In the Courts

Water cases

San Antonio Water Sys. v. Matiraan, Ltd., No. 04-22-00138-CV, 2023 WL 2290301 (Tex. App.—San Antonio Mar. 1, 2023, no pet. h.).

The San Antonio Water System (“SAWS”) was granted a conservation easement (the “Easement”) for the purpose of limiting any use of the property at issue that will adversely impair or interfere with the recharge of the Edwards Aquifer. A property owner acquired land burdened by the Easement and sought to terminate the Easement. SAWS submitted a plea to the jurisdiction, claiming it was entitled to governmental immunity, which was denied by the trial court. SAWS appealed, and the present case examines whether governmental immunity applies. To make this determination, the court analyzed whether SAWS entered the Easement in its proprietary or governmental capacity.

The court’s analysis was guided by the four factors from Wasson Interests, Ltd. v. City of Jacksonville, 559 S.W.3d 142, 154 (Tex. 2018): 1) whether SAWS’s act of entering into the Easement was mandatory or discretionary; 2) whether the Easement was intended to benefit the general public or only those within SAWS’s corporate limits; 3) whether SAWS was acting on the State’s behalf or its own behalf when it entered the Easement; and 4) whether SAWS’s act of entering into the Easement was sufficiently related to a governmental function to render the act governmental even if it would otherwise have been proprietary.

SAWS concedes that its entry into the Easement was discretionary, so the first factor supports a finding of a proprietary act. The court found that SAWS’s action was motivated by benefits to the general public, which supports the determination of a governmental act. Due to the importance of the Edwards Aquifer to Texas, San Antonio’s legislative determinations regarding regulation of Edwards Aquifer recharge, and the language of the Easement, the court found that SAWS acted as an arm of the government in entering the Easement. This weighs in favor of the conclusion that SAWS’s entry into the Easement was a governmental act. The court also concluded – in agreement with SAWS – that because conservation and protection of the Edwards Aquifer is a key component of SAWS’s provision of water service, SAWS’s entry into the Easement was related to a governmental function.

In sum, the court held that SAWS’s primary purpose in entering the Easement was to benefit the general public. The utility was acting as an arm of government, rather than on its own behalf, when it entered the Easement, and the utility’s decision to enter the Easement was related to a governmental function. Because SAWS’s entry into the Easement was a governmental act, governmental immunity applies and the denial of SAWS’s plea to the jurisdiction was reversed.

Hidalgo County Water Improvement Dist. No. 3 v. Hidalgo County Irrigation Dist. No. 1, No. 21-0507, 2023 WL 3556685 (Tex. May 19, 2023).

A water improvement district and an irrigation district provide water and irrigation services in Hidalgo County. Negotiations between the two for a pipeline extension failed, and the improvement district filed a condemnation action. The irrigation district objected, claiming that the improvement district could not establish the paramount public importance of its pipeline.

The Court typically applies the paramount public importance doctrine in condemnation proceedings. However, in this case, the irrigation district filed a plea to jurisdiction, arguing that it had governmental immunity from the condemnation suit and that the Legislature had not waived that immunity. The trial court agreed, granted the plea, and dismissed the suit. The court of appeals affirmed, and the improvement district filed a petition for review. The question before the Court in this case is whether governmental immunity applies to a condemnation proceeding, and specifically, whether the improvement district’s condemnation proceeding is barred by governmental immunity.

The improvement district argued that courts should apply the paramount public importance doctrine to condemnation suits, while the irrigation district claimed that such doctrine only comes into play after a court determines that the Legislature has waived the condemnee’s immunity. In its analysis, the Court stated that an important purpose of governmental immunity is to protect the public from potential consequences of “improvident actions of their governments.” Condemnation proceedings are not considered an improvident action but are the lawful authority of the government to appropriate property for the benefit of the public. The court noted that applying governmental immunity would undermine the condemnation power that the Legislature specifically granted to condemning authorities to fulfill a public need.
The court held that the long-standing paramount public importance doctrine provides an adequate framework for comparing two public interests, and replacing this framework by applying governmental immunity would skew the analysis in condemnation proceedings to ensure the public condemnee will always prevail. Ultimately, the court held that governmental immunity does not apply in condemnation proceedings, and accordingly reversed and remanded the case.

Litigation Cases

City of League City v. Jimmy Changas, Inc., No. 21-0307, 2023 WL 3909986 (Tex. June 9, 2023).

In City of League City v. Jimmy Changas, Inc., the Texas Supreme Court determined whether a city’s participation in an economic development agreement under Chapter 380 of the Texas Local Government Code is a protected governmental function which preserves the City’s sovereign immunity, or a proprietary function that makes it subject to actions for breach of contract. In other words, was the City acting on the State’s behalf or was it taking an action as a private corporation, for the private advantage and benefit of the locality and its inhabitants.

League City and Jimmy Changas entered into a contract under Chapter 380 of the Texas Local Government Code, which authorizes cities to provide economic incentives to stimulate commercial activity. The agreement stipulated that the city would reimburse certain fees and taxes to Jimmy Changas upon successful establishment of a restaurant and creation of jobs in League City. However, following the completion of the project, League City reneged on its commitment, leading Jimmy Changas to file a lawsuit. In response, the City argued it had immunity due to the assertion that contracts under Chapter 380 were governmental functions, hence immune to litigation, an argument rejected by both the trial court and the court of appeals, who held that the City acted in its proprietary capacity.

At the Supreme Court, League City argued that engaging in the contract was a governmental function because (1) it falls within the statutory list of governmental functions, and (2) even if it doesn’t, it falls within the statute and the common law’s general definitions. The Supreme Court disagreed with both arguments.

The Court held that Chapter 380 contracts do not parallel those explicitly classified as governmental in the Texas Tort Claims Act (“TTCA”). TTCA identifies community development activities under Chapter 373 and urban renewal activities under Chapter 374, without any indication that local economic development activities under Chapter 380 should be impliedly included.

Having determined that the act of engaging in a contract for local economic development was not included in the statutory list of governmental functions, the Supreme Court looked to the general definitions. In Wasson Interests, Ltd. v. City of Jacksonville (commonly referred to as Wasson II), the Texas Supreme Court set forth four factors that determine whether a city’s contractual conduct is governmental or proprietary:
(1) was the act mandatory or discretionary?; (2) was it intended to benefit the general public or the City’s residents?; (3) was it on its own behalf or the behalf of the State?; and (4) was it sufficiently related to a governmental function to render the act governmental even if it would otherwise have been proprietary? The Court held that the decision to enter into a contract with Jimmy Changas was discretionary, it principally served the City’s residents, and the City was not acting as a state agent. Moreover, the actions undertaken by the City were not sufficiently related to a governmental function that they could be construed as governmental. As such, the court concluded that the City did not have immunity from the lawsuit.

CPS Energy v. Electric Reliability Council of Tex., No. 22-0056 (Tex. June 23, 2023).

In CPS Energy v. Electric Reliability Council of Texas, a consolidated appeal of two cases wherein the Electric Reliability Council of Texas, Inc. (“ERCOT”) was the defendant, the Texas Supreme Court answered three questions concerning ERCOT: (1) is ERCOT a governmental unit as defined in the TTCA and thereby entitled to pursue an interlocutory appeal from the denial of a plea to the jurisdiction?; (2) does the Public Utility Commission of Texas (“PUC”) have exclusive jurisdiction over the parties’ claims against ERCOT?; and (3) is ERCOT entitled to sovereign immunity? The Court answered all three questions in the affirmative.

As stated above, the Court had consolidated two separate cases: CPS Energy v. ERCOT, No. 22-0056 (on appeal from the 4th Court of Appeals, 648 S.W.3d 520) and ERCOT v. Panda Power Generation Infrastructure Fund, LLC, No. 22-0196 (on appeal from the 5th Court of Appeals, 641 S.W.3d 893).

CPS Energy arose from the 2021 Winter Storm Uri. In that case, CPS Energy sued ERCOT for various claims related to ERCOT’s actions taken during the storm. Additionally, CPS sued ERCOT for requiring load servers such as CPS Energy to make up for payments that should have been made by market participants, except the market participants had defaulted on such payments. Although the payments were only required so that ERCOT could pay generators for load, CPS argued that it required CPS, a publicly-owned entity (owned by the City of San Antonio), to unconstitutionally lend credit to cover private debts.

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.

Although the cases before the Court stemmed from different facts and different parties, they raised the above-mentioned three overlapping jurisdictional questions concerning ERCOT.

IS ERCOT A GOVERNMENTAL UNIT UNDER THE TTCA?
The first question faced by the Court was whether ERCOT is a governmental unit as defined in the TTCA and thereby entitled to pursue an interlocutory appeal from the denial of a plea to the jurisdiction. If ERCOT is deemed a governmental unit under the TTCA, Section 51.014(a)(8) of the Civil Practice and Remedies Code authorizes the interlocutory appeal of a trial court order granting or denying its plea to the jurisdiction. See Tex. Civ. Prac. & Rem. Code § 51.014(a)(8).

TTCA defines “governmental unit” to include not only the state and its agencies and political subdivisions, but also “any other institution, agency, or organ of government the status and authority of which are derived from the Constitution of Texas or from laws passed by the legislature under the constitution.” Id. § 101.001(3). The Court held that ERCOT, a utility corporation directly responsible and accountable to the PUC and established pursuant to legislation, was both an “organ of government” and derived its “status and authority” from statute. Thus, ERCOT is a “governmental unit” entitled to take an interlocutory appeal from the denial of a plea to the jurisdiction.

DOES THE PUC HAVE EXCLUSIVE JURISDICTION OVER THE PARTIES’ CLAIMS AGAINST ERCOT?
The next question addressed by the Court’s decision was whether the PUC has exclusive jurisdiction over the issues underlying both of the parties’ claims. To determine whether the legislature has granted an agency exclusive jurisdiction over a particular issue, there must be (1) an express or implied grant of exclusive jurisdiction and (2) the issue must fall within that jurisdictional scope. If the agency’s exclusive jurisdiction is established, the claimant must pursue and exhaust all available administrative remedies before turning to the courts.

ERCOT argued that Section 39.151 of the Texas Utilities Code constitutes a pervasive regulatory scheme that imparts exclusive jurisdiction to the PUC. The Court agreed, noting that the statute provides that ERCOT is directly responsible to the PUC, and the PUC has substantial authority over the operations of ERCOT. The Court further agreed that the adjudication of the claims presented—claims concerning ERCOT’s execution of its duties—involved functions regulated by the PUC, and therefore properly fell under review via the PUC’s adjudication system.

IS ERCOT ENTITLED TO SOVEREIGN IMMUNITY?
The Texas Supreme Court held that ERCOT is entitled to sovereign immunity. The Court held that ERCOT’s governmental nature is demonstrated by the level of control and authority the state exercises over it and its accountability to the state. By statute, the state has complete authority over everything ERCOT does to perform its statutory functions. Therefore, the entity is an “arm of the state,” and enjoys sovereign immunity.

Utility Case

Court Again Finds that Commission Action Related to Winter Storm Uri Violated Texas Law.

On June 1, 2023, the Third Court of Appeals at Austin, Texas rendered its decision in RWE Renewables Americas, LLC and TX Hereford Wind, LLC v. Public Utility Commission of Texas, No. 03-21-00356-CV (Tex. App.—Austin, Jun. 1, 2023). Similar to its recent ruling in Luminant Energy Co., LLC v. Public Utility Commission of Texas, the court found that the Public Utility Commission of Texas (“PUC”) exceeded its statutory authority during Winter Storm Uri, albeit on different legal grounds.

Following Winter Storm Uri, the Electric Reliability Council of Texas (“ERCOT”) filed Nodal Protocol Revision Request (“NPRR”) 1081 essentially codifying the Commission’s Winter Storm Uri order and, specifically, requiring that ERCOT set system-wide wholesale market prices at $9,000/MWh when it issues an Energy Emergency Alert level 3 (“EEA3”). PUC Staff recommended approval of NPRR 1081 and, on July 16, 2021, the PUC issued its Order approving NPRR 1081 (the “Order”).

RWE Renewables Americas, LLC (“RWE”) and TX Hereford Wind, LLC (“TX Hereford”) filed a direct appeal under Public Utility Regulatory Act (“PURA”) § 39.001(e) asserting that the PUC, when it adopted the Order, exceeded its statutory authority and violated rulemaking provisions in the Administrative Procedure Act (“APA”).

Ultimately, the Court found that the Order constituted a rule, exceeded the PUC’s statutory authority, and was invalid due to the PUC’s failure to follow mandatory rulemaking procedures under the APA. Although the court’s ruling is subject to an appeal, it has broad policy implications regarding the PUC’s authority, rulemaking procedures, and influence over the ERCOT market.

If the ruling ultimately stands, consumers would no longer be subject to a fixed system-wide wholesale market price of $9,000 during EEA3 events and, moreover, may be entitled to some form of reimbursement. On a broader level, the ruling restricts the PUC’s ability to unilaterally adopt policy without significant stakeholder and public participation.

“In the Courts” is prepared by Lora Naismith in the Firm’s Water Practice Group; James Parker in the Firm’s Litigation Practice Group, and Rick Arnett in the Firm’s Energy and Utility Practice Group. If you would like additional information or have questions related to these cases or other matters, please contact Lora at 512.322.5850 or lnaismith@lglawfirm.com, or James at 512.322.5878 or jparker@lglawfirm.com, or Rick at 512.322.5855 or rarnett@lglawfirm.com.