On June 14, 2024, the Supreme Court of Texas issued its opinion in PUC of Tex. v. Luminant Energy Co. LLC, No. 23-0231, 2024 Tex. LEXIS 465 (June 14, 2024). This high-profile case reviewed the Austin Court of Appeals’ striking down of the Public Utility Commission of Texas (PUC) and Electric Reliability Council of Texas's (ERCOT) orders maxing out the price of power during the 2021 Texas Winter Storm Uri.
As former PUC Chairman Arthur D’Andrea famously put it after the storm, the PUC and ERCOT cannot just unscramble the pricing egg after the storm. The Supreme Court, on the other hand, observed that while the egg actually could be unscrambled, it just did not need to be.
In short, the Supreme Court held that (1) the court had jurisdiction, (2) the PUC’s pricing orders did not exceed its authority under the Public Utility Regulatory Act (PURA) and (3) the PUC substantially complied with the Administrative Procedure Act’s (APA) emergency rulemaking requirements. The court reversed the judgment of the Austin Court of Appeals and rendered judgment affirming the February 2021 pricing orders. Id. at 2.
The court set forth the relevant context and objectives of PURA as well as the well-known history of Winter Storm Uri’s disastrous impact on the Texas power grid in February 2021. The disputes in the case focused on the two February 2021 orders from the PUC that had the effect of raising the price of electricity to the system-wide offer cap of $9,000. Id. at *4-15.
The court addressed the jurisdictional questions first. Regarding standing, the PUC argued that Luminant and the power-purchaser parties lacked standing because their injuries were not redressable by the court. The PUC contended that the remedy Luminant sought was “retrospective repricing,” i.e., to get its money back for overpaying for power. PURA does not authorize the court to grant that relief, it only has authority to affirm a PUC rule or to reverse and remand it to the PUC—not to award damages. Luminant and the other power purchasers pointed out in response that they had addressed this issue by initiating administrative proceedings under PURA contesting the amount of the invoices received from ERCOT, and any ruling by the court would be controlling in those proceedings. The PUC responded that since ERCOT is merely a clearinghouse and does not “maintain a fund of money,” any payment would have to come from other market participants. Therefore, any potential recovery was mere speculation. In other words, the PUC basically argued that “the egg cannot be unscrambled.” Id. at *16. The court rejected the PUC’s argument because the egg in fact can be unscrambled and has been unscrambled in the past. ERCOT has a procedure for and experience with market-wide resettlements, including one that occurred just prior to the storm. Thus, the court found that Luminant and the power purchasing respondents had standing. Id.
Next, the PUC argued that the case was moot because the February 2021 orders expired under their own terms within days of being issued. The court dispatched this argument in three sentences. Luminant suffered financial loss due to the orders, and the practical effect of the PUC’s argument would be that “short-term rules could never be challenged.” Id. at 17.
The PUC then argued that this dispute was outside the court’s limited jurisdiction to review only “competition rules” under PURA. Id. at *17-18. Regarding being a “rule,” the court reasoned that even though the orders only applied to a single event, they applied to the entire market and affected market participants directly. Id. at *18. The Orders were designed to implement the PUC’s market-wide policy that “[i]f customer load is being shed, scarcity is at its maximum, and the market price … should also be at its highest.” Id. As such, the February 2021 orders qualified as rules under PURA. Regarding being a “competition” rule, the court noted first that PURA does not define “competition.” The PUC attempted to limit the definition to issues relating to monopolies and anti-competitive practices. Further, the PUC argued that PURA gave the PUC the implicit authority to issue directives to ERCOT in an emergency. The court rejected these arguments finding that neither was supported by the text of PURA as it existed at the time. Id. at *19-20. The court found that a rule regulating pricing of wholesale power is within the scope of a competition rule, and therefore, jurisdiction had been proper in the Austin Court of Appeals. Id.
As a side note, on June 14, 2024, the Supreme Court also issued its opinion in the related case of PUC of Tex. v. RWE Renewables Ams., LLC, No. 23-0555, 2024 Tex. LEXIS 461 (June 14, 2024). In the wake of Winter Storm Uri, ERCOT adopted, and the PUC approved, a nodal protocol revision setting the price at the high cap during load shed. RWE contested the PUC’s approval under similar arguments as asserted in Luminant. The court reasoned that the PUC’s approval process of a Nodal Protocol Revision Request is not transformed into a “competition rule” merely based on its subject matter. Thus, the court of appeals did not have jurisdiction under those circumstances. PUC v. RWE, 2024 Tex. LEXIS 461 at *17-18.
In Luminant, after finding jurisdiction existed, the court turned to the merits. The court began with the statutory construction and agency deference issues. Regarding statutory construction, the Supreme Court disagreed with the Austin Court of Appeals and found that the implicated statutory provisions in PURA can be harmonized under these circumstances. The Austin Court of Appeals and the Supreme Court of Texas diverged in how they analyzed the potential friction between Tex. Util. Code § 39.001 (establishing the “desirability of competition [pricing]” as the Supreme Court characterized it) and Tex. Util. Code § 39.151 (setting forth ERCOT’s “responsibility to ensure the reliability of the power grid.”). Id. at *20-21. The courts generally agreed on the rules of statutory construction, including that courts should look to the statute’s plain text, statutory provisions should be read in context, and courts should endeavor to find harmony in the provisions within the framework of the entire statute. Id. at *20. Both courts spotlighted Section 39.001(d)’s mandate that the competitive pricing objectives should be achieved “to the greatest extent feasible.” Id. at *21. The court of appeals found that since the formula-generated pricing during Winter Storm Uri was lower than the highest capped price mandated by the PUC in the orders, the PUC/ERCOT had not implemented competition-based pricing “to the greatest extent feasible.” Id. at *22. The Supreme Court, on the other hand, pointed out that the text of PURA did not require competition-based pricing without restriction. On the contrary, the statute provided several exceptions to and limitations on competition-based pricing—including among others the “to the greatest extent feasible” limitation. Id. at *21. The court noted the additional legislative policy objective set forth in multiple sections of PURA that require the PUC to ensure the reliability of the power grid. Id. The court held that “the Orders are authorized by Section 39.151 [regarding grid reliability]” and nothing in “Section 39.001 [regarding competition-based pricing] changes that; to the contrary, Section 39.001 acknowledges that the goal of prices set by competition may, in some circumstances, have to yield.” Id. at *25.
Moving on to agency deference, the court held that deciding when circumstances exist which would allow for exceptions to market-based pricing and how the PUC should respond “is the [PUC’s] job, not the judiciary’s.” Id. at *25. The court tracked its analysis of the judiciary’s limited role in reviewing agency rules for validity that it had recently set forth in Tex. Bd. of Chiropractic Exam’rs v. Tex. Med. Ass’n, 616 S.W.3d 558 (Tex. 2021). The court instructed that “when the claim is that an agency rule exceeds the scope of statutory law, the judiciary’s role is purely textual.” Id. at *27. This limited role “ensures that courts will stay in their lane.” Id. at *27-28. When the question comes down to whether the PUC implemented market-based pricing “to the greatest extent feasible” while ensuring the reliability of the grid, the PUC “has the expertise to manage the electric utility industry; the courts do not.” Id. at 26. The court afforded the PUC deference and declined to analyze the further questions regarding the effectiveness of the February 2021 orders, including among others, whether the price hikes or load shed saved the grid from collapse. Id. at *26-27. Since the orders did not contravene statutory language or objectives, the court affirmed their validity. Id. at *27.
Since the Austin Court of Appeals reversed the orders under PURA, it did not reach the APA arguments. The Supreme Court addressed the APA arguments and affirmed the orders for four reasons. Id. at *27-31. First, the court found that they complied with the APA’s emergency rule-making requirement that the rule contain in its preamble written findings of imminent peril and reasons for those findings. Id. at *27-29 (discussing Tex. Gov’t Code § 2001.034(a)). The court found that the opening paragraphs of the orders explaining the then-existing emergency circumstances substantially complied with this requirement. Id. at *29.
Second, the court held that the PUC substantially complied with the requirement that the rule be filed with the Secretary of State to be published in the Texas Register. Id. The court noted that there is a two-week gap between the filing of the rule and the publication in the Register. The February 2021 orders would have expired during that timeframe. The APA further provides that the agency “shall take appropriate measures to make emergency rules known to persons who may be affected by them.” Id. at *29-30. The PUC and ERCOT posted the orders on their websites and emailed them to the ERCOT distribution list. In the court’s opinion, this provided “better and faster notice” to the interested parties than the Register would have. Id.
Third, the court determined that the substantial compliance provision applies to the emergency procedures provisions because the emergency rules section is specifically cited in the substantial compliance section. Id. at *30 (citing Tex. Gov’t Code § 2001.035(a).
Fourth, the court highlighted that the Respondents did not make a showing of prejudice from any alleged violation of the APA notice requirements and that the Respondents had actual notice of the orders. Id. at *30-31. In sum, the court found that the PUC substantially complied with the APA emergency rulemaking procedures.
The court reversed the court of appeals’ opinion and rendered judgment affirming the orders.
