Third Court of Appeals Decides Public Utility Commission Exceeded Authority During Winter Storm Uri

by Wyatt Conoly and Samantha Miller

Luminant Energy Company (“Appellants”) filed a direct appeal in March 2021 to the Third Court of Appeals challenging the Public Utility Commission of Texas’s (“PUC’s”) First and Second Orders (the “Orders”) as competition rules under Section 39.001(e) of the Texas Utilities Code. On March 17, 2023, the Court filed its opinion reversing and remanding the case back to PUC. Luminant Energy Co. LLC v. Pub. Util. Comm’n of Tex., No. 03-21-00098-CV (Tex. App.—Austin Mar. 17, 2023, pet.filed). In addition to issues related to the Court’s subject matter jurisdiction, two main issues that were considered by the Court were whether the Orders were considered de facto competition rules under Chapter 39 of the Texas Utilities Code, and whether the Orders exceeded PUC’s statutory authority. The Court held that the Orders were in fact de facto competition rules and exceeded PUC’s statutory authority. The PUC has filed a petition for review to the Texas Supreme Court.

Scarcity Price Mechanism
In 2006, PUC created a rule that established a general outline of a scarcity pricing mechanism (“SPM”) for use during high demand periods. The rule required ERCOT to establish rules that add specificity to SPM. ERCOT’s rules include a complex mathematical formula and enumerate several variables to determine when and how scarcity pricing takes effect. The scarcity pricing is limited to a system-wide offer cap of $9,000/megawatt hour (“MWh”). The purpose of the windfall price is to incentivize generators, who are compensated only for energy sold, to come online when demand (also referred to as “load”) exceeds supply. This helps ensure the equilibrium of flow of generation and consumption of energy system frequency of 60 Hertz is maintained in order to prevent the risk of grid collapse or damage to grid equipment.

Winter Storm Uri and PUC Orders
Winter Storm Uri (“Uri”) hit Texas on February 12, 2021, causing significant blackouts until February 18, 2021. Uri took out almost 50 percent of the generation available and caused the system’s frequency to drop below 59.4 Hertz for approximately four minutes and three seconds. During the Storm, SPM indicated the market clearing prices to be just over $1,200/MWh. During the 87th Legislative Session in 2021, then-Chair of PUC, DeAnn Walker, spoke at a Hearing before the Senate Committee on Business and Commerce about her conclusion that during Uri the market price of $1,200/MWh indicated that SPM malfunctioned by erroneously disregarding the lost load for purposes of computing price. SPM instead should have moved prices in an inverse correlation with reserve capacity, and that at load shed, maximum demand had been reached, such that maximum price cap should be in effect. This was an issue because the clearing prices signal to market participants that additional generation is needed to maintain the frequency of the grid. As a result of the malfunction, SPM was sending the market false signals indicating additional generation was not needed.

To address the false signals, PUC held Open Meetings on February 15 and 16 issuing separate orders during each meeting. The First Order stated, “if customer load is being shed, scarcity is at its maximum, and the market price for energy needed to service that load should also be at its highest.” PUC issued the order because it determined the $1,200/MWh clearing price to be “inconsistent with the fundamental design of ERCOT,” thus directing ERCOT to ensure that firm load that is being shed is accounted for in ERCOT’s scarcity pricing signals. ERCOT adjusted its price algorithm accordingly to cause clearing prices to increase to the $9,000/MWh cap. The next day, PUC revisited the First Order and issued the Second Order which was nearly identical to the first but rescinded the language that allowed for retroactive repricing. As a result, ERCOT issued settlement statements to market participants that reflect the $9,000/MWh clearing price.

Subject Matter Jurisdiction
PUC challenged the Court’s subject matter jurisdiction on five separate bases: (1) Appellants’ claims are moot; (2) PUC’s rules are valid until adjudicated void; (3) Appellants’ alleged injury is non-redressable; (4) the Orders were not competition rules within the meaning of Section 39.001(e); and (5) the Appellants are not actually challenging the Orders’ validity, they are challenging the application. The Court held that subject matter jurisdiction was proper, disagreeing with each of these arguments.

Mootness
The Third Court of Appeals held that the Appellants’ Claims were not moot, because a live controversy existed as to whether Appellants were required to pay what PUC invalidly charged in excess of what should have been charged. PUC argued that, under Texas case law, issues relating to the validity of a PUC order are rendered moot upon the expiration of that order. In other words, if the order is expired, so too is any controversy surrounding that order. The Court disagreed. It held that PUC’s temporary orders had caused financial damage to the Appellants. Those Orders had been timely challenged by Appellants and the amounts payable set pursuant to those Orders were either due and payable or paid under protest. Thus, the legality of the Orders is a live controversy. Whether the Orders had expired had no bearing on that controversy.

Valid until Void
The Court held that it had the authority to grant an aggrieved party relief with respect to the material PUC rules. PUC pointed out that under the Government Code, even if the Orders were not adopted under the Emergency Act, the rule was “voidable.” Tex. Gov’t Code § 2001.035. PUC argued that, given this statute and Texas case law regarding voidable rules, the “voidable” status of the rule entails that any such rule is valid until adjudicated void. Retroactive relief for any action performed prior to a declaration that the rule is void is therefore not available. The Court disagreed. In reviewing the case law, the Court found the current case to be distinct from those cited by PUC, as none of the cases cited stated that courts lack jurisdiction to remedy action undertaken pursuant to a voidable order before it is adjudicated as void. The Court compared voidable private contracts with the current voidable PUC rule, noting that a voided private contract in fact entitles each party to retroactive relief: a recovery of the consideration already paid under the contract. Thus, by parity of reasoning, there is no bar to retroactive relief for voidable rules solely because they are voidable rules. The Court acknowledged the difficulties associated with remedying damages after the passage of some time; however, it pointed out that the Appellants here timely filed their direct appeal within 15 days after the First Order was issued. In sum, the Court found PUC’s argument, under the specific circumstances of the case, unpersuasive.

Redressability
PUC also argued that the Utility Code and the Government Code only allowed for the Court to remand a rule held to be invalid back to PUC; therefore, the grievance complained of could not be redressed by the Court. Additionally, PUC argued that ERCOT was the proper defendant instead of PUC, and that PUC did not have the authority to order ERCOT to undertake such repricing. The Third Court of Appeals disagreed, holding that it had the authority either to remand the case for a ruling consistent with its holding, or to reverse the rule outright under Section 39.001(f) of the Texas Utilities Code. Additionally, the Court held that PUC had complete authority to order ERCOT to undertake such repricing under Section 39.151 of the Texas Utilities Code and Title 16, Texas Administrative Code Section 25.501(a), and thus PUC was the proper party in the case.

PUC additionally argued that it was too late under the Nodal Protocols for ERCOT to act, as the requisite notice had not been provided. The Court held that the time bar implemented by Nodal Protocols applied to actions taken on ERCOT’s own initiative and had no effect on whether ERCOT could effect a price correction by order of the Court.

Order is a Rule
The Court held that the Orders were subject to the direct appeal process provided by the Texas Utilities Code, since the Orders were competition rules within the meaning of the Texas Utilities Code Section 39.001(e). When determining whether the Orders are a rule or not, PUC looked at the Administrative Procedure Act’s (“APA”) definition of “rule” which defines rule as a “state agency statement of general applicability that:
(i) implements, interprets, or prescribes law or policy; or (ii) describes the procedure or practice requirements of a state agency.” Tex. Gov. Code § 2001.003(6). APA further indicates that a rule includes a repeal of or amendment to a previous rule but does not include a statement regarding only the internal management or organization of a state agency and not affecting private rights or procedures. The Court found that, since the Orders and directions to ERCOT were intended to affect the rights of private parties, and did so, it was a rule. Additionally, the Court found that Section 25.505 of Title 16, Texas Administrative Code is a rule, and the Orders had the effect of amending such rule by creating an extratextual exception to a previous rule which constitutes an amendment.

Validity of the Rules
PUC finally argued that the Court lacked jurisdiction because Appellants actually were challenging the application, rather than the validity of the Orders. The Court disagreed, finding that the face of Appellants’ pleading challenged the validity of the guidance order issued by PUC, which expressly required ERCOT to take steps necessary to ensure that energy prices would clear at $9,000/MWh during the duration of the Energy Emergency Alert Level 3 event.

Finding none of PUC’s arguments persuasive, the Court thus held that it had jurisdiction to decide the case.

Court Finds PUC Exceeded its Authority
The Court found the substance of the Orders exceeded PUC’s statutory authority because, as argued by Appellants, the subject of the Orders “contravene statutory authority and run counter to statutory objectives that electricity prices should be determined by the normal forces of competition.” A state administrative agency obtains its power from the legislature who expressly confers power upon the agency, as well as those reasonably necessary to carry out their express functions or duties. If an agency goes beyond such power in implementing a rule, the rule is invalid. In determining PUC’s authority, the Court considered the statutory language in Sections 39.001 and 39.151 of the Texas Utilities Code. In doing so, the Court determined that Section 39.151’s direction for PUC (or independent organization if PUC delegates this authority) to ensure system reliability was not an exception to Section 39.001’s preference for reliance on competition rather than regulatory authority in setting prices. Section 39.001 usage of clear language showing a preference of competition to the “greatest extent feasible” for setting prices, and Section 39.151 being silent on the issue, indicated that actions of PUC pursuant to Section 39.151 must be subject to the preference
provided in Section 39.001. Section 39.001 further limited PUC rules by requiring the rules to be “limited so as to impose the least impact on competition.” In issuing the Orders to set the market clearing price at the market cap of $9,000/MWh and directing the market price for energy be at its highest while there was load shed, PUC eliminated competition and ordered the maximum impact on competition by setting a single price. By doing so, PUC exceeded its statutory authority granted by the Legislature. Consequently, the

Court reversed the Orders and remanded back to PUC for further proceedings consistent with the ruling.

Wyatt Conoly is an Associate in the Firm’s Litigation Practice Group. Samantha Miller is an Associate in the Firm’s Energy and Utility Practice Group. If you have any questions or would like additional information related to this article or other matters, please contact Wyatt at 512.322.5805 or wconoly@lglawfirm.com, or Samantha at 512.322.5808 or smiller@lglawfirm.com.