Texas Court Reverses PUC's Winter Storm Uri $9,000 Pricing Orders -- EnergyChoiceMatters.com

Texas Court Reverses PUC's Winter Storm Uri $9,000 Pricing Orders

Court Says Time Limits In ERCOT Nodal Protocols Would Not Prohibit Court-Ordered Price Corrections, Remands Case For Further Proceedings

With Broader Implications, Court Says PUC's Actions To Achieve §39.151 Statutory Reliability Directive Must Be Subject To Prevailing Statute Which Requires That "Competitive Rather Than Regulatory Methods" Are Preferred "To The Greatest Extent Feasible" And With "The Least Impact On Competition"

March 16, 2023

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Copyright 2010-21 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

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The Texas Court of Appeals, Third District has issued a decision reversing the Public Utility Commission of Texas's emergency pricing Orders of February 15 and 16, 2021, and remanded case for further proceedings

As described by the Court, "On the afternoon of February 15, 2021, the Commission held a brief open meeting in which the commissioners discussed the SPM and issued the first of the two Orders that are the subject of this litigation. Finding that the electricity market was clearing as low as $1,200 and that this outcome was 'inconsistent with the fundamental design of ERCOT,' the Commission directed ERCOT 'to ensure that firm load that is being shed in EEA3 is accounted for in ERCOT's scarcity pricing signals.' Order Directing ERCOT to Take Action and Granting Exception to Commission Rules, PUC Project No. 51617 at 1-2 (Feb. 15, 2021) (First Order). The First Order stated, 'If customer load is being shed, scarcity is at its maximum, and the market price for the energy needed to serve that load should also be at its highest.' Id. at 1. By its terms, the First Order applied only to the then-in-effect EEA event.

The Court noted, "Later that same day, ERCOT issued a market notice reflecting its understanding that the PUC's 'directive [was] based on the [PUC's] observation in the order that energy prices of less than $9,000/MWh during load shed conditions are 'inconsistent with the fundamental design of the ERCOT market.'' ERCOT, M-C021521-01 Emergency Order of the Public Utility Commission Affecting ERCOT Market Prices (Feb. 15, 2021). ERCOT then adjusted its price algorithm to cause the market to clear at the $9,000/MWh cap."

The Court explained, "On the afternoon of the 16th, the Commission held a second meeting to revisit the First Order, ultimately issuing a second order that was substantially identical to the first, except that it rescinded language in the First Order that would have required retroactive repricing. Second Order Directing ERCOT to Take Action and Granting Exception to Commission Rules, PUC Project No. 51617 (Feb. 16, 2021) (Second Order). The Second Order again directed ERCOT that, if there was load shed, the market price for the energy needed to serve that load should also be 'at its highest.' Id. at 1. ERCOT has since issued settlement statements to market participants reflecting the $9,000/MWh clearing price."

Appellants, including Luminant, contend that the substance of the Orders exceeded the Commission's statutory authority.

The Court agreed

Luminant's substantive challenge to the Commission's statutory authority rests, in part, on the argument that the subject Orders, "contravene[ ] statutory language and run[ ] counter to statutory objectives that electricity prices should be determined by the normal forces of competition."

The Court agreed

The Court said, "Two Utilities Code provisions are key here. The first provision is the policy-and-purpose provision set forth at the beginning Chapter 39, 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.' Id. § 39.001(a). That section further provides 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.' Id. § 39.001(d)."

"The second provision is Section 39.151(d), Utilities Code, which the Commission expressly invoked in the Orders. Importantly, the Orders expressly addressed the scarcity pricing mechanism that by its own terms was adopted pursuant to Section 39.151(d). See Tex. Admin. Code § 25.505(g)(6)(B) (eff. May 30, 2019, to July 13, 2021). Section 39.151 chiefly concerns the creation and management of ISOs but also provides, in relevant part, 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.' Tex. Util. Code § 39.151(d). 'Independent organization' is defined as a region's ISO, which, in this case, is ERCOT. Id. § 39.151(b); Texas Com. Energy, 2004 WL 1777597, at *2. An adjacent provision requires such entities to 'ensure the reliability and adequacy of the regional electrical network.' Id. § 39.151(a)(2)," the Court said

"A threshold question is whether the authority granted by Section 39.151 qualifies, or is qualified by, the limitations imposed by 39.001. Put another way, the question is whether, or to what extent, Section 39.151's directive to ensure system reliability provides an exception to Section 39.001's general preference for reliance on competition rather than regulation to set prices. This appears to be a case of first impression," the Court said

"Here, Section 39.001 makes clear that 'competitive rather than regulatory methods' are preferred 'to the greatest extent feasible,' and with 'the least impact on competition.' Id. § 39.001(d). In contrast, Section 39.151 is silent as to whether 'regulatory' rather than 'competitive' methods may be adopted to ensure grid reliability. In the absence of specific guidance from Section 39.151, the Commission's actions must be subject to the constraint provided by the text of Section 39.001. Fidelity to the whole-text canon, as codified in our Code Construction Act, requires that we give effect to the phrase 'greatest extent feasible.' To find that the subject Orders were compliant with this statutory constraint, then, we must find that the Orders could not have used 'competitive rather than regulatory methods' to any greater extent than they did as issued. This we cannot do; the very notion is belied by the operation of the SPM as it existed immediately before the issuance of the subject Orders, and by the fact that, operating independently, this SMP did not result in 'HCAP' pricing," the Court said

The Court said, "In extreme circumstances under extraordinary pressure, the Commission exceeded its power by eliminating competition entirely. The previously adopted rule set the system-wide offer cap at $9,000/MWh. 16 Tex. Admin. Code § 25.505(g)(6)(B). The typical market clearing price in Texas can be $30/MWh. During Winter Storm Uri, the price had risen to just above $1,200, but that rise was not having the effect the Commission desired. The Orders, which we determined above are rules, instructed that if customer load is being shed, scarcity is at its maximum, and 'the market price for the energy needed to serve that load should also be at its highest.' First Order, at 1; Second Order, at 1. Knowing that the First Order caused ERCOT to set the market clearing price at the market cap of $9,000/MWh, the Commission issued the Second Order with the identical language directing 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. While the breadth of the Commission's discretion largely resists sharp delineation, the Legislature clearly stated that the Commission's rules must be 'limited so as to impose the least impact on competition.' See Tex. Util. Code § 39.001(d) (emphasis added [by Court]). Instead, 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. While the extraordinary circumstances of Winter Storm Uri may have required extraordinary modifications to the SPM to send appropriate pricing signals to prompt the necessary market response, the Commission here exceeded the Legislature's limits on its power. Setting a single price at the rule-based maximum price violated the Legislature's requirement in the Utilities Code Section 39.001(d) that the Commission use competitive methods to the greatest extent feasible and impose the least impact on competition," the Court said

"For the foregoing reasons, we reverse the Commission's Orders of February 15 and 16, 2021, and remand this case for further proceedings consistent with our ruling," the Court said

Addressing arguments from the PUC that appellants' sought relief has been rendered moot, due to, among other reasons, the window closing for ERCOT price corrections per the nodal protocols, the Court said, "We see no reason why the resolution of challenges to settlement invoices in ADR proceedings, whether due and payable or already paid under timely preserved protest, cannot and should not be governed by this Court's determination regarding appropriate pricing."

The Court further said, "the Commission overstates the effects of the Nodal Protocols. The Commission acknowledges that those rules 'provide ERCOT with some discretion after settlement point prices have become final to determine that prices qualify for a correction and then seek ERCOT Board review of such prices.' Per the Nodal Protocols, however, ERCOT would have had to notice participants during the month after the subject Order was issued and, the Commission argues, '[t]hat ship has sailed.' Thus, 'even if this Court were to order the PUC to issue an order directing ERCOT to resettle the market,' the Commission reasons, 'Appellants have not identified any means under the Nodal Protocols by which ERCOT can now make any market-wide corrections to pricing for EEA3-operating days.' This argument lacks merit. The fact that ERCOT may be time-barred under the protocols from effecting a price correction on its own initiative has few if any implications for the question of whether it may do so pursuant to an order of this Court. While we can imagine scenarios in which limitations on an entity's powers to act may operate as practical limitations on what a court may order it to do, this is not such a case. Where, as here, administrative disputes of the settlement statements were timely initiated and stayed pending decision of this timely-filed direct appeal, we discern no reason why the notice provisions that would ordinarily apply to ERCOT acting alone should prevent us from hearing Appellants' challenge and, if appropriate, granting relief."

Link to Court opinion

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