Texas Supreme Court to Determine ERCOT’s Winter Storm Uri’s Liability

by Rick Arnett

On January 9, 2023, the Texas Supreme Court heard oral arguments in Electric Reliability Council of Texas, Inc. v. CPS Energy, 648 S.W.3d 520 (Tex. App.—San Antonio 2021, pet. granted) and Panda Power Generation Infrastructure Fund, LLC v. Electric Reliability Council of Texas, Inc., 641 S.W.3d 893 (Tex. App.—Dallas 2022, pet. granted). City Public Service Energy (“CPS Energy”), San Antonio’s municipally-owned utility provider, and Panda Power Generation Infrastructure Fund, LLC (“Panda”) brought unrelated lawsuits against the Electric Reliability Council of Texas (“ERCOT”). In both lawsuits, ERCOT claimed sovereign immunity and asserted that the Public Utility Commission of Texas (“PUC”) has exclusive jurisdiction over the various claims.

The Texas Supreme Court took up both cases on the same day to decide whether ERCOT is a governmental entity entitled to sovereign immunity and if PUC has exclusive jurisdiction over ERCOT-related claims. Put differently, the Court will soon decide whether ERCOT is liable for Winter Storm Uri-related events, including roughly 200 property damage, personal injury, and wrongful death lawsuits brought by victims of the storm. On a broader level, the Court will further clarify what entities, absent express statutory delegation, are a “governmental unit” entitled to sovereign immunity and further define the scope of PUC’s exclusive jurisdiction. As such, both cases have far-reaching implications for Texas, its agencies, and its citizens.

I. CPS Energy

CPS Energy directly relates to Winter Storm Uri and its impact on the ERCOT market. In response to Winter Storm Uri-related bankruptcies, ERCOT “uplifted” insolvent market participants’ default amounts to non-defaulting entities including CPS Energy. CPS Energy subsequently sued ERCOT for breach of contract, negligence, gross negligence, negligence per se, and breach of fiduciary duty.

A. The San Antonio Court of Appeals found that ERCOT is a governmental unit and, therefore, entitled to sovereign immunity.

The San Antonio Court of Appeals determined that because ERCOT is “an entity that operates as part of a larger governmental system” and “derive[s] [its authority]…from laws passed by the legislature under the constitution,” it is a “governmental unit” for purposes of sovereign immunity. To reach its conclusion, the court opined that ERCOT Protocols “have the force and effect of statutes,” ERCOT is subject to the Sunset Act and is therefore statutorily defined as a state agency, and ERCOT’s “certification arose out of a legislative delegation of authority to the PUC.” Moreover, the court found that CPS Energy’s claims fall within PUC’s exclusive jurisdiction and, therefore, CPS Energy failed to exhaust its administrative remedies before suing ERCOT in district court.

B. The Texas Supreme Court focused on ERCOT’s autonomy.

At the Texas Supreme Court, CPS Energy counsel focused on the sovereign immunity issue. Counsel emphasized that the legislature has never granted ERCOT, as a private entity, sovereign immunity and the court should not determine this “policy laden” issue. Moreover, Counsel asserted that a private entity is not entitled to sovereign immunity merely because it serves a public service and is subject to heavy regulation.

The Court questioned CPS Energy’s underlying assumption that ERCOT is a private entity and indicated that the legislature’s control over ERCOT may be a controlling factor. Justice Bland questioned whether, based on recent legislation regarding ERCOT and Winter Storm Uri-related securitization, “the legislature considers that it has control over the governance of ERCOT” similar to its control over state agencies. Justice Blacklock asked if PUC has authority “to control and dictate everything ERCOT does or does not do.” Counsel responded that the Texas Supreme Court recently held that “essentially complete [governmental] oversite was not enough to confer immunity.” And, the legislature’s selection of the ERCOT Board is too attenuated to provide the political accountability that justifies “immunity’s unfairness.” Finally, ERCOT primarily performs operational functions that are not subject to PUC control. As such, in the absence of clear legislative intent, ERCOT is not entitled to sovereign immunity.

ERCOT counsel focused on the exclusive jurisdiction issue emphasizing that, based on the Public Utility Regulatory Act’s (“PURA’s”) pervasive regulatory regime, CPS Energy’s claims belong in front of PUC. If the court allows CPS Energy to pursue its claims “in its hometown district court,” all other market participants will similarly abandon the regulatory process and “chaos will follow.” As such, it is imperative that PUC have exclusive jurisdiction over CPS Energy’s claims.

II. Panda Power

In Panda Power, Panda took issue with ERCOT’s “CDR Reports” that, pursuant to PUC rules, ERCOT issues to predict future electricity demand and forecast market participants’ ability to meet that demand. According to Panda, ERCOT fabricated its 2011 and 2012 CDR Reports and intentionally “broadcast[ed] false market information throughout Texas” to encourage market participants to build new power generation. Panda asserted that because the CDR Reports predicted a generation shortfall, it invested $2.2 billion to build three new power plants. After Panda initiated construction, ERCOT revised the CDR Reports and, in contrast to its initial forecast, predicted excess generation capacity. Accordingly, Panda sued ERCOT for fraud, negligent misrepresentation, and breach of fiduciary duty.

A. The Dallas Court of Appeals found that ERCOT is not a governmental unit and, therefore, not entitled to sovereign immunity.

In “Panda I,” the Dallas Court of Appeals first found that ERCOT was a governmental entity entitled to sovereign immunity. But in response to three intervening Texas Supreme Court cases, and after Winter Storm Uri, the court revisited its holding sitting en banc. Specifically, it reviewed the Supreme Court’s reasoning that the Court has “yet to extend sovereign immunity to a purely private entity—one neither created nor chartered by the government—even when that entity performs some governmental functions.” And, because ERCOT is a “private, membership-based, nonprofit corporation that was neither created nor chartered by the government,” the Dallas Court of Appeals reversed Panda I finding that ERCOT is not a governmental unit entitled to sovereign immunity.

B. The Texas Supreme Court focused on PUC’s control over ERCOT.

At the Texas Supreme Court, ERCOT counsel focused on ERCOT’s sovereign immunity and emphasized that, without sovereign immunity, lawsuits around the state would lead to conflicting results and, ultimately, “regulatory collapse.” Counsel asserted that because ERCOT has “no autonomy from the state” and cannot spend or incur debt without the state’s permission, it is a private organization “in name only.” It is therefore entitled to sovereign immunity.

The Court first scrutinized ERCOT’s conflicting lawsuit argument and questioned whether PUC’s exclusive jurisdiction would remedy this issue. Counsel responded that there are claims outside PUC’s exclusive jurisdiction, such as gross negligence, that would subject ERCOT to conflicting judgments. Justice Bland addressed ERCOT’s decertification process and asked whether ERCOT’s assets and liabilities would wind up similar to those of a private corporation. Counsel conceded that ERCOT’s assets would transfer to a successor organization. But because the state generated ERCOT’s assets through regulatory action, the state would maintain control over the assets in the event of a transfer. Thus, ERCOT’s asset and liability transfer would not be a purely private transaction.

Panda’s counsel also focused on the sovereign immunity issue and emphasized that ERCOT exercised independent discretion over the CDR Reports. And, because ERCOT did not engage in a governmental or regulatory function when it produced the CDR, sovereign immunity was not appropriate in this context. Counsel also addressed ERCOT’s fiscal structure and opined that none of ERCOT’s revenue is subject to the legislative appropriation process. As such, due to the lack of governmental control and “other typical markers for modern justifications of immunity,” ERCOT is not entitled to sovereign immunity.

The Court questioned whether ERCOT had complete discretion over the CDR. Specifically, Justice Blacklock asked if PUC has “the power” to dictate how ERCOT compiles its CDRs and, if it does, whether ERCOT is actually acting with independent authority. He indicated that PUC does have authority to influence ERCOT’s CDRs but, in this instance, chose not to. As such, he seemingly rejected Panda’s argument that ERCOT functions in a private capacity.

C. Conclusion

It appears that ERCOT’s autonomy is the controlling factor for purposes of sovereign immunity. Although the Court questioned other factors, such as ERCOT’s fiscal structure and whether ERCOT ultimately serves the general welfare or itself for a profit motive, the justices consistently returned to the legislature and PUC’s control over ERCOT’s operations. ERCOT’s exclusive jurisdiction defense is a question of statutory interpretation and, specifically, whether PURA grants PUC

exclusive jurisdiction over CPS Energy and Panda’s claims. The Texas Supreme Court will now consider these factors to determine whether ERCOT is subject to Winter Storm Uri-related liability or, in the words of ERCOT counsel, whether “chaos” will ensue.

Rick Arnett is an Associate in the Firm’s Energy and Utility Practice Group. If you would like additional information or have questions related to this article or other matters, please contact Rick at 512.322.5855 or rarnett@lglawfirm.com.