During a January 30 hearing, the state’s highest court heard oral arguments from lawyers for the Public Utility Commission of Texas, Calpine Corp., and Luminant. The implications of the lawsuit are immense.
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Cold weather knocked out generation across the state during Winter Storm Uri.
A lawsuit alleging that Texas energy regulators overstepped their authority by forcing up electricity prices during Winter Storm Uri has come up for review by the Texas Supreme Court.
During a January 30 hearing, the state’s highest court heard oral arguments from lawyers for the Public Utility Commission of Texas, Calpine Corp., and Luminant. The implications of the lawsuit, which was brought by Luminant against the PUC, are immense. The Supreme Court, among other questions, must clarify whether the PUC improperly restricted wholesale energy market competition during the 2021 storm and, as such, violated the Public Utility Regulatory Act (PURA).
The Background
In February 2021, during Winter Storm Uri, freezing temperatures caused failures at multiple power generators and prompted ERCOT to order statewide rolling outages. But despite a lack of generation supply during the storm and intense demand, energy prices remained relatively modest. Specifically, market clearing prices were approximately $1,200 per megawatt hour, far lower than the systemwide offer cap at that time of $9,000. This pricing imbalance prompted then-PUC Chair DeAnn Walker to conclude that ERCOT’s Scarcity Pricing Mechanism (SPM), which should raise prices during times of low generation supply to incentivize additional generation, was malfunctioning. Accordingly, the Commission issued an order during the storm directing ERCOT to set market prices at the $9,000/MWh cap when “customer load is being shed” — i.e., during outages.
Due to this order, Luminant incurred losses of almost $1 billion because it had to purchase energy at the market cap to fulfill its obligations during Winter Storm Uri. The company sued the PUC after the storm, asserting that because the agency had manually adjusted the Scarcity Pricing Mechanism to the systemwide offer cap, it illegally frustrated free competition in the energy market. The Third Court of Appeals then issued a ruling agreeing with Luminant, finding the PUC’s order exceeded its statutory authority. The PUC and its various intervenors, including Calpine, appealed to the Texas Supreme Court.
Oral Arguments
Oral arguments before the Texas Supreme Court focused on various questions, including whether the agency’s controversial order constituted a “competition rule.” The court also considered whether the PUC exceeded its statutory authority by limiting market competition. However, whether the PUC’s decision to manually adjust the Scarcity Pricing Mechanism was correct — from a policy perspective — was irrelevant to the legal proceeding.
Among other things, the Commission’s legal counsel argued that the agency’s order did not constitute a “competition rule” because the order did not relate to market abuse. As such, the agency’s counsel argued that the Supreme Court lacked jurisdiction in the case. Further, PUC counsel argued that the agency’s order did not amend the Scarcity Pricing Mechanism rule. Instead, counsel argued that the Commission recognized the SPM was malfunctioning and so issued an order directing ERCOT to comply with an existing rule. However, Justice Jane Bland appeared skeptical and questioned whether the order’s expressed consideration of “load shed” — which the previous SPM rule did not consider for pricing purposes — demonstrates that it did, in fact, amend the SPM rule.
The Supreme Court justices also found themselves weighing the Commission’s sometimes conflicting duties to promote reliability on the one hand, and to promote free market competition on the other. PURA § 39.001(d) instructs the PUC to “order competitive rather than regulatory methods to achieve the goals of [PURA] to the greatest extent feasible.” However, PURA also directs the Commission to “adopt and enforce rules relating to the reliability of the regional electric network.” The legal question, therefore, was whether the Commission’s duty to ensure reliability trumps the Commission’s duty to promote competition.
Calpine counsel argued that statutory mandates relating to reliability are paramount and, therefore, the agency’s order did not exceed its statutory authority. 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’s counsel countered that the Commission cannot promulgate rules or issue orders regulating competition, except as authorized. According to Luminant’s counsel, the Commission cannot use vague statutory authority to “override” this express ban from the Texas Legislature. However, Justice Jimmy Blacklock 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.”
Market Implications
The Supreme Court’s eventual decision in the case will have both immediate and far-reaching consequences. For instance, a finding that the PUC’s Order violated the Public Utility Regulatory Act would result in the unwinding of complex settlement proceedings. It is unclear whether consumers would ultimately receive refunds from these settlements, although it is almost certain that such an unwinding process would result in additional, expensive litigation.
Further, a holding that the PUC’s order constituted a rule could create challenges for the agency when confronted with future emergencies. That’s because almost all ERCOT emergency protocols, including load shed decisions, would become “rules” and therefor subject to emergency rulemaking requirements that include notice and public participation.