Texas Supreme Court Set to Determine Whether Public Utility Commission of Texas Violated Texas Law

by Rick Arnett

On January 30, 2024, the Supreme Court of Texas (“SCOTX”) heard oral argument from the Public Utility Commission of Texas (the “Commission”), Calpine Corp. (“Calpine”), and Luminant Energy Co. (“Luminant”) in Luminant Energy Co. LLC v. Pub. Util. Comm’n of Tex, Cause No. 23-0231 (Tex. 2023)—a lawsuit challenging the Commission’s authority to set real-time energy prices at $9,000 per megawatt hour (“MWh”) during Winter Storm Uri.

The lawsuit’s implications are immense. SCOTX must clarify what Commission action constitutes a rule and is therefore subject to rulemaking procedures. Additionally, the Court must determine what action “restricts” wholesale energy market competition and, as such, is invalid under the Public Utility Regulatory Act (“PURA”). Significantly, a ruling against the Commission would impose burdensome procedure on emergency protocols and require the Electric Reliability Council of Texas (“ERCOT”) to unwind all market transactions that occurred when the Commission set prices at $9,000/MWh—a process that could result in consumer refunds. A summary of the lawsuit, oral arguments, and market implications is below.

Freezing temperatures during Winter Storm Uri resulted in generation outages, requiring ERCOT to order systemwide load shed to maintain system frequency. Despite insufficient generation supply, energy prices remained relatively modest. Specifically, market clearing prices were approximately $1,200/MWh, far lower than the $9,000/MWh systemwide offer cap. Then-Commission Chair Deann Walker concluded the Scarcity Pricing Mechanism (“SPM”), which should raise prices during times of low generation supply to incentivize additional generation, malfunctioned by erroneously disregarding load shed. Accordingly, the Commission issued an order directing ERCOT, when “customer load is being shed,” to set market prices at the $9,000/MWh systemwide offer cap (the “Order”).

Luminant subsequently incurred losses of almost $1 billion. Winter Storm Uri outages required Luminant to purchase energy to fulfill Luminant’s market obligations, requiring the generator to purchase energy from the market at the $9,000/MWh cap. Accordingly, it sued the Commission alleging the Order was an invalid competition rule and exceeded the Commission’s authority under PURA. Specifically, Luminant asserted that because the Commission manually adjusted the SPM to the systemwide offer cap, it frustrated free competition in the energy market in violation of PURA. The Third Court of Appeals agreed, finding the Order constituted a competition rule and exceeded the Commission’s statutory authority. The Commission and its aligned Intervenors, including Calpine, appealed.

SCOTX focused on two issues: (A) whether the Order constitutes a “competition rule,” and therefore grants the Court jurisdiction over the lawsuit; and (B) whether the Commission exceeded its statutory authority by limiting market competition. Whether the Commission’s decision to manually adjust the SPM was the correct decision, for purposes of this lawsuit, is irrelevant. Arguments on each issue are addressed in turn below.

A. The Commission argued the Order did not constitute a competition rule because it did not relate to market abuse.
PURA § 39.001(e) grants the courts jurisdiction to review “competition rules” under the Administrative Procedure Act (“APA”). Whether the Order constituted a competition rule, therefore, determines whether SCOTX has jurisdiction over Luminant’s lawsuit.

Commission counsel asserted the Order was not a competition rule and, therefore, the Court lacks jurisdiction. She argued the Order did not amend the SPM rule. Rather, during Winter Storm Uri the Commission recognized the SPM was malfunctioning and, accordingly, issued the Order directing ERCOT to comply with existing rule. Justice Bland appeared skeptical, questioning whether the Order’s expressed consideration of “load shed”—which the previous SPM rule did not consider for pricing purposes—demonstrates the Order did amend the SPM rule. Commission counsel responded that other pricing mechanisms, such as the Operating Reserve Demand Curve (ORDC), already consider load shed, and therefore load shed considerations were already incorporated in the SPM. As such, the Order did not amend the SPM and constitute a rule.

B. SCOTX attempted to reconcile the Commission’s duties to promote reliability and free market competition.
PURA § 39.001(d) instructs the Commission to “order competitive rather than regulatory methods to achieve the goals of [PURA] to the greatest extent feasible.” The Commission must also “adopt and enforce rules relating to the reliability of the regional electric network.” The legal question, therefore, is whether PURA
§ 39.151(d) qualifies, or is qualified by, PURA § 39.001(d). Put differently, SCOTX must determine whether the Commission’s duty to ensure reliability trumps the Commission’s duty to promote competition.

Calpine counsel argued that statutory mandates related to reliability are paramount and, therefore, the Order did not exceed the Commission’s statutory authority. She questioned the Third Court of Appeals’ reasoning, asserting the court highlighted one mandate, related to competitive pricing, over the Commission’s most critical duty—grid reliability. According to Calpine counsel, competition cannot exist without a reliable grid, and the Commission cannot risk grid collapse “in the name of unfettered competition.”

Luminant counsel argued the Commission violated an expressed prohibition: the Commission cannot promulgate rules or issue orders regulating competition, except as authorized. According to Luminant counsel, the Commission cannot use vague statutory authority to “override” this express ban from the Legislature. Justice Busby questioned Luminant’s argument, opining that PURA § 39.001(d) requires the Commission to order competitive methods only “to the greatest extent feasible.” Justice Blacklock further questioned whether “it is really” Luminant’s position that the Commission “is tied to competition in a way that prevents them from taking an action…to make sure that we are not in the stone ages.” In response, Luminant counsel emphasized that the Legislature has expressly prohibited the Commission from setting wholesale market prices. Because the Commission manually adjusted the SPM and set wholesale prices, it violated PURA and exceeded its statutory authority.

SCOTX’s decision will have both immediate and far-reaching consequences. First, if SCOTX does find the Order violated PURA, it would result in complex settlement proceedings to unwind all energy market transactions that occurred while the Order was in effect. It is unclear whether consumers would ultimately receive refunds from the settlements. It is almost certain, however, that the settlements would result in additional, expensive litigation.

A holding that the Order violated PURA would also establish an arguably damaging precedent. First, it would necessarily require a finding that the Order was a competition rule. Justice Blacklock addressed the significance of this finding, questioning “if [the Order] is a rule, what are the practical consequences for the Commission’s ability to respond to an emergency?” Commission counsel responded that the consequences would be significant—almost all ERCOT emergency protocols, including load shed decisions, would be rules subject to emergency rulemaking requirements that include notice and public participation. In sum, if SCOTX does find the Order was a rule, it could greatly frustrate the Commission and ERCOT’s ability to address future emergency conditions that require immediate attention. Second, a finding that the Order unlawfully limited competition could undermine other market mechanisms such as the ORDC, Reliability Unit Commitment, and Emergency Pricing Program. The market and consumers rely on these programs for reliability and reasonable prices during emergencies.

SCOTX will now consider the Commission, Calpine, and Luminant’s oral arguments before rendering its decision. The decision will be final—no other avenues for appeal are available. We will continue to monitor the litigation and report as it proceeds.

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.

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