Electric grid manager argues for immunity at Texas high court

AUSTIN, Texas (CN) — The question of whether the Electric Reliability Council of Texas has sovereign immunity from lawsuits has been hanging over the electricity grid manager since before the Winter Storm Uri disaster of February 2021 that exposed the fragility of the state’s power supply.

Hundreds of Texans died from hypothermia and medical complications as some households went four days without power during freezing temperatures after ERCOT implemented blackouts due to a shortage of electricity with power plants going offline because some operators and natural gas companies that supply gas-fired plants had failed to winterize their equipment.

Economists say ERCOT’s underestimation of the state’s peak demand for a winter storm that brought frigid temperatures in the week leading up to Christmas Day points to the fundamental problem: Texas lacks sufficient power in all circumstances for a populace growing by the day, adding to a population that increased by more than 3.9 million from 2010 to 2020, the most of any state, according to U.S. Census data.

The Texas Supreme Court heard arguments Monday in a case arising from ERCOT’s grid management during Winter Storm Uri, and another dating to 2016 involving a power company that claims ERCOT’s misrepresentations in 2011 and 2012 about a looming power shortage led it to spend $2.2 billion building three power plants.

Panda Power says it was forced to sell power for a fraction of the price it anticipated due to ERCOT’s distortions and one of its plants went bankrupt.

Both cases turn on the same question: Is ERCOT, which is classified as a private nonprofit entity, entitled to sovereign immunity because it performs a government function of managing the state’s grid?

The implications go beyond these two cases into county courthouses throughout the state, with ERCOT facing hundreds of Uri wrongful death and negligence lawsuits.

Aside from immunity, ERCOT argues any grievances against it should first be adjudicated in administrative hearings before the Texas Public Utility Commission, which oversees its operations.

Governor Greg Abbott has sided with ERCOT. “To ensure the reliability of Texas’s electric grid, the Legislature has conferred authority upon the Public Utility Commission and put ERCOT at that agency’s complete disposal,” he wrote in a Jan. 6 amicus brief.

“But ERCOT cannot serve this important governmental function if it is subject to competing commands and retrospective money judgments from district judges scattered across our 254 counties,” added the Republican governor, a former Texas Supreme Court justice.

San Antonio’s municipal electric utility, CPS Energy, sued ERCOT in March 2021 on claims of breach of contract, negligence, breach of fiduciary duty and violations of the Texas Constitution.

CPS alleges ERCOT overcharged it and other electricity retailers billions of dollars by holding prices at the maximum of $9,000 per megawatt hour – a megawatt is enough to power 200 homes on a hot summer day – for 33 hours longer than it had been ordered to by the PUC after the commission ended its directive for rolling blackouts during Winter Storm Uri to prevent a catastrophic grid failure.

Several retail energy companies and cooperatives could not afford ERCOT’s charges and have declared bankruptcy.

To make up for $800 million worth of defaulted payments owed to ERCOT from the Uri charges, Texas passed a bill in May 2021 under which ERCOT received that amount from the state’s rainy-day fund and issued bonds to recoup the balance with charges imposed on CPS Energy and other market participants.

Despite the legislative response to the storm’s fallout, CPS Energy’s counsel, Harriet O’Neill, focused on what the Legislature has yet to do in her opening statements before the Texas Supreme Court on Monday.

“Despite many opportunities, including after the winter storm, the Legislature has never conferred government status on ERCOT,” she said.

The council was formed in 1970 by a private association of electric utilities to comply with requirements of the North American Electric Reliability Corporation. It now oversees power distribution to 90% of the Texas power market, a region encompassing more than 26 million customers.

O’Neill argued that before ERCOT was certified as the state’s grid operator in 2001, after Texas deregulated its electricity distribution market in 1999, it performed the same functions it does today.

“Those functions did not suddenly become governmental when ERCOT became the ISO [independent system operator],” she said.

Arguing for ERCOT on rebuttal of CPS Energy’s arguments, Elliot Clark of Winstead PC in Austin stressed he believes CPS’s dispute belongs before the PUC. “The PUC has expert agency knowledge to dispose of that claim," he said.

He noted other market participants have initiated around $3.2 billion worth of disputes with ERCOT over Winter Storm Uri electricity prices and said they will work their way to the PUC.

But by filing suit in Bexar County District Court in San Antonio, Clark argued, CPS did not follow the regulatory process mandated by state law.

“If it is allowed by this court to pursue the same issues in its hometown district court, then all those other market participants will abandon the regulatory process and go file suit in their hometown district courts. Quite literally chaos will follow,” Clark warned.

Wallace Jefferson, of the Austin firm Alexander Dubose and Jefferson, represents ERCOT in the Panda Power case in which the power supplier has accused ERCOT of fraud, negligent misrepresentation and breach of fiduciary duty for allegedly misleading it into building power plants.

He argued ERCOT should be granted immunity because it has been afforded no autonomy from the state.

“A stable electric grid is critical to the Texas economy, to the health of citizens and to the general welfare and that is why the state controls every aspect of the grid,” Jefferson said, noting the state appoints ERCOT’s governing board.

Attacking ERCOT’s immunity claims, Ben Mesches, Panda Power’s counsel from the Dallas office of Haynes Boone, focused on the grid manager’s funding. He underscored it is financed through the collection of annual membership dues and fees collected for its services from market participants.

“The Legislature … knows how to confer immunity … it knows how to confer government entity status, as it has done in countless statutes. It knows how to supply an entity with tax dollars,” Mesches said.

“But here the Legislature did none of those things,” he added. “And those decisions are striking. They are striking in the context of Winter Storm Uri where there was unprecedented scrutiny on ERCOT. It’s striking because of the policy nature of those decisions. And because fundamentally ERCOT’s history is that of a private entity.”

Panda Power claims ERCOT prepared false power-demand projection reports that duped it into building power plants.

Justice James Blacklock, probing the immunity question, indicated he believes the PUC had authority to dictate ERCOT’s reports on a granular level and ERCOT is immune because it is completely beholden to the PUC.

Mesches replied, “Our complaint is not the PUC should have done more here, our point is our clients were lied to in these capacity reports.”

In the last back-and-forth of 90 minutes of arguments, Justice Jeff Boyd offered an apt summation.

“Does it boil down to you are arguing ERCOT is too big to fail?” he asked Jefferson.

Chuckling, Jefferson said, “Without a stable grid nothing else can happen.”

“So, the answer is yes?” Boyd pressed.

“Yes. Yes it is,” Jefferson said.

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Categories / Appeals, Energy, Government, Regional

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Electric grid manager argues for immunity at Texas high court

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