Reed Smith In-depth

On March 17, 2023, the Texas Court of Appeals at Austin set aside the Public Utility Commission of Texas’ (PUC) February 15 and 16, 2021, orders (the Orders) that caused energy prices to be set at $9,000 per megawatt hour during Winter Storm Uri. The case was initiated on March 2, 2021, when Luminant Energy Company LLC – a market participant subject to the Electric Reliability Council of Texas (ERCOT) Nodal Protocols – filed a direct appeal challenging the Orders as competition rules under the Texas Public Utility Regulatory Act (PURA) section 39.001(e). The Court of Appeals held that the Orders violated the statutory requirement that electricity prices be based on market competitive forces, not regulatory fiat. The court reversed the Orders and remanded the proceedings to the PUC.1 If the ruling is upheld, it could result in massive financial complications between counterparties. Companies should consider evaluating the impact of potentially having to resettle transactions entered into at the price cap during Winter Storm Uri.

Background and context

(a) PURA context and objectives

The court began its opinion by providing historic context for the Texas Public Utility Regulatory Act (PURA), Tex. Util. Code section 11.001 et seq. PURA was implemented as part of the federal government’s and various states’ efforts to reform the power industry in wake of the OPEC oil embargo and resultant energy crisis.2 The objective was to foster competition in electric power markets via deregulation and restructuring.3

The Texas effort to deregulate began in 1999 with revisions to PURA.4 A key aspect to Texas’ deregulation was that “wholesale and retail rates generally be set by competition rather than regulation.”5 Since the expansive Texas power grid is entirely within the state, it is not subject to regulation by the Federal Energy Regulatory Commission.6 The PUC has the regulatory jurisdiction over the market, and it established ERCOT as its Independent System Operator. ERCOT’s responsibilities include ensuring “system reliability, nondiscriminatory access to transmission and distribution systems, and clearance of all market transactions in the region served by the grid.”7 Accordingly, “ERCOT acts as the central counterparty for all transactions it settles and is deemed to be the sole buyer to each seller (typically a generator), and the sole seller to each buyer (typically a retailer) of all energy and related services.”8

PURA required the PUC to develop rules addressing scarcity pricing.9 The PUC established a general Scarcity Pricing Mechanism (SPM) and directed ERCOT to develop and implement formulas and rules implementing the SPM.10 Scarcity pricing has a system-wide offer cap of $9,000 per megawatt hour (MWh).11 For context, the court noted that a typical market price is around $30/MWh. The scarcity pricing mechanism had two goals: (1) “by offering windfall prices to peak generators through a number of scarcity price ‘adders,’ it creates incentives for any idle generation capacity to come online when demand (or ‘load’) threatens to exceed supply” and (2) “by imposing sticker-shock costs on consumption, it encourages conservation by any institutional consumers that may have some elasticity of demand, thus hopefully easing system load.”12