EnergyERCOT Lacks Sovereign Immunity, Appeals Court Rules, Opening the Door for Lawsuits Against the Grid Regulator

Filed by Panda Power, a Temple-based power company, and its subsidiaries, the case alleges ERCOT knowingly issued false electricity market estimates to “encourage investors and their financial sponsors to build new power generation.”

Based on that allegedly faulty prognostication, Panda Power invested $2.2 billion into building three new power plants. Shortly after ground broke on those plants, ERCOT revised the estimate to show a projected generation excess. Panda Power says this has caused the company to sell its power at “a fraction of the price.” 

Panda sued ERCOT alleging “fraud, negligent misrepresentation, and breach of fiduciary duty.”

The court summarized the petition, stating, “This case is about allegedly false representations ERCOT made to the market for the purpose of luring investors to build new power plants, and Panda’s alleged reliance on them.”

ERCOT is an energy-only market, meaning that the price of wholesale electricity fluctuates based on supply and demand. With more supply generally online, Panda states, the downward pressure was put on the trading price of electricity leading to less income for the company. This system is different than the capacity markets across the U.S., which negotiate an amount of electricity to be provided for a set price all upfront.

“[W]e conclude ERCOT is not entitled to sovereign immunity and the Legislature did not grant exclusive jurisdiction over Panda’s claims to the Public Utility Commission (PUC),” Texas’ Fifth District Court of Appeals’ opinion reads.

The trial court rejected ERCOT’s requests to dismiss the case, after direction from the appeals court in the case’s first iteration, ruling it lacked subject matter jurisdiction on the issue — suggesting Panda take its case to the PUC, the governmental agency that oversees ERCOT.

“To the extent we previously held otherwise,” the appeals court opinion reads, in contrition, “that holding is in error.”

Pivotal to the ruling, the court found ERCOT not to be an arm of the state, and thus not subject to the sovereign immunity doctrine writ large. ERCOT is a nonprofit corporation that was chartered by the Texas legislature in 1970 to oversee the state’s grid. When the grid’s deregulation occurred in the late 1990s, ERCOT’s role shifted to its current model akin to an “air-traffic controller” — doesn’t own generation or transmission, but directs the electricity traffic through the system. It also serves as the market’s accountant, billing companies on either side of the transactions.

But the court did draw a distinction on the liability ERCOT faces. 

“ERCOT likewise is not liable for its ordinary negligence when it exercises its power to cause the interruption of transmission service for the purpose of maintaining the ERCOT system stability and safety, but it may be liable for ‘its gross negligence or intentional misconduct when legally due,’” the court stated.

Here, the court draws a distinction between run-of-the-mill mistakes and deliberate misbehavior, which Panda is alleging in this case.

ERCOT also argued that the legislature’s intent in the grid regulator’s supervision is that the sole venue for grievances against it is the PUC — an appeal the court rejected, finding a lack of evidence to support that judgment of legislative intent.

The court reversed the trial court’s 2018 order of dismissal and remanded it back to that lower court for further consideration. It is likely to be appealed to the Texas Supreme Court.

Justice David Schenk dissented from the majority, expressing concerns about the precedential consequences that rise from the decision. 

“[T]he PUC chose to delegate its rule-making and enforcement authority to ERCOT,” Schenk wrote. “Thus, ERCOT makes binding rules that have the positive force of a statute. Concluding that ERCOT’s function in this capacity is a private one raises serious constitutional questions.”

He was also persuaded by ERCOT’s position of the PUC’s sole jurisdiction on allegations against the grid regulator.

“The en banc appellate court’s 50-page decision is a scholarly and complete rejection of ERCOT’s attempt to avoid the courthouse,” said attorney Ben Mesches with Haynes Boone, LLP, which represents Panda Power in the litigation.

This case, which began in 2018, holds even greater implications now after the 2021 blackouts. 

“The answer to the immunity issue in this case has become perhaps more important to the public than even to the parties,” Chief Justice Nathan Hecht opined in March 2021 when the Supreme Court of Texas declined to review the case because the trial court issued its ruling before the top court could consider the case.

A year later, Hecht’s assessment still holds true as lawsuits from the winter storm fallout are populating and progressing.

The industry-focused question Panda’s complaint highlights is generation projections. Since 2015 and through 2023, the ERCOT grid will have retired nearly 25,000 megawatts (MW) of thermal generation while adding 32,000 MW of renewable power.

While this is a net gain on a strictly megawattage level, when the wind doesn’t blow and the sun doesn’t shine, no power can be generated from those renewable sources. This happens every time the sun sets, and wind tends to diminish during peak usage hours.

Panda’s claims are strictly tied to its own self-interest, and information manipulation in the market is a valid concern, but the state’s grid is generally better off with the three thermal generators the company built than without.

Yet, Panda — which shelled out over $2 billion in needless, in its estimation, projects — would reject that ends-justify-the-means mentality.

Read the court’s ruling and dissent below.