The Texas agency overseeing a $5 billion low-interest loan program to help build new power plants, and the firm it’s paying millions to manage it, missed red flags on an application and chose the project as a finalist for a loan.

When the issues came to light, the Public Utility Commission of Texas rejected the application on Sept. 4. But the incident put a cloud over the rollout of the newly-created Texas Energy Fund, angering lawmakers and raising questions about the agency’s ability to implement the program.

The PUC initially advanced the project put forth by Aegle Power, whose CEO Kathleen Smith in 2017 was convicted in what the U.S. Justice Department called an “ embezzlement scheme.” Aegle Power also included the name of another company, NextEra, which told the PUC it was included on the application without its knowledge or consent.

The PUC was created to regulate Texas’s electric utilities market. After Winter Storm Uri in 2021, its responsibilities ballooned as lawmakers passed measures aimed at strengthening the state’s power grid. Its staff grew by about 50% and its budget increased significantly, too.

Now the agency is tasked with administering a high-risk, taxpayer-backed loan program on a compressed timeline — something it has never done before.

“The role of your organization has changed dramatically,” state Sen. Paul Bettencourt, R-Houston, told PUC Chair Thomas Gleeson at a Senate Finance Committee hearing this month as lawmakers grilled the agency’s leaders about the debacle. “We’re expecting more from you. You’re not just a (electricity) rate organization anymore.”

Gleeson acknowledged at the hearing that the agency and Deloitte, the firm the PUC contracted to administer the Texas Energy Fund, should have caught the flaws in Aegle’s application.

Smith, Aegle’s CEO, did not immediately reply to requests for comment over text and email. She told the Houston Chronicle this month that there was “absolutely never any embezzlement.”

Gleeson said the project never would have won final approval for a loan because of existing guardrails in the process, but added that the PUC will review its processes and cut Deloitte’s $107 million contract by at least 10% percent.

“When you’re dealing with public funds, what you’re actually dealing with is the public trust,” Gleeson said. “It is clear that our contractor (Deloitte) needed to do better in their initial review of this company, that our staff needed to hold our contractor more accountable for that review.”

Voters approved a constitutional amendment to create the Texas Energy Fund last year. The program provides 3% interest loans to build or upgrade gas-fueled power plants — an idea lawmakers passed after the 2021 winter storm overwhelmed the state grid, triggering blackouts that left millions of Texans without electricity or heat for days in freezing conditions. Hundreds of people died.

The storm knocked out all forms of power generation, including gas-fired power plants. But lawmakers prioritized adding more gas plants to boost the state’s supply of dispatchable power — energy sources that can turn on at any time, unlike renewable sources that rely on wind and sun.

The PUC received 72 loan applications totaling more than $24 billion for projects that would produce more than 38,000 megawatts of power. On Aug. 29, the agency announced 17 projects totaling $5.4 billion in loans as finalists for the program before rejecting the Aegle application. The agency said more finalists could be excluded during the ongoing review process.

Lawmakers mandated in the bill that the PUC begin handing out funds by the end of 2025. That’s a timeline that some grid and energy experts called too aggressive.

“There’s a lot of pressure to get money out the door” on an agency that has no experience running a program like this, said Joshua Rhodes, a research scientist at the University of Texas at Austin.

And while the Legislature has increased funding and staff for the PUC over the past several years, lawmakers and experts said the agency likely needed more resources to handle all the new responsibilities it’s been given to shore up the grid and the state’s power market.

State Rep. Rafael Anchia, D-Dallas, voted for the Texas Energy Fund but said he was worried about the PUC’s ability to implement it.

“I’m sympathetic to the PUC because the Legislature put too much on their plate,” Anchia said.

Sen. Nathan Johnson, D-Dallas and a member of the Texas Energy Fund Advisory Committee, agreed.

“We have a lot of really good people in agencies that work really hard, and they need more resources,” he said. “But we’ve been telling them we want small government for two decades, not recognizing that small government is supposed to be limited in scope, not limited in ability.”

Notwithstanding the bumpy rollout, Walt Baum, president of Powering Texans, a trade group that represents power generators, said that the program is sound.

“Overall, it’s a good start to a program that I think is hopefully well on its way to achieving the legislature’s goal of 10,000 megawatts of new dispatchable generation,” he said.

Some experts were skeptical that the Texas Energy Fund would add a significant amount of power to the grid — a concern that laced debate in the Legislature when it was being considered against other ideas for shaping the electricity market to ensure better reliability.

Critics noted that the loans did not guarantee more power on the grid because companies could retire older power plants and electricity-hungry industries like artificial intelligence could eat up any new capacity.

And any new plants built with the loans could quickly become too expensive to operate, critics said. In the current market, gas plants have trouble competing with solar and wind power, which are cheaper energy sources to produce. Power generators and grid experts argued that for new gas plants to be viable, the state will have to fine-tune the market to help them compete.

Supporters of the program said the PUC had a rigorous plan in place to run it, and the bungling of the Aegle application was not reflective of a broader, flawed process.

“I think they’re up to it,” said Johnson, the state senator. “I’ve talked with the PUC about the overall conception of the program, and I was impressed with how well it was thought through.”

“They had sound rules and procedures going into this,” added former PUC Commissioner Will McAdams, who advised EmberClear Management, a finalist for a Texas Energy Fund loan, on its application. “I believe the PUC was able and is able to process those loans.”

Still, lawmakers sent the PUC an unambiguous signal: no more missteps. Some threatened to scrap a plan to add another $5 billion to the loan program unless the agency cleaned up its act.

“The Senate and House have sent clear messages to the Public Utility Commission reemphasizing the importance of a deliberate, transparent, and prudent review process,” the co-chairs of the Texas Energy Fund Advisory Committee said in a Sept. 4 statement. “The protection and stewardship of taxpayer money must be the highest priority.”

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This story was originally published by The Texas Tribune and distributed through a partnership with The Associated Press.