More than a dozen of the largest electric power companies operating in Texas will face off with their state regulator Tuesday at the Texas Supreme Court. At stake are billions of dollars paid and received under emergency circumstances during Winter Storm Uri three years ago.
The energy companies, led by Dallas-based Luminant and Houston-headquartered Pattern Energy, claim that the Texas Public Utility Commission illegally and unnecessarily increased the rates to buy and sell electricity for the four days that unprecedented cold temperatures and freezing rain engulfed the state in February 2021 — rate increases that cost some companies to lose billions of dollars while providing other energy companies billions of dollars in sudden profits.
Lawyers for Luminant, Pattern and other electric power giants such as Exelon and Constellation argue that the state PUC, represented by Texas Attorney General Ken Paxton, abandoned free market principles, violated state law and was privately lobbied by other energy companies that stood to profit from the price-fixing measures.
The PUC contends that it had to intervene in the electric rates scheme to fix a “system malfunction” in order to prevent “a catastrophic grid failure that could have plunged most of the State into a total blackout for weeks.” Lawyers for the PUC claim that it intervened to manually increase electric rates to $9,000 per megawatt-hour — about 30,000 percent higher than normal rates — to encourage power production and depress electric consumption.
And the energy companies defending the PUC, including Houston-based TexGen Power, argue that corporate executives at the power companies now arguing that they were overcharged and seeking refunds actually supported the PUC’s actions during the Winter Storm Uri crisis — they only changed their positions when they realized those measures would cost them large financial losses.
Both sides agree that billions and billions of dollars are at stake. They each claim that the law favors their position and that the electric generation and provider market in Texas will fall into chaos if the other side wins. And the arguments are loaded with apparent contradictions and conflicts, according to legal experts. Energy giants such as Exelon and Constellation are supporting Luminant’s legal arguments, while NRG, Calpine and Talen Energy are backing the PUC and TexGen.
“This is a case about administrative agency overreach at its worst,” Allyson Ho, an appellate law partner at Gibson, Dunn & Crutcher who represents Luminant, told the Texas Supreme Court in written briefs. “[The PUC] devastated the Texas electricity market and caused many Texans, businesses, and market participants to pay thousands upon thousands in charges for electricity billed at the PUC’s price-by-administrative fiat. The PUC’s market-crushing rule was doubly unlawful.”
“Emergencies are exactly when administrative agencies must follow the law and respect the limits of the power the Legislature has entrusted to them,” Ho wrote in the briefs. “This case is a cautionary tale about what happens when an administrative agency not only fails to follow the law, but also refuses to acknowledge those failures. The people of Texas deserve better, and Texas law requires it.”
Lawyers for the PUC, led by Texas Principal Deputy Solicitor General Lanora Pettit, argue that Winter Storm Uri “devastated Texas” and that the PUC commissioners were within their power to take whatever steps were necessary in the public interest, including dramatically fixing the price of electric so high.
“Facing unprecedented challenges to the state’s electricity grid, the commission and ERCOT had simple priorities,” Pettit wrote in her brief to the justices. “Keep the light and heat on for as many Texans as possible while preventing a catastrophic grid failure that could have plunged most of the state into a total blackout for weeks.”
ERCOT is the Electric Reliability Council of Texas, a quasi-governmental agency that manages the Texas power grid for the PUC.
“After realizing that a glitch in ERCOT’s pricing mechanism was causing the market to underestimate the energy scarcity caused by massive decreases in generation, the commission issued two emergency orders to correct the market failure, spur energy production and discourage unnecessary commercial use by reflecting the true market-clearing price for electricity,” Pettit argued in court documents. “Unsurprisingly, not everyone agrees with the split-second decisions that the commission and ERCOT had to make in a life-or-death situation.”
“The stakes are high. Billions of dollars are potentially implicated,” Pettit wrote. “So is the commission’s ability to react quickly in emergency situations to save lives by minimizing blackouts and preventing a system-wide collapse.”
There are key dates that explain how this case made its way to the Texas Supreme Court.
Feb. 14, 2021: An ice storm and record-low temperatures invaded Texas for four days, causing power outages that left more than nine million people without electricity. About 130 deaths are attributed to Winter Storm Uri.
Feb. 15, 2021: The PUC, under pressure to address power blackouts, met for six minutes in an emergency session and voted to increase the universal rate that ERCOT would require electric suppliers to pay for power to $9,000 per megawatt-hour — a rate that stayed on the books until Feb. 19.
March 2021: Luminant and other energy companies filed a complaint with the Texas Court of Appeals for the Third District in Austin, challenging the PUC’s authority to set electric rates manually and seeking price adjustments.
March 28, 2023: Austin appeals court rules in favor of Luminant, finding that the PUC exceeded its legal authority to set electric rates manually.
The PUC appealed the Austin court’s decision to the Texas Supreme Court, arguing that the PUC orders expired on Feb. 19, 2021, and that the Austin court “had no jurisdiction to validate or invalidate already-expired orders.” The state also argues that the appeals court wrongly “prioritized market competition over grid integrity.”
“At bottom, the court of appeals’ decision was impermissible judicial second-guessing of agency action,” Pettit wrote in the brief. “It rests on faulty statutory interpretation that pursues one legislative policy goal to the exclusion of all others. And it has thrown Texas’s electricity and associated markets into confusion.”
Legal experts point out, however, that the state attorney general’s briefs also appear to make contradictory arguments.
For example, it argues that the Austin court of appeals “gave no deference to the commission’s expertise about how to prevent a catastrophic grid collapse,” but then two pages later points out that the same appeals court judges “spent just over four pages of its 42-page opinion addressing the case’s merits” and later complains that the appeals court “did not explain what actions the commission could have taken to address” the crisis.
“Instead of recognizing that the commission, as the expert agency charged with administering PURA (the Texas Public Utility Regulatory Act), must balance the policy objectives expressed in the statute, the court focused solely on market competition,” the state argues. “This court should clarify that the judiciary will not strike down agency rules just because a court might have balanced competing policy goals differently.”
“Nothing in PURA demands that the commission prioritize free-market principles over public safety,” Pettit wrote in the briefs. “If the commission had not issued the orders and the grid had collapsed, there would have been no market, and competition would have been irrelevant.”
Attorneys for Luminant and Pattern argue that the PUC’s price-setting rule violates PURA and is also “independently unlawful on procedural grounds” because PUC commissions failed to “comply with any of the Administrative Procedure Act’s minimal emergency rulemaking requirements.”
“An emergency isn’t a blank check for administrative agencies to ignore the law — especially not where, as here, the legislature has already anticipated the need for agencies to act with alacrity and provided the tools agencies need to do so,” Ho wrote in the brief for Luminant.
Luminant also brushed aside the PUC arguments that the case is moot because the PUC rules expired.
“While you may not be able to unscramble an egg, you can certainly remedy unlawful agency action,” Ho argues. “Market-wide resettlements are expressly contemplated by the ERCOT protocols — and, in fact, the PUC approved one just a few days before issuing the price-setting rule.”
“The PUC says this case is moot because the storm is over, but that argument flouts this court’s holding that the government ‘cannot extract millions in unlawful fees and fines, decide the whole thing was a mistake, keep the money, and insist the whole matter is moot,’” she states in the brief.
Legal analysts say the Texas attorney general would normally be able to get around that claim with an argument that ERCOT — not the PUC — is technically collecting and paying the money and ERCOT is a private organization. Except that in June of last year, the state argued — and the Texas Supreme Court in a 5-4 decision agreed — that ERCOT is a governmental agency.
In their written legal arguments, Constellation Energy Generation and Exelon Generation Company told the state justices that some of their competitors “seized on an opportunity they saw in the crisis.”
“They lobbied the PUC commissioners to set energy prices at the $9,000/MWh maximum even though ERCOT was accepting offers to sell energy at prices the generators chose, and market rules were already adding hundreds of millions in bonus payments to reflect the storm’s scarcity conditions,” wrote Lino Mendiola III, a partner at Eversheds Sutherland who represents Constellation and Exelon Generation. “The commission, perhaps bending to a bureaucratic urge to ‘do something’ during the storm, obliged.”
Mendiola argues that the position of the PUC and the profiting energy companies that the commission’s orders increasing rates “saved the grid and saved the day” is a “narrative that cannot be squared with what really happened.”
“The PUC orders devastated the market,” he wrote in the briefs to the Texas Supreme Court. “The estimated total cost of electricity during the winter storm exceeded $50 billion, a $46 billion increase in the cost of electricity from the week before. The largest electric co-operative in the state was forced into bankruptcy. Numerous retail electric providers were wiped out. Fitch Ratings placed all ERCOT retail and wholesale electric utilities on negative ratings watch status. Constellation incurred hundreds of millions in losses as a result of the Orders. The Commission’s lawlessness created a furor.”
Proof that the PUC’s orders were the wrong decision can be easily detected in the weeks that followed when the PUC chair and all the commissioners who decided to increase rates resigned, Mendiola argues.
But TexGen Power’s lawyers argue that executives at the energy companies now arguing that the state regulators should have kept their hands off rates “implored the PUC to fix the ‘anomaly’ that kept prices below $9,000 per megawatt hour.
“After the PUC did exactly that by issuing the orders and fixing the acknowledged market distortion, respondents’ executives privately thanked Texas regulators, and they publicly declared it ‘preposterous’ that the price would be anything but $9,000 per megawatt hour,” Kirkland & Ellis partner Anna Rotman, who represents TexGen Power, told the high court in court documents. “During the several days that the orders were in effect, moreover, nobody — not least any of the respondents — sought to enjoin the orders as procedurally or substantively invalid.”
“Only much later, after finding themselves in financial straits due to their unsuccessful attempts to manage risk, did respondents bring suit challenging the orders as improper, shamelessly invoking the plight of orphanages while candidly seeking billions of dollars for themselves from retroactive repricing,” Rotman wrote.
TexGen argues that the opposing energy companies’ “disingenuity continues in their briefing.”
“They brush aside fundamental statutory and constitutional constraints on the retroactive remedy they ultimately seek,” Rotman wrote on behalf of TexGen. “And they have almost nothing to say about the colossal mess that would ensue from their desired result in this case: a massive, unprecedented, market-wide effort to reprice billions of dollars in energy transactions years after the fact, based on reconstructing thousands of hypothetical scenarios among thousands of market participants.”
Lawyers for Luminant dismiss that argument.
“What’s truly scary here isn’t the prospect of further administrative proceedings to arrive at a workable and just remedy for the PUC’s unlawfulness,” Ho wrote in Luminant’s briefs. “It’s the prospect of emboldening administrative agencies with immense power over the State’s markets and citizens to operate with impunity outside the guardrails erected by the legislature. Even during emergencies, it isn’t too much to ask state agencies to follow the law — just as ordinary citizens must do.”