Earlier this summer, the Texas Supreme Court decided two highly publicized, high-stakes cases arising out of Winter Storm Uri: Public Utility Commission v. Luminant Energy Co., about the power of the Public Utilities Commission to respond to statewide emergencies by issuing orders to adjust pricing of electricity in an emergency so as to set the prices at the high offer cap; and Public Utility Commission v. RWE Renewables Americas, which examines the oversight of rulemaking by the Electric Reliability Council of Texas. Both cases matter greatly to the Texas electricity industry.
In Luminant, the plaintiffs — purchasers of electricity — sought to recover potentially billions of dollars for increased electricity costs mandated through PUC orders during the storm, as well as to cabin the Commission’s ad hocpowers in emergencies. In RWE, the plaintiffs sought not only to invalidate the pricing orders but also to invalidate the PUC’s approval of an ERCOT protocol to automatically raise electricity prices to the regulatory maximum offer cap during a statewide emergency of the highest energy alert level. In both cases, the Texas Court of Appeals for the Third District invalidated the PUC’s action, creating a great cloud of uncertainty for both electricity producers and purchasers in Texas. In both cases, the Texas Supreme Court unanimously reversed. We write to share the story and to propose possible implications of these Winter Storm Uri decisions.
The polar vortex that cut through Texas in February 2021 — Winter Storm Uri as we all now know it — brought the entire Texas electric grid to a point very near total collapse, within five minutes to be exact, according to a report by the University of Texas at Austin. The freezing weather took some power generation facilities offline and slowed or stopped deliveries of natural gas to operable gas-fired facilities, all while demand for electricity skyrocketed as Texans sought to heat their homes and businesses. The Texas grid would have failed if it had fallen to a certain frequency (59.4 hertz) for nine minutes and would have taken weeks or months to fix. The grid hung at that frequency for just over four minutes during the storm.
During this critical period, the PUC and ERCOT took two major steps that contributed to preventing the collapse of the grid. First, ERCOT began rotating blackouts across Texas to reduce the system’s load — referred to as “load-shedding.” But these widespread blackouts (and power withheld by ERCOT to maintain the grid) distorted the Texas market’s pricing mechanism, with ERCOT’s systems interpreting the reserve capacity held by ERCOT as excess capacity. By interpreting the load shed period as one in which the load was voluntarily offline, the ERCOT systems significantly and artificially reduced the market price even though much additional generation was needed. As a result, the PUC , through the emergency orders, ordered ERCOT to manually set electricity prices at $9,000/MWh to encourage production of electricity by any generator that could find a way to generate including paying exorbitant prices for natural gas to continue running, while discouraging the use of electricity by large industrial users. These measures helped keep the Texas electric grid afloat. The grid did not collapse. But many Texans lost power for days as the rolling blackouts continued.
In the aftermath of Winter Storm Uri, the Texas Legislature took action to amend the Public Utility Regulatory Act (“PURA”) to subject ERCOT to additional oversight from the PUC, which included requiring PUC approval of any protocols set by ERCOT for managing the electric grid. ERCOT then passed a protocol to automatically raise the price of electricity to the regulatory maximum offer cap whenever the highest level of statewide emergency is declared. The PUC approved the protocol.
Litigation ensued on both the PUC’s emergency orders increasing the price to the maximum offer capand the protocol raising electricity prices to the regulatory maximum offer cap during statewide emergencies. The Luminant case challenged the emergency pricing orders, while RWE contested the PUC’s authority to authorize the same result in future events by its approval of the subsequent ERCOT protocol. The plaintiffs brought these cases directly in the Third Court — rather than a trial court — under Section 39.001(e) of PURA, which permitted direct appellate review “of competition rules adopted by the commission.” (Section 39.001(e) has since been amended for direct challenges to be heard by the forthcoming Court of Appeals for the Fifteenth District.)
The parties raised many issues and arguments before the Third Court. A threshold issue in both cases was whether the emergency pricing orders and approval of the emergency pricing protocol comprised “competition rules adopted by the commission” sufficient to trigger direct review. The PUC also asserted standing and mootness in Luminant, as the emergencyorders expired Feb. 19, 2021, after the emergency ended and the PUC voted to withdraw the orders. Accordingly, the PUC argued, courts could not any further remedy the alleged harm. On the merits, the plaintiffs urged that, given PURA’s clear preference for market competition, the PU Cgenerally cannot intervene to set prices by regulatory edict. The plaintiffs also raised administrative-process defects for alleged failures by the PUC to comply with requisite rulemaking requirements.
A two-judge panel of the Third Court found that both the emergencyorders and the protocol effective during emergencies that was subsequently approved were competition rules for jurisdictional purposes. Then, based on its reading of PURA, the Third Court reasoned that upholding the emergency pricingorders and subsequent protocol required that they “could not have used ‘competitive rather than regulatory methods’ to any greater extent than they did as issued.” Under this test, the Third Court believed circumstances showed the orders and protocol could have used competition to a greater extent, and the Third Court therefore invalidated them. Particularly in Luminant, however, the Third Court did not indicate what came next. It “reverse[d] the Commission’s Orders … and remand[ed] this case for further proceedings consistent with our ruling.” This ambiguous outcome created doubt about the fate of billions of dollars for electricity purchased and sold during Winter Storm Uri. It also weakened the PUC’s authority to respond to statewide emergencies, which no one disputed Winter Storm Uri presented.
And that brings us to the recent rulings by the Texas Supreme Court. The PUC predictably petitioned for review of both Luminant and RWE, and the Texas Supreme Court obliged. The Court granted review and, after hearing argument, decided both cases in the PUC’s favor on June 14.
Both opinions began with the threshold issue of the Third Court’s direct jurisdiction, where RWE was felled. In RWE, the PUC’s mere “approval” of ERCOT’s protocol did not amount to a “competition rule adopted by the [C]ommission” subject to direct judicial review. PURA has long recognized distinct processes as between PUC “rules” and ERCOT “protocols,” with separate pathways for review. By legislative design, this “approval” did not amount to a separate rulemaking by the PUC. It amounted to more of a ratification, even though the ERCOT protocol would not enter effect without the PUC’s approval. The Court therefore held that there is no direct review of the PUC’s approval of ERCOT protocols. These protocols can be challenged by different means. Accordingly, the Court dismissed RWE for want of jurisdiction and did not reach the merits. That dismissal vacated the Third Court’s opinion invalidating the protocol. Thus the protocol remains in force today.
The Texas Supreme Court held that Luminant survived the jurisdictional hurdles. First, the Court made quick work of the mootness and standing arguments. It reasoned that Luminant’s alleged financial harm (paying the price set by the ad hocorders) could “potentially” be remedied for overpricing by “ERCOT protocols authorizing invoice repricing and market-wide resettlements.” It was unconvinced that “the egg cannot be unscrambled,” despite that egg’s enormity. Second, the PUC’s ad hocorders amounted to “competition rules” because they ordered ERCOT to implement a statewide policy, however temporarily, on prices for all occurring market transactions. While the Court declined to “delineate the precise contours of [a] competition rule,” it read that term based on the effect of the policy embodied by the emergency pricing orders — despite that these orders did not go through the ordinary rulemaking processes to become formal “rules.”
On the merits in Luminant, the Court held that the PUC had the substantive authority to issue the emergency pricing orders. It rejected the Third Court’s conclusion that, to comply with Chapter 39, courts “must find that the Orders could not have used ‘competitive rather than regulatory methods’ to any greater extent than they did as issued.’” It held that PURA reflects twin goals of competition and reliability, which need not inherently conflict and must be harmonized to the extent possible. The “goal of prices set by competition may, in some circumstances, have to yield.” After all, if the grid collapsed, there would be no Texas market in which to compete. Because the PUC “has the expertise to manage the electric utility industry,” it “is the Commission’s job” to determine when competition must yield, “not the judiciary’s.” In light of the undisputed emergency presented by Winter Storm Uri, the Texas Supreme Court refused to “second-guess the Orders’ necessity” and the “presumption of validity” afforded to agency decisions held firm.
The Texas Supreme Court lastly addressed the procedural rulemaking challenges in Luminant. First, while the emergency pricing orders did not specifically state “imminent peril” findings under a “preamble” as the emergency rulemaking procedures required, they substantially complied with that requirement by articulating the reasons for their necessity — achieving the legislative objective. Second, the PUC undisputedly failed to file the emergency pricing orders with the secretary of state for publication, but the Court found that the PUC did better by posting notice on ERCOT’s website and emailing notice to its distribution list. Because no one could articulate any prejudice caused by these two minor administrative defects, the Court found substantial compliance was enough to uphold the ad hoc orders.
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The upshot of Luminant and RWE appear three-fold for the Texas electricity industry. First, direct appellate review of “competition orders” turns on the effects of the PUC order, even if the order does not proceed through the formal rulemaking process. This effect-based inquiry may subject many types of orders to direct review, such as a contested case that is litigated before the PUC, or an order adopting a rule that impacts prices or some other aspect of competition. However, the PUC’s mere approval of ERCOT protocols cannot be the subject of direct judicial review under Chapter 39. Second, the PUC may enact rules — at least in emergency situations threatening the Texas electric grid — that prioritize other factors, such as reliability, over competitive pricing in the wholesale electricity market. Third, Texas courts will afford competition orders by the PUC — again, at least for grid-wide emergencies requiring swift action — great deference and a presumption of validity, making any successful legal challenge difficult. Such rules will not be invalidated on procedural grounds if they substantially comply with the rulemaking requirements.