On June 23, in CPS Energy v. Electric Reliability Council of Texas, the Texas Supreme Court held that the Electric Reliability Council of Texas (ERCOT) is entitled to sovereign immunity, concluding that ERCOT is an “arm of the state” because it is under the complete purview of the Public Utility Commission of Texas (PUC), the Legislature, and the statutory requirements of the Public Utility Regulatory Act (PURA).

The case was a consolidation of two conflicting Court of Appeals rulings: CPS Energy v. ERCOT and ERCOT v. Panda Power Generation Infrastructure Fund, LLC et al. The Texas Supreme Court answered three distinct questions raised by the two cases, finding:

1. ERCOT is a governmental unit as defined by the Texas Tort Claims Act (TTCA) and thereby entitled to pursue an interlocutory appeal of its plea to the jurisdiction;
2. the PUC has exclusive jurisdiction over the parties’ claims against ERCOT; and
3. ERCOT is entitled to sovereign immunity.

The net result of these findings is that parties may not sue ERCOT in regard to many types of claims and, as to others that could be brought (such as Constitutional claims), a party would have to first exhaust administrative remedies before the PUC.

In finding that ERCOT is a “Governmental Unit” under the TTCA, the Court noted that ERCOT operates as part of the state’s broader electricity regulation system, performs the uniquely governmental function of utilities regulation, and does so under the direct oversight of the PUC. Further, although ERCOT is a private, nonprofit corporation, its “status” as the Independent System Operator for the Texas Power Region and its authority to act in that capacity are derived from PURA.

In determining that the PUC has exclusive jurisdiction over the claims in the two cases, the Court found that the extensive regulation and oversight by the PUC (including complete financial, regulatory, budgetary, and adjudicatory power over ERCOT), constituted a pervasive regulatory scheme that encompassed the claims made by the parties. The Court did note that the PUC has no authority to determine whether ERCOT complied with common-law standards, and thus an aggrieved party could pursue damages or other relief after exhausting the regulatory process.

Finally, in determining that ERCOT is entitled to sovereign immunity, the Court found that PURA “evinces clear legislative intent” to vest it with the “nature, purposes, and powers” of an “arm of the state government” and because doing so “satisfies the ‘political, pecuniary, and pragmatic policies underlying our immunity doctrine.’” The Court noted there are “few things more fundamental to the state’s ability to function than its electricity grid.” Further, the Court leaned on the protection of public funds and state assets as justification for recognizing immunity. This marks the first time the Court has found that a nonprofit entity is entitled to sovereign immunity without a direct grant of statutory authority, a point stressed in the dissenting opinion critical of the majority holding on the issue of immunity.