go. You know, we've added additional staffing, we've grown, expanded quite a bit that, you know, normally wouldn't have occurred. And certainly, I guess to Chris point, I don't sit still very well. I'm not sure if that's my consulting background or what, but you know, Rayburn has expanded faster than what a typical cooperative would do. And we have, and I mean, I'll brag on our employees, I think we got quality of folks that a lot of folks don't have. And we've got a culture here that I'm very proud of. We've got some great relationships with the communities that we work with. I mean, the city of Sherman, where the Rayburn energy station and where RES2 are located have been terrific to work with. And so, I mean, I think as we continue to go forward, talking about these data centers, these large loads, you know, look, we're going to continue to be opportunistic. Just because it hadn't been done before is not a hurdle for us. Gets back to that status quo is not company policy. So I always hesitate to say exactly because frankly, I don't know where Raymond's going to go. But I love the path that we're on. I love the people that we have in place and I love the attitude that we approach and tackle problems with. And so I'm very excited about where the, where the next steps are.
- [41:00]
Ed Crookes
So we really ought to wrap it up there. We really are out of time. But just before we go, just wanted one final thought about what lessons you think other leaders in the utility industry, maybe co ops, maybe of other kinds of utilities, can learn from Rayburn. When you think about your experience, the journey that you've been on since Yuri, what would you think would be the most important thing for other leaders in the industry to think about? Perhaps when they're facing a similar kind of crisis or just in terms of the general evolution of the industry overall.
- [41:36]
David Naylor
You can't let no get in your way. Winter Storm Yuri is a lesson in extremes. We had some extreme weather and we've seen these extreme events start taking place. And so when you're faced with these challenges that supposedly only happen once in 100 years, which is great, until you're in that one year that it happens, you can't let what has happened in the past and things where people have said, well, no, you can't do this get in your way. I mean, if we took that as an answer, then we wouldn't have securitization, we probably would have filed bankruptcy, which would not have been an option that we wanted to. If we had said, hey, private equity is not something that a cooperative can participate in auction with. And when we would have let that get in the way. And so you can't be scared of those situations. And I guess it really gets back to, you know, the book as far as the, you know, the title and what we, you know, I mean, honestly I'm a strong believer in status quo is not company policy. Innovation, I think is critical to be able to continue to move forward. And in the power industry, I mean, shoot, I've been here almost 30 years, over 30 years now in the power space. These are probably the most exciting times we've ever had in the power industry.
- [42:47]
Ed Crookes
Yeah, 100%. I do think that's absolutely right. Yeah.
- [42:50]
Chris Addison
I would add to what David said in a couple of different ways. First of all, let's hope you have a principled leadership team that's visionary and can communicate. Hopefully you start with that in your crisis because you're going to need to rely upon that as you go forward. But despite or in spite of or put that to the side, I think what I saw coming into this company was out of Winter Storm Erie was the strength of relationships with your stakeholders and making sure that you have good advisors and good communication and good communication with the people that you rely upon upon your day to day business. To be transparent and open and to be a good business partner and to surround yourself with good business partners that when a crisis like that comes to you, you can rely on those relationships and you can help each other weather that storm. That would be step one. Step two is to be transparent and communicative to your employee base and to really invest in an employee base that really understands the mission and understands their roles and understands the value that they have as part of a whole. And finally, I think, you know, getting back to the principled leadership part of it as well is, you know, mantra of Rayburn is member focused, member driven. Why are you in business? What is your purpose and what are you trying to achieve? And if you're clear on those goals, then that helps. When all the noise is going on, some of that noise can fall away because you already have essentially helped direct the path that you have to follow to get to the right outcome.
- [44:36]
Ed Crookes
Yeah, those really are great points. I think things I would entirely agree with and I think very important lessons for everyone in the industry to think about. Unfortunately though, we do have to leave it there. But it's been fantastic talking to you both. Thanks very much indeed, David.
- [44:51]
David Naylor
Appreciate it.
- [44:52]
Ed Crookes
Thank you, Chris.
- [44:53]
Chris Addison
Thank you.
- [44:54]
Ed Crookes
It has been great having you on. Fascinating conversation. Thanks very much for doing this today. Many thanks to our producers, Dan Cottrell, Stuart Duffy and Toby Biggins Gilchrist. And above all, many thanks to all of you for listening. This episode is also available in video format on YouTube. Just search for Energy Gang to find us there. We really value your feedback, so please do keep that coming. You can leave a comment there on YouTube or review on the podcast platforms and we'll be back soon with all the latest news and views on the future of energy. Until then, goodbye.