Texas Attorney General Says ERCOT Re-pricing Within PUC's Authority, Does Not Raise Constitutional Concerns If Action Furthers A Compelling Public Interest -- EnergyChoiceMatters.com

Texas Attorney General Says ERCOT Re-pricing Within PUC's Authority, Does Not Raise Constitutional Concerns If Action Furthers A Compelling Public Interest

March 17, 2021

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Reporting by Paul Ring • ring@energychoicematters.com

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Texas Attorney General Ken Paxton has issued an opinion finding that re-pricing the ERCOT market is within the Texas PUC's authority and does not raise constitutional concerns if such action furthers a compelling public interest

As previously reported, the lieutenant governor had asked the AG for an opinion regarding: "Whether under the Utilities Code the Public Utility Commission has the legal authority to issue orders affecting pricing for the wholesale electricity market and ancillary services?"

Summarizing the request from the lieutenant governor, the AG's opinion states, "In response to the 2021 Winter Emergency, you state that the Texas Senate passed Senate Bill 2142 to correct the pricing of wholesale electricity and ancillary services during the period beginning at 11:55 PM on February 17, 2021, and ending at 9:00 AM on February 19, 2021 (the 'Correction Period'). Request Letter at 1. You inquire whether the Commission has the authority to issue orders correcting the pricing of certain aspects of the Texas electricity market during the Correction Period. Id. While the question presented generally speaks to authority under the Utilities Code, we note that your specific question relates to the electricity market, thus we limit our opinion to the relevant title of the Utilities Code (Title 2, also known as the Public Utility Regulatory Act ('PURA'), and subtitle B of such Act as it relates to electric utilities) and the constitutional issues presented by your question."

The AG's opinion, in summation, states, "The Utilities Code gives 'complete authority' to the Public Utility Commission to adopt and enforce rules relating to reliability and accounting for the production and delivery of electricity among market participants. Specifically, subsection 39.151(d) of the Utilities Code authorizes the Public Utility Commission to oversee and investigate the independent organization (ERCOT) as necessary to ensure ERCOT’s accountability and to ensure that it adequately performs its functions and duties. Within the regulatory timelines, ERCOT can also revise pricing on the wholesale electricity market if certain events occur."

"Under the plain language of subsection 39.151(d), the Public Utility Commission has complete authority to act to ensure that ERCOT has accurately accounted for electricity production and delivery among market participants in the region. Such authority likely could be interpreted to allow the Public Utility Commission to order ERCOT to correct prices for wholesale electricity and ancillary services during a specific timeframe," the AG's opinion states

"A court would likely find that such corrective action by the Public Utility Commission under subsection 39.151(d) does not raise constitutional concerns, namely under article 1, sections 16 and 17 of the Texas Constitution, provided that such regulatory action furthers a compelling public interest," the AG's opinion states

"In short, nothing in the Utilities Code prevents the Commission from acting, nor does anything require such specific action be taken. We note that prior to this proposed legislation, no specific authority required the Commission to take the actions contained in Senate Bill 2142 as they relate to the 2021 Winter Emergency ... the Commission has general authority to take actions in furtherance of its statutory authority and as otherwise permitted by law (namely the Utilities Code)," the AG's opinion states

"[A]mple prior action illustrates the Commission’s use of its general authority to take similar actions as the ones contemplated by Senate Bill 2142. In the ... TXU Generation case [TXU Generation Co., L.P. v. Pub. Util. Comm’n of Tex., 165 S.W.3d 821, 831–32 (Tex. App.— Austin 2005, pet. denied) ], the Third Court of Appeals stated that the Commission had broad authority to create rules governing the conduct of market participants. Specifically, the court held that subsection 35.004(e) of the Utilities Code empowers the Commission to 'ensure that ancillary services necessary to facilitate the transmission of electric energy are available at reasonable prices with terms and conditions that are not unreasonably preferential, prejudicial, discriminatory, predatory, or anticompetitive.' TXU Generation Co., L.P., 165 S.W.3d at 834," the AG's opinion states

"The Commission has also exercised its statutory authority to affect prices for both wholesale electricity and ancillary services during the 2021 Winter Emergency on several occasions, including the passing of the following orders: (i) the first Order Directing ERCOT to Take Action and Granting Exception to Commission Rules, dated February 15, 2021 (the 'First Order') ; (ii) the second Order Directing ERCOT to Take Action and Granting Exception to Commission Rules, dated February 16, 2021 (the 'Second Order'); (iii) the third Order Directing ERCOT to Take Action and Granting Exception to ERCOT Protocols, dated February 21, 2021 (the 'Third Order'); and (iv) the Second Order Addressing Ancillary Services, dated March 12, 2021 (the 'Second Ancillary Services Order')," the AG's opinion states

"Because the applicability of the statute as to the above-mentioned Commission orders will depend on the particular facts concerning the compelling public interest and a review of the Commission’s actions in meeting said circumstances, we cannot resolve issues requiring the consideration of specific facts. See Tex. Att’y Gen. Op. No. KP-0309 (2020) at 4 (stating that the opinion process cannot resolve issues requiring the consideration of specific facts)," the AG's opinion states

"In consideration of the foregoing, we conclude that the Commission has the general authority to act under the Utilities Code to take the actions set out in the above-mentioned orders during the 2021 Winter Emergency for the reasons stated above and, additionally, on the basis that (i) the 2021 Winter Emergency conditions presented a 'compelling public interest' to so act; (ii) the Governor declared a disaster under Chapter 418 of the Texas Government Code with respect to the 2021 Winter Emergency; and (iii) PUC directed ERCOT to ensure that firm load that was being shed was accounted for in ERCOT’s pricing signals during the 2021 Winter Emergency (as a result of the scarcity conditions in the market for the applicable period thereto)," the AG's opinion states

"In addition to the statutory analysis of the Commission’s authority to issue orders affecting pricing, a constitutional analysis is required. The takings clause encapsulated in article 1, section 17 of the Texas Constitution applies when the State acts in its sovereign capacity—that is, when it uses its eminent-domain or police powers. See Gen. Servs. Comm’n v. Little-Tex Insulation Co., 39 S.W.3d 591, 598 (Tex. 2001). 'However, the State does not have the requisite intent under constitutional-takings jurisprudence when it withholds property or money from an entity in a contract dispute.' Id. at 598–99. Here, if the Commission (through ERCOT) was acting as a price regulator, any repricing might be found by a Court to be an exercise of the police power. To the extent ERCOT set prices when acting as a counterparty during clearance or in the course of providing settlement services, including with respect to a market participant agreement, a court may find that ERCOT is repricing under the terms of a contract. A detailed analysis of the facts of specific contracts would need to be considered further and exceeds the scope of this expedited opinion process. Tex. Att’y Gen. Op. No. KP-0309 (2020) at 4," the AG's opinion states

"We have considered one potential issue as it relates to subsection 17(b) of the Texas Constitution: '‘public use’ does not include the taking of property under subsection (a) of this section for transfer to a private entity for the primary purpose of economic development or enhancement of tax revenues.' TEX. CONST. art. I, § 17(b). There is little caselaw respecting this provision. In one case, however, a colorable argument was made that a requirement that a generator return money to a counterparty to undo economic harm would constitute a transfer to a private entity for economic-development purposes. See Tex. Rice Land Partners, Ltd. v. Denbury Green Pipeline-Tex., LLC, 363 S.W.3d 192, 195 (Tex. 2012) ('The overarching constitutional rule controls: no taking of property for private use.')," the AG's opinion states

"That case has limited applicability, however, because of the antecedent issue—whether the generators’ right to the proceeds from the energy sales is sufficiently vested to constitute 'property' within the meaning of the Takings Clause. See City of Austin v. Whittington, 384 S.W.3d 766, 790 (Tex. 2012) ('[V]ested rights . . . are property rights that the Constitution protects like any other property.'). It is likely that they are not. 'A ‘vested right’ implies an immediate right or entitlement—it is not an expectation or a contingency. When the authority granting the right has the power and discretion to take that right away – as the Commission does, per the authorities cited above, it cannot be said to be a vested right. 'Engrained in the concept of vested rights is the idea of certainty. When a lawmaking power can declare that a right does not exist, the right is not ‘fixed or vested.’' Houston Indep. Sch. Dist. v. Houston Chronicle Pub. Co., 798 S.W.2d 580, 589 (Tex. App.—Houston [1st Dist.] 1990, writ denied). The rights here are not vested. See TEX. CONST. art. I, § 16," the AG's opinion states

"For similar reasons, a price correction would not be the kind of retroactive law prohibited by article 1, section 16 of the Texas Constitution. See TEX. CONST. art. I § 16. That is because '[t]he constitutional prohibition against retroactive laws' only 'protects settled expectations.' Robinson v. Crown Cork & Seal Co., 335 S.W.3d 126, 145 (Tex. 2010). Thus, if generators were aware prices were subject to future modification, the generators cannot be said to have a settled expectation in those prices. Cf. id. at 140 (noting 'that permit holders could reasonably expect enforcement of the conditions inherently attached to their permit, and that a permit included no right to be forever free of a remedy to enforce those conditions' (quotation marks omitted)). Additionally, and irrespective of the settled nature of the generators’ expectations, '[a] valid exercise of the police power by the Legislature to safeguard the public safety and welfare can prevail over a finding that a law is unconstitutionally retroactive.' Id. at 144. That includes instances where the retroactive legislation contained legislative findings that the law was 'vital to the general economy and welfare of this state.' Id. at 144–45," the AG's opinion states.

"ERCOT has thirty days to alter prices (after notifying market participants) if they are in need of a correction. See ERCOT Protocol 6.3(6). To the extent that ERCOT’s thirty-two-hour long mis-pricing violated Commission rules or ERCOT protocols, language within the ERCOT Protocols appears to allow certain violations to be corrected within the thirty-day window (and possibly in some cases even after the thirty-day window has expired under the ERCOT Protocols), accompanied by a good-cause exception to the surge pricing caps. See 16 TEX. ADMIN. CODE § 25.3(b). In other words, until at least the close of the thirty-day window, the Commission and ERCOT retain the power to alter prices. Until that window closes, there is only an expectation of receiving the full cleared price, not a settled expectation or immediate entitlement," the AG's opinion states.

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