On Friday, March 17, 2023, the Third Court of Appeals issued an Opinion in an appeal brought by Luminant Energy Company and aligned intervenors, and reversed the Texas PUC’s February 15 and 16, 2021 Orders setting the price of wholesale electricity in the ERCOT market at $9,000 per megawatt-hour (“MWh”), and remanded to the Commission for further proceedings consistent with the ruling. The Court stated “Setting a single price at the rule-based maximum price violated the Legislature’s requirement in the Texas Utilities Code § 39.001(d) that the Commission use competitive methods to the greatest extent feasible and impose the least impact on competition.” Opinion at 42.
The Court found that: (1) the PUC Orders had the effect of amending the Commission’s rule, 16 Tex. Admin. Code (“TAC”) § 25.505, and therefore constitute rules as defined in the Texas Administrative Procedure Act (“APA”) § 2001.003(6); and (2) the Orders exceeded the Commission’s statutory authority. Because the Court agreed with Appellants on the second ground, it did not address Appellant’s contention that the Commission failed to comply with the APA’s rulemaking procedures in adopting the Orders.
In finding that the Commission exceeded its statutory authority in issuing the Orders, the Court agreed that the orders contravene statutory language and run counter to statutory objectives that electricity prices should be determined by the normal forces of competition. The Court did not reach a decision on Luminant’s additional argument that the Orders were not properly limited in duration.
The Court relied on two provisions of the Texas Utilities Code. First, § 39.001(a), which includes the Legislature’s express finding that “the production and sale of electricity is not a monopoly warranting regulation of rates, operations, and services and that the public interest in competitive electric markets requires that…electric services and their prices should be determined by customer choices and the normal forces of competition.” And that “[r]egulatory authorities…shall authorize or order competitive rather than regulatory methods to achieve the goals of this chapter to the greatest extent feasible and shall adopt rules and issue orders that are both practical and limited so as to impose the least impact on competition.” Texas Util. Code § 39.001(a).
Second, § 39.151 provides that “[t]he commission shall adopt and enforce rules relating to the reliability of the regional electrical network and accounting for the production and delivery of electricity among generators and all other market participants, or may delegate to an independent organization responsibilities for establishing or enforcing such rules.” Texas Util. Code § 39.151(d). Furthermore, § 39.151(a)(2) requires ERCOT to “ensure the reliability and adequacy of the regional electrical network.” The Court first determined that the directive in § 39.151 to ensure system reliability does not provide an exception to the general preference in § 39.001 for reliance on competition rather than regulation to set prices for electricity. The Court stated that the Commission exceeded its power by eliminating competition entirely when it directed that the market price for energy be at its highest while there was load shed. “For four days under the Orders, the minimum price was the same as the maximum price by operation of executive fiat.” Opinion at 41. This contravened the statutory requirement that the Commission’s rules be “limited so as to impose the least impact on competition.” Texas Util. Code § 39.001(d) (emphasis added in the Opinion). Instead, the Court found that the Orders had the maximum impact on competition conceivable by setting a single price for power and directing ERCOT to take all necessary steps to ensure the market cleared at that single price, and therefore the Commission exceeded the Legislature’s limits on its power.
Background:
In February 2021, the state of Texas experienced an unprecedented winter storm that caused the loss of more than 40,000 MW of electric generation resources within the ERCOT power region. ERCOT declared its highest state of emergency, and Emergency Energy Alert Level 3 (“EEA 3”) due to high electrical demand exceeding supply. ERCOT then ordered utilities to reduce customer electric demand through rolling electricity outages (known as “firm load shed”) to avoid a system-wide failure on the Texas electric grid.
In response to energy prices in the ERCOT-run wholesale market clearing at less than $9,000, which was the maximum price during scarcity conditions pursuant to 16 TAC § 25.505(g)(6)(B), the Texas PUC” or “Commission sua sponte issued orders (collectively, “Orders”) during two brief emergency open meetings on February 15 and 16, 2021. The Orders directed ERCOT to “ensure that firm load that is being shed in EEA3 is accounted for in ERCOT’s scarcity pricing signals,” which required that ERCOT ensure that energy prices would clear at the system-wide offer cap of $9,000/MWh during the duration of the EEA3 event. The $9,000/MWh is the maximum amount permitted under the PUC’s rules in 16 TAC § 25.505(g)(6)(B)—and hundreds of times higher than the average price of wholesale electricity.
The PUC administratively set the wholesale price of electricity at the higher cap instead of permitting the competitive market to dictate the price of energy at the highest offer accepted at any given location, resulting in every MWh sold priced by administrative rule at $9,000 until 9:05 a.m. on February 19th.
Luminant requested judicial review of PUC Orders as “competition rules” under Texas Utilities Code 39.001(e)-(f), which provides for a fast-tracked appellate process that skips the Travis County District Court and instead is filed directly with the Third Court of Appeals. Luminant argued that the Commission failed to comply with the APA’s regular or emergency rulemaking procedures and challenged the validity of the competitive pricing rule reflected in the Orders, contending that the substance of the Orders exceeded the Commission’s statutory authority.
