In two cases testing the limits of ERCOT’s governmental immunity, a divided Texas Supreme Court has determined that an independent systems operator certified by the PUC has sovereign immunity from suit as “an arm of the state.”
The first case, CPS Energy v. Electric Reliability Council of Texas (No. 22-0056), arose from ERCOT’s actions during Winter Storm Uri, which resulted in CPS and other market participants suffering substantial financial losses after the PUC directed ERCOT to raise the per-megawatt-hour price of wholesale electricity to the highest permissible level. CPS sued ERCOT for breach of the Standard Form Market Participant Agreement, negligence, breach of fiduciary duty, and unconstitutional taking. ERCOT filed a plea to the jurisdiction asserting sovereign immunity and, alternatively, that the PUC had exclusive jurisdiction over CPS’s claims. The trial court denied the plea. The San Antonio Court of Appeals eventually reversed, finding that the PUC had exclusive jurisdiction and CPS had not exhausted its administrative remedies. CPS sought review.
The second case, Electric Reliability Council of Texas, Inc. v. Panda Power Generation Infrastructure Fund, LLC d/b/a Panda Power Funds, et al. (No. 22-0916; delivered June 23, 2023) stemmed 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 alleged 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 was 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). ERCOT sought review.
In an opinion by Chief Justice Hecht, joined by Justices Blacklock, Bland, Huddle, and Young, SCOTX held that that: (1) ERCOT is a governmental unit under the Texas Tort Claims Act and could thus file an interlocutory appeal of the denial of a plea to the jurisdiction; (2) the PUC has exclusive jurisdiction over CPS’s and Panda’s claims against ERCOT (thus requiring exhaustion of administrative remedies before pursuing judicial remedies); and (3) ERCOT is entitled to sovereign immunity as “an arm of the state.” The dissent, co-authored by Justices Devine and Boyd, and joined by Justices Lehrmann and Busby, agreed with the majority as to the first two issues, but sharply departed from the majority on the sovereign immunity issue.
As to the interlocutory appeal issue, the Court determined that ERCOT is an “organ of government” because it “performs a ‘unique governmental’ function as part of a ‘larger governmental system,’” that is, the operation of the state’s electric grid. The Court further found that ERCOT derives its authority from the Public Utility Regulatory Act, which directs the PUC to certify an independent system operator to “supervise the Texas power region’s transmission facilities and to coordinate its market transactions, transmissions planning, and network reliability. Thus, although ERCOT is a private, nonprofit corporation, its ‘status’ as the ISO for the Texas power region and its ‘authority’ to act in that capacity derive directly from PURA.”
The Court likewise unanimously agreed that the PUC has exclusive jurisdiction over “issues underlying” CPS’s and Panda’s claims, and that courts could only address their statutory and constitutional complaints after the exhaustion of administrative remedies at the agency. Whether an agency has exclusive jurisdiction depends on whether the Legislature has made “an express or implied grant” of jurisdiction and whether the specific issue “fall[s] within that jurisdiction scope.” Although PURA does not grant express jurisdiction to the PUC over the issues in these cases, the Court concluded, § 39.151, Utilities Code, constitutes a “pervasive regulatory scheme” from which exclusive jurisdiction may be implied. Given the broad scope of this scheme, the Court had no trouble finding that CPS’s and Panda’s claims were governed by the PUC’s authority over ERCOT’s “operations, functions, and duties.”
But the consensus disintegrated over whether ERCOT should be afforded the state’s sovereign immunity from suit. In only one case, El Paso Education Initiative, Inc. v. Amex Properties, 602 S.W.3d v. 521 (Tex. 2020), has the Court found that sovereign immunity extended to a private entity, in that case an open-enrollment charter school explicitly considered by law to be part of the public school system. The majority reasoned that when it enacted the 1999 amendments to PURA, the Legislature “demonstrate[d] legislative intent to grant [ERCOT] the ‘nature, purposes, and powers’ of an ‘arm of the State government.’” It reached this conclusion based on the level of PUC control over ERCOT’s finances operations, ERCOT’s accountability to the state, and the state’s authority over the selection of ERCOT’s governing body. While ERCOT may exercise some discretion in its operation of the system, it nevertheless operates “with the nature of an arm of the state independently of the PUC’s actions on a given day.” Finally, the majority determined that “ERCOT’s immunity satisfies the ‘political, pecuniary, and pragmatic policies underlying [SCOTX’s] immunity doctrines.’” In short, extending sovereign immunity to ERCOT would protect taxpayer and ratepayer funds, which would have to be used to pay claims such as CPS’s and Panda’s through increased system administration fees. Moreover, giving ERCOT immunity “respects separation of powers principles” because “judicial imposition of a damages award against ERCOT would run afoul of the Legislature’s determination that the PUC alone has ‘complete authority’ over ERCOT’s finances. This directive necessarily prevents the courts from enforcing a monetary judgment against it.”
The dissent argued that the majority “over-read” the Court’s precedents. After running through the history of electric regulation, the dissent asserted that as an “industry-created, private, nonprofit corporation” with management of the “privately-owned transmission grid,” ERCOT not only pre-dated the 1999 PURA amendments by three decades, but the amendments did not address ERCOT as the ISO or give it “any particular functions, duties, or powers. Instead, PURA requires industry participants in each ‘power region’ to ‘establish one or more independent organizations’ to serve as the region’s coordinating organization and empowers the PUC to ‘certify’ the selected organizations to perform that function.” And although the amendments may have resulted in the newly certified ERCOT exercising functions of a “necessarily governmental” character, “[i]ts nature as an entity . . . did not change.” The entity remains essentially private in character. “Indeed,” the dissent argued, “legislatively authorizing private entities to perform public purposes without designating them as part of the government may provide the government with the political benefit of not having express accountability for those entities’ actions. The government could avoid blame or responsibility for any negative repercussions by disavowing the private entity’s improvident actions, which could encourage a hands-off approach with minimal oversight before any public outcry.”
The dissent invited the Legislature to step in and make it clear that ERCOT does not have sovereign immunity. In any event, it would have waited to determine the sovereign immunity issue until the PUC had exercised its exclusive jurisdiction and made factual findings with respect to the agency’s actual “control” over ERCOT’s actions. In the final analysis, the dissent expressed concern that allowing ERCOT to assume the “cloak” of sovereign immunity would “alter the public’s trust in our State’s justice system” by allowing a private entity to escape accountability for its management (or to some, mismanagement) of the response to Winter Storm Uri. Noting that at least 246 deaths were attributed to the storm and the number of lawsuits filed against ERCOT in its wake, the dissent lamented the majority’s decision to let ERCOT off the hook.
While it might be a stretch to suggest that this case reveals a significant rift in the Court, we think it fair to say that it does evince a real philosophical difference over how far sovereign immunity should be extended, particularly when private entities are assigned governmental functions, whether statutorily or contractually. The fact that the dissent indicated serious concern that the majority opinion could undermine “public trust” seems very serious, indeed. On another level, it will be interesting to see how the Legislature may or may not respond to the dissent’s invitation to overturn or limit the scope of this decision. By determining that ERCOT is “an arm of the state,” the majority has essentially erased the shield of plausible deniability that enabled the state leadership and Legislature to lay much of the blame for the Uri disaster at ERCOT’s feet. Any political benefit that might have accrued from ERCOT’s “private” character appears gone with the wind at this point. Put another way, is there any longer a point in perpetuating the fiction that ERCOT is an “independent” organization?
