Brazos Electric Power Cooperative Inc., the biggest electricity co-op in Texas, won bankruptcy-court approval to poll its creditors on a $1.4 billion compromise over allegedly exorbitant power purchases during the extreme winter storm that hit the state last year.

The proposed settlement would ease the burden on Brazos and its member cooperatives from the storm-related bills that drove it into chapter 11. Brazos has been fighting the nearly $1.9 billion invoice it received from the Electric Reliability Council of Texas, or Ercot, saying the Texas grid operator overcharged for electricity after winter storm Uri, which knocked out power to millions for days and spiked electricity prices.

Power generators including Calpine Corp. and NRG Energy Inc. that sold electricity to Brazos would have two choices under the settlement plan. They could collect from Brazos in full over 30 years or opt for quicker payments by taking on average a discount of nearly 24 cents on the dollar on their invoices.

Brazos would make up front payments totaling over $1.15 billion to Ercot, the state’s clearinghouse for buying and selling electricity, to distribute to generators still owed money from bills the co-op incurred during the winter storm. In addition Brazos would make 12 payments annually of up to $13.8 million each and hand over a portion of the $116 million in proceeds from the sale of its generation assets, according to court documents filed Tuesday.

Judge David Jones of the U.S. Bankruptcy Court in Houston will take up approval of the chapter 11 plan in November, he said at a court hearing. The judge on Tuesday authorized Brazos to solicit votes from creditors on the restructuring plan, and the plan is expected to become effective by Dec. 30 if approved.

Brazos has argued that Ercot overcharged for power during winter storm Uri when it artificially raised prices to $9,000 per megawatt hour to spur generators to produce more power during the energy crisis, compared with about $22 per megawatt hour in 2020.

Generation companies argued that Brazos’ effort to pay less than the full $1.9 billion simply shifts the burden onto them and the entire Texas electricity market.

The payments to Ercot and other creditors will be funded partly by a debt financing raised by Brazos as well as by the smaller member-cooperatives that collectively own it.

In a key decision in January, Judge Jones ruled that money owed to Ercot wouldn’t receive priority payment status in the bankruptcy case ahead of unsecured creditors. Litigation over the amount of Ercot’s claim against Brazos was paused to allow for negotiations that yielded the proposed deal.

Under the plan, Brazos would pay its general unsecured creditors, including a subsidiary that owns a minority interest in the Sandy Creek Energy Station coal-fired power plant, just over 89 cents on the dollar of the full amounts owed to them.

In an objection to disclosures made by Brazos, South Texas Electric Cooperative, one of the market participants owed money by Brazos, said the plan proposes to pay Ercot approximately $500 million less than what Brazos owes.

STEC’s objection said the plan doesn’t clearly state that it leaves Ercot, and the market participants who bought power through the grid operator, with a shortfall and doesn’t explain Ercot’s rationale for agreeing to compromise its claim. STEC also said the disclosures fail to explain why unsecured creditors and others are recovering more than Ercot.

The Texas legislature has required utilities that can’t pay the full amounts they owe from winter storm Uri to close the shortfall by raising money through a securitization financing backed by surcharges on customers’ bills, lawyers for STEC also noted. Brazos’ member cooperatives are using securitization financing to pay just a portion of what they owe Ercot, rather than to fund all of the shortfall, according to the objection.

Creditors will have the chance to vote on the chapter 11 plan, which requires court approval to become effective.

Write to Soma Biswas at soma.biswas@wsj.com