SCOTX to Decide ERCOT’s Sovereign-Immunity Claim

by James F. Parker

On September 2, the Texas Supreme Court granted the petitions for review in two cases addressing Electric Reliability Council of Texas (“ERCOT”) and its operation of the electric grid in Texas: 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 arises from the 2021 Winter Storm and the default of a number of market participants. The default of some market participants meant that there was not enough money paid to ERCOT for electricity trades during the 2021 Winter Storm for ERCOT to pay all of the generators for the electricity generated during that time.

In such an event, ERCOT’s Nodal Protocols—the rules that govern the electric market that ERCOT oversees—provide that the shortfall is “uplifted” to all entities that serve electric “load.” That is to say that the non-defaulting load serving entities are required to pay the shortfall caused by the default of other load serving entities.

Among the load serving entities is CPS Energy, which is the municipally-owned utility of the City of San Antonio. CPS Energy filed suit against ERCOT, alleging various causes of action arising from its actions during the 2021 Winter Storm. CPS Energy also alleged that ERCOT’s uplift scheme is unconstitutional as applied to municipally-owned utilities, as it would require the City of San Antonio to unconstitutionally lend its credit to cover private debts.

The district court denied ERCOT’s plea to the jurisdiction, which was based on its claim of governmental immunity and, alternatively, Public Utility Commission (“PUC”) exclusive jurisdiction. ERCOT filed an interlocutory appeal under Section 51.014(a)(8) of the Civil Practice & Remedies Code, arguing that it is a “governmental unit” that is entitled under that provision to take an interlocutory appeal as a matter of right.

As an initial matter, the San Antonio Court of Appeals agreed that ERCOT is a governmental unit, and thus entitled to an interlocutory appeal. On considering that appeal, the Court of Appeals concluded that PUC has exclusive jurisdiction over CPS Energy’s common-law and constitutional claims against ERCOT.

Panda Power arises from a different set of circumstances, but involves many of the same issues. Panda Power sued ERCOT for a variety of claims, alleging that ERCOT’s electricity capacity, demand, and reserves reports, which initially projected a likelihood of severe energy shortfalls but were revised to predict excess of generation capacity, misled the power company to invest $2.2 billion in building new power plants. The Dallas Court of Appeals (sitting en banc) reached the opposite conclusion from that reached in San Antonio, deciding that PUC did not have exclusive jurisdiction over Panda Power’s claims. In addition, the Court of Appeals concluded that ERCOT was not a governmental entity with immunity, and so it can be sued in court for damages.

With numerous cases arising from the Winter Storm still pending, this case will be watched across the state. And beyond the Winter Storm litigation, this case may have a broad effect on the Texas electric market that may ultimately require legislative action.

James Parker is a Principal in the Firm’s Litigation Practice Group. If you would like additional information or have questions related to this article or other litigation matters, please contact James at 512.322.5878 or jparker@lglawfirm.com.