In a rare departure from the “law of the case doctrine,” under which a court of appeals is bound by its initial decision in a subsequent appeal in the same case, the Dallas Court of Appeals has held that the state’s electric grid operator is not entitled to sovereign immunity from suit and that the Legislature did not grant the PUC with exclusive jurisdiction over common law claims. The en banc decision reversed the court’s prior panel decision in Elec. Reliability Council of Tex., Inc. v. Panda Power Generation Infrastructure Fund, LLC (Panda I), 552 S.W.3d 297 (Tex. App.—Dallas 2018, pet. dism’d w.o.j.), which determined that ERCOT had sovereign immunity.

The case, Panda Power Generation Infrastructure Fund, Inc. et. al v. Electric Reliability Council of Texas (No. 05-18-00611-CV; February 18, 2022), arose from Panda’s claims that ERCOT published and publicized a series of reports on capacity, demand, and reserves (CDR reports) in 2011 and 2012 projecting a “serious and long-term scarcity of power supply.” Based on these representations, Panda alleges that it raised $2.2 billion in capital investment funds to construct three power plants in Texas. After construction had commenced, ERCOT revised its projections to predict an excess of generation capacity. Panda alleges that ERCOT knew that its initial projections were inaccurate but negligently, fraudulently, or intentionally published the false data anyway to induce investors to build new generation and filed suit in a Grayson County district court. ERCOT filed a plea to the jurisdiction, which the trial court denied. The court of appeals reversed and remanded to vacate its order and dismiss the case for lack of jurisdiction (Panda I). Panda appealed to SCOTX, which dismissed the appeal without reaching the merits. Elec. Reliability Council of Tex. v. Panda Power Generation Infrastructure Fund, LLC (Panda I Appeal), 619 S.W.3d 631 (Tex. 2021). On remand, the trial court dismissed the case. Panda once again appealed to the court of appeals.

On the second go-around, the court of appeals determined that its prior ruling was “clearly erroneous,” justifying the court’s departure from the law-of-the-case doctrine. It based this reversal on an analysis of three SCOTX decisions handed down between the decision in Panda I and Panda’s second appeal. These decisions involved sovereign and governmental immunity and, according to the majority opinion, dictated a different result. These cases may be briefly summarized as follows:

  • Rosenberg Development Corp. v. Imperial Performing Arts, Inc., 571 S.W.3d 738 (Tex. 219). SCOTX ruled that economic development corporations created by cities under the Texas Development Corporation Act (Tex. Gov. Code §§501.001-507.202) “are not governmental entities in their own right and therefore are not entitled to governmental immunity,” although they are heavily regulated by political subdivisions of the state.
  • El Paso Education Initiative, Inc. v. Amex Properties, 602 S.W.3d v. 521 (Tex. 2020). SCOTX held that open-enrollment charter schools and their charter holders, although they are private, non-profit entities, are entitled to governmental immunity to the same extent as public schools. Because the Legislature has extended such immunity to their operations by virtue of their public funding and accountability to the state, they act as “an arm of the state” and have the same immunity.
  • University of the Incarnate Word v. Redus, 602 S.W.3d 398 (Tex. 2020). SCOTX held that a private university did not have governmental entity against a suit brought by the parents of a student killed by a university police officer. The university’s administration and private board of directors were responsible for the police department and its operations and not accountable to the taxpayers or public officials. SCOTX also determined that extending immunity to a private university would not further the purpose of the doctrine of sovereign community, which is to preserve the separation of powers and protect the public purse.

Applying the guidance of these decisions, the court of appeals determined that ERCOT is not “an arm of the state.” Although heavily regulated and answerable to the PUC, the court found, ERCOT remains a private entity [501(c)(4) nonprofit entity] that is: (1) not created or chartered by the government, (2) operated and overseen by a private board and CEO, and (3) funded by fees charged to wholesale electricity buyers and sellers, not tax revenue. In the majority’s view, ERCOT resembles an economic development corporation (a regulated private entity subject to government oversight) or a private university (raises revenue through user and membership fees, not taxes) rather than an open-enrollment charter school (publicly funded and subject to the same regulatory scheme as public schools).

The court of appeals rejected ERCOT’s argument that it is entitled to derivative immunity by virtue of the regulatory functions it performs on behalf of the PUC. ERCOT urged the court to adopt SCOTUS authority giving “self-regulatory organizations” in the federal securities enforcement arena governmental immunity. The court of appeals distinguished ERCOT from these entities and declined to be the first Texas court to apply a federal precedent in this area. Finally, the court of appeals determined that the Legislature had not granted the PUC exclusive jurisdiction to adjudicate Panda’s common law claims of negligence, gross negligence, fraud, and breach of fiduciary duty on two grounds: (1) the Legislature did not expressly grant this authority by statute; and (2) the Legislature did not establish a pervasive regulatory scheme indicating that it intended for the regulatory process to be the exclusive means of remedying” Panda’s claims. While the court of appeals reasoned from SCOTX precedent that such a scheme may exist with respect to public utilities, it does not extend to Panda, a power generator that relied on ERCOT’s allegedly false and misleading reports. Moreover, the court noted, the PUC’s own regulations detailing its enforcement authority over ERCOT specify that the regulations do not “preclude any form of civil relief that may be available under federal or state law.”

Justice Schenk dissented on the basis that the law-of-the-case doctrine applies because the court’s decision in Panda Iwas not erroneous, much less clearly erroneous. He would find that ERCOT has sovereign immunity, partly based on his concern that the court of appeals’ decision raises a constitutional issue involving the delegation of rule-making authority to a private entity. Since PURA authorizes the PUC to delegate certain functions to ERCOT, and these functions include promulgating rules binding on wholesale entities, ERCOT does in fact act as an arm of the state. He would also find that the Legislature has granted the PUC exclusive jurisdiction over claims against ERCOT, since all of ERCOT’s activities fall within the Legislature’s express grant to authority to PUC to designate an independent operator for the state’s electric grid.

This case will undoubtedly make a beeline for the Texas Supreme Court. While it involves the propriety of ERCOT’s market capacity reports, the implications of the court of appeals’ decision are far broader, perhaps exposing ERCOT to wrongful death claims arising from Winter Storm Uri. In any event, big dollars are involved, and the prospect of passing huge damage awards onto ratepayers will more than likely inform SCOTX’s consideration of the issues.

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