The Texas Public Utility Commission emergency rules in February 2021 that increased electric rates to $9,000 per megawatt-hour in response to the demand for power because of Winter Storm Uri were “invalid” and must be reexamined, a Texas appeals court ruled Friday.
The Texas Third District Court of Appeals in Austin issued the long-anticipated opinion Friday stating that PUC board members issued two unlawful rules — an “operation of executive fiat” — that allowed the Electric Reliability Council of Texas to increase the emergency price of electricity 650 percent for five days.
The decision, according to legal experts, could be a multibillion-dollar victory for power companies such as Luminant Energy, Pattern Energy, Exelon Generation, Constellation NewEnergy and Brazos Electric Coop who claim the PUC charged them too much to buy electricity from other power generators.
If the court decision is upheld, it could mean a multibillion-dollar defeat for Calpine Corporation, Talen Energy, TexGen Power and other power generators who sold the electricity at the $9,000 rate.
More than a dozen power companies such as Luminant claim the PUC rules illegally forced them to purchase electricity at exorbitant prices from the other energy companies. They are challenging the rate and demanding refunds.
The potential impact on retail electric consumers – whether some will be reimbursed for the higher charges – and whether taxpayers will be on the hook for any of the pricing if the ruling is upheld will not be known for years, according to lawyers familiar with the litigation.
Lawyers for both sides of the case declined to comment on the decision Friday, but all agreed that an appeal to the Texas Supreme Court is likely.
Attorneys for the PUC argued in court that the energy companies suing the agency are simply upset at losing money during Winter Storm Uri and warned the judges against “second-guessing” decisions made by the PUC and ERCOT under extreme weather conditions. The PUC also argued that the court did not have jurisdiction to overrule the agency’s rulemaking.
In a 42-page opinion, Austin Appeals Court Justice Edward Smith rejected the PUC’s arguments, writing that the Texas Legislature gave the court the power of review and jurisdiction and that state law requires that the PUC set rates based on a “preference for reliance on competition rather than regulation.”
“In extreme circumstances under extraordinary pressure, the commission exceeded its power by eliminating competition entirely,” Justice Smith wrote. “The Legislature clearly stated that the commission’s rules must be ‘limited so as to impose the least impact on competition.’
“Instead, the orders had the maximum impact on competition conceivable by setting a single price for power and directing ERCOT to take all necessary steps to ensure the market cleared at that single price,” the court ruled.
The typical market clearing price in Texas can be $30 per megawatt hour. During Winter Storm Uri, the price had risen to just above $1,200 based on market forces and demand.
But the PUC board, believing that the market demand-based system was not operating properly, issued rules to set the market clearing price at the legal cap of $9,000 per MWh and kept the price there for four days.
“While the extraordinary circumstances of Winter Storm Uri may have required extraordinary modifications to the [scarcity pricing mechanism] to send appropriate pricing signals to prompt the necessary market response, the commission here exceeded the Legislature’s limits on its power,” the appeals court ruled.
“Setting a single price at the rule-based maximum price violated the Legislature’s requirement in the Utilities Code Section 39.001(d) that the commission use competitive methods to the greatest extent feasible and impose the least impact on competition,” Justice Smith wrote.
Winter Storm Uri hit Texas Feb. 14, 2021, bringing with it snow, freezing rain and subzero temperatures. While electric service went out in large portions of the state, especially in the Houston area, power demand surged in other areas, such as Dallas. At the same time, many electric generators went off-line, and natural gas providers also were unable to supply product to electric generators.
The PUC, at a six-minute meeting Feb. 15, decided to address the gap between supply and demand by issuing an emergency “rule” that reset the maximum price at $9,000 per megawatt-hour — up from $1,200. It made the $9,000 price retroactive to Feb. 14. The next day, Feb. 16, the PUC met again and rescinded the retroactive part of its order.
Allyson Ho, a lawyer for Luminant and partner at Gibson, Dunn & Crutcher, in oral arguments last April, told the Austin appellate judges that the PUC simply “disregarded legal procedures.”
“It did not follow the law,” Ho argued. “It is not too much to ask the PUC to follow the rules, follow the law. The PUC has staked out extreme and unprecedented positions in this case.”
Texas Assistant Solicitor General Lisa Bennett, who represents the PUC, told the judges that the PUC didn’t violate Texas law because the agency’s actions were merely “a direction to ERCOT, not rulemaking.” She argued that the law “provides wide discretion” for the PUC to make such decisions.
The PUC’s actions were “taken during an extreme emergency” and because of a flaw in the system, she said.
“We were at negative reserves, but the price was not going up,” Bennett told the judges.
Baker Botts appellate partner Macey Reasoner Stokes, who represents Calpine and Talen, contended that companies like Luminant are using the litigation to “improperly shift resulting market losses to other parties.”
“When the emergency passed, however, market participants assessed the financial outcomes of the complex actions they and others had taken in the market during the storm, and some suffered staggering losses,” Reasoner Stokes argued. “In hindsight, some market participants now blame the PUC for their losses and argue that the orders were illegal all along.”
Dallas trial lawyer Chrysta Castañeda, who represents power generator DGSP2, told the judges during arguments that the PUC’s first rule was valid and that “the price of electricity was properly set at $9,000.”
Castañeda argued that the PUC’s second-day decision to repeal the retroactivity of the price change to $9,000 “gave zero reason – emergency or otherwise – to retract some of its rulemaking.” As a result, it should be declared invalid.
The case is Luminant Energy Company v. Public Utility Commission of Texas, No. 03-21-00098-CV.