Updated: Texas Supreme Court Soon to Decide ERCOT’s Exposure

By: Nicholas Victor

To those wondering whether the Electric Reliability Council of Texas (ERCOT) will be held responsible for its actions and inactions during the deadly freeze that occurred in Texas in February 2021, your questions soon will be answered—at least in part.

In February 2021, Texans experienced a winter storm that brought snow, ice, and temperatures lower than the temperatures in Anchorage, Alaska. The storm triggered one of the worst energy infrastructure failures in Texas history, leading to shortages of water, food, and heat.

ERCOT is Texas’s independent electric power transmission system operator tasked with dispatching power on the state’s electric grid. During the storm, increased demand for electricity coupled with grid equipment problems forced ERCOT to initiate rotating partial grid shutdowns to prevent a complete failure of the grid. It is estimated that more than 4.5 million homes and businesses lost power, and somewhere between 240 and 700 people died as a result of the storm and the resulting power outages. Estimates for damages due to the storm and subsequent outages are around $195 billion.[1]

It is alleged that, during the storm, ERCOT allowed power generators to charge power retailers the maximum amount ($9,000/MWh, typically $50/MWh) for two days too long, resulting in retailers either passing off the cost to consumers or incurring $16 billion in unnecessary charges. Some retailers even went bankrupt.[2]

Across the state, numerous lawsuits were filed against ERCOT, with several now before the Texas Supreme Court. The Court’s review centers on two primary questions: (1) whether ERCOT is protected by sovereign immunity, and (2) if it is not, whether the Public Utility Commission (PUC) of Texas has exclusive jurisdiction to adjudicate the complaints.

On December 13, 2021, the Fourth Court of Appeals at San Antonio held that ERCOT is a governmental entity and that the PUC has exclusive jurisdiction over the plaintiff’s common-law claims against ERCOT. See Electric Reliability Council of Texas, Inc. v. CPS Energy, 648 S.W.3d 520 (Tex. App.—San Antonio 2021, pet. granted). On February 23, 2022, the Fifth Court of Appeals at Dallas, sitting en banc, held the opposite—that ERCOT is not an arm of the state entitled to sovereign immunity and that the PUC does not have exclusive jurisdiction over plaintiff’s common-law claims against ERCOT. See Panda Power Generation Infrastructure Fund, LLC v. Electric Reliability Council of Texas, Inc., 641 S.W.3d 893 (Tex. App.—Dallas 2022, pet. granted). On September 2, 2022, the Texas Supreme Court granted review of these lawsuits and, on January 9, 2023, the Court heard oral arguments.

The doctrine of sovereign immunity is unique to governmental entities and protects the State of Texas and its agencies and subdivisions from suit. If the Court finds ERCOT is an arm of the government, it is immune from suit; any claims against it would be adjudicated either under PUC’s regulatory scheme or not at all. If the Court concludes ERCOT is not an arm of the government, the lawsuits can go forward as long as the Court also concludes that the PUC does not have exclusive jurisdiction over claims against ERCOT.

Although this analysis seems cut and dried, the formation and configuration of ERCOT complicates the issues. Is ERCOT an arm of the government? The inception of ERCOT sheds some light on this question.

In 1975, the Texas Legislature passed the Public Utility Regulatory Act (PURA) and created the PUC to provide statewide regulation of rates and services of electric utilities. Within PURA, the legislature carved out the role of an independent system operator (ISO) and directed the PUC to appoint an independent organization to fill the role. The PUC appointed the already-existing independent organization ERCOT to be Texas’s independent system operator.[3]

ERCOT’s configuration and operations also provide some insight into this question. On the one hand, ERCOT is a private, membership-based organization operated by a CEO and board of directors and receives no tax funding. It is a private section 501(c)(4) non-profit corporation, whose incorporation preceded the legislation authorizing its public functions.

On the other hand, ERCOT serves the public purpose of operating and managing the electrical grid. Its role is legislatively authorized, and it only performs statutory functions delegated to it by the PUC and, by extension, the legislature. Additionally, its board of directors are selected using a statutorily specified selection criteria.

The Court’s decision on ERCOT’s immunity is significant. A holding that ERCOT is immune indicates an expansion of the scope of the sovereign immunity principle in Texas. A holding that ERCOT is not immune will open the floodgates for lawsuits against ERCOT, which could have a powerful impact on the energy distribution market in Texas and perhaps also on consumers.

However, even if ERCOT is not immune from suits, it may be protected by jurisdictional limitations of Texas state courts. The Texas Constitution gives district courts jurisdiction over all actions unless exclusive jurisdiction is conferred by other law. An administrative agency has exclusive jurisdiction only when the legislature has granted it sole authority to adjudicate a dispute. If an agency has exclusive jurisdiction, a party must exhaust all administrative remedies before seeking judicial review.[4]

Thus, if the PUC has exclusive jurisdiction over a claim against ERCOT, the party seeking redress for that claim must first do so through the PUC adjudication process. The PUC provides corrective remedies for claimants; but, it is not authorized to award monetary damages.[5] This creates somewhat of an all-or-nothing paradigm for claimants seeking monetary remedies.

UPDATE

On June 26, 2023, in a 5-4 ruling, the Texas Supreme Court held that ERCOT enjoys sovereign immunity as an arm of the government.[6] Chief Justice Hecht delivered the opinion, reasoning that ERCOT is immune due to its composition and for pragmatic purposes:

“[ERCOT] provides an essential governmental service. While the Legislature has not expressly stated a desire that ERCOT be immune from suit, as it did in Amex Properties, the ‘the governing statutory authority’—PURA—nevertheless ‘demonstrates legislative intent to grant [ERCOT] the nature, purposes, and powers of an arm of the State government.’ ERCOT operates under the direct control and oversight of the PUC, it performs the governmental function of utilities regulation, and it possesses the power to adopt and enforce rules pursuant to that role. In addition, recognizing immunity satisfies the ‘political, pecuniary, and pragmatic policies’ underlying immunity because it prevents the disruption of key governmental services, protects public funds, and respects separation of powers principles.”[7]

The majority concluded governmental immunity benefits the public by preventing disruptions of key governmental services, and there are few things more fundamental to the state’s ability to function than its electricity grid.

The four-justice dissent argued that ERCOT’s nature and history indicate that it was never vested with the “nature, purposes, and powers of an arm of the state” sufficient to bestow it with sovereign immunity.[8] Further, the dissent urged that this holding leaves ERCOT unaccountable to the public.

The majority countered this retort by explaining that ERCOT is accountable to the state through the legislature. Justice Hecht referenced certain legislation already enacted in response to Uri, including the Default Balance Financing act,[9] an overhaul of ERCOT’s board of directors,[10] and an omnibus bill that required weatherization of electric utilities’ assets.[11]

In line with this rationale, the dissent urged the Texas Legislature to abrogate the decision and pass legislation waiving ERCOT’s newfound immunity.[12]