Phillips v. Elec. Reliability Council of Tex., Inc. (In re Entrust Energy, Inc.)

101 F.4th 369

In the MATTER OF ENTRUST ENERGY, INCORPORATED, et al., Debtor,Anna Phillips,as trustee of The Entrust Liquidating Trust, Appellee/Cross-Appellant, v. Electric Reliability Council of Texas, Incorporated, Appellant/Cross-Appellee.

No. 22-20603

United States Court of Appeals, Fifth Circuit

FILED April 29, 2024

Appeal from the United States Bankruptcy Court for the Southern District of Texas, USDC No. 4:22-MC-3018, David Ronald Jones, U.S. Bankruptcy Judge

Debbie E. Green, Charles R. Gibbs, McDermott Will & Emery, L.L.P., Dallas, TX, Darren Azman, Attorney, McDermott Will & Emery, L.L.P., New York, NY,

Andrew Lyons-Berg, McDermott Will & Emery, L.L.P., Washington, DC, Guyon H. Knight, Attorney, Mound, Cotton, Wollan & Greengrass, L.L.P., New York, NY, for Appellee/Cross-Appellant

Jamil Alibhai, Kevin M. Lippman, Munsch Hardt Kopf & Harr, P.C., Dallas, TX, for Appellant/Cross-Appellee.

Aaron Michael Streett, George H. Fibbe, Attorney, Jonathan Mark Little, Baker Botts, L.L.P., Houston, TX, for Amicus Curiae.

Before Higginbotham, Smith, and Higginson, Circuit Judges.

Jerry E. Smith, Circuit Judge:

This appeal is the latest in a series of cases spawned by Winter Storm Uri, which struck Texas in 2021 and wreaked havoc on the state's electrical grid and power systems. The storm caused numerous generators to fail and go offline. That, combined with spiking demand for energy, put the grid at risk of failure. The Electric Reliability Council of Texas, Inc. ("ERCOT"), the entity tasked with managing the grid, took drastic measures to prevent that failure, including manipulating the price of energy in hopes of incentivizing production. Those measures resulted in the receipt by Entrust Energy, Inc., of an electric bill from ERCOT of nearly $300 million—which rendered Entrust insolvent.

Entrust filed for bankruptcy, and ERCOT filed a claim seeking payment of the invoice. Anna Phillips (the Trustee of the Entrust Liquidating Trust, hereinafter the "Trustee") responded by initiating an adversarial proceeding challenging ERCOT's proof of claim. The Trustee contended that (1) ERCOT's price manipulation violated Texas law; (2) ERCOT was grossly negligent in failing to winterize the Texas grid and respond adequately to Uri; and (3) ERCOT's transitioning of Entrust's customers to another retail utility post-default was an uncompensated taking in violation of the Fifth Amendment.

ERCOT moved to dismiss all claims and requested alternatively that the bankruptcy court abstain under Burford v. Sun Oil Co., 319 U.S. 315, 63 S.Ct. 1098, 87 L.Ed. 1424 (1943). The bankruptcy court declined to abstain and denied ERCOT's motion to dismiss on all claims except for the takings claim.

The bankruptcy court's refusal to abstain under Burford was error. Accordingly, we reverse its denial of ERCOT's motion to abstain, reverse its denial of ERCOT's motion to dismiss Count's I-IV and VI of the Trustee's complaint, and vacate the bankruptcy court's order dismissing Count V with prejudice.

Since abstention is warranted, we remand with instruction to dismiss Counts I-IV, as the parties agree those counts seek equitable or discretionary relief. See Quackenbush v. Allstate Ins. Co., 517 U.S. 706, 729-31, 116 S.Ct. 1712, 135 L.Ed.2d 1 (1996). The parties also agree, however, that Counts V and VI are claims for damages, so the bankruptcy court must stay those counts pending resolution of related state proceedings.¹

I.

Unlike every other state in the Lower Forty-Eight, Texas uses an intrastate electric grid to service most of its counties. That grid is independent of larger, interstate grids servicing the other mainland states. See New York v. FERC, 535 U.S. 1, 7-9, 122 S.Ct. 1012, 152 L.Ed.2d 47 (2002). Therefore, though the grids of the other mainland states are interconnected and may import energy from each other in times of need, "Texas stands alone."²

To manage its unique grid, Texas passed the Public Utility Regulatory Act ("PURA") to "establish a comprehensive and adequate regulatory system for electric utilities." TEX. UTIL. CODE § 31.001(a). Part of PURA's purpose is to develop "a competitive wholesale electric market that allows for increased participation by electric utilities." Id. § 31.001(c). PURA is implemented by the Public Utility Commission of Texas ("PUC"). See id. § 39.151. The PUC is required to certify an "independent organization," id. § 39.151(c), to manage the Texas grid's "wholesale electric market," id. § 31.001(c). The PUC certified ERCOT as that organization.

That means ERCOT is responsible for ensuring the "reliability and adequacy of the regional electrical network" and "that electricity production and delivery are accurately accounted for among the generators and wholesale buyers and sellers." Id. § 39.151(a). And because Texas's grid is a market-based system, ERCOT "determines market-clearing prices unless otherwise directed by the [PUC]" and acts as "the sole buyer to each seller [of electricity], and the sole seller to each buyer." ERCOT v. Just Energy Tex., L.P. (In re Just Energy Grp., Inc.), 57 F.4th 241, 246 (5th Cir. 2023) (citations omitted).

The power generators of the Texas grid produce electricity for ERCOT to purchase. Utilities and other interested parties then buy electricity from ERCOT that they will use or sell to their own customers. In that way, ERCOT uses market forces—instead of regulatory measures—to manage Texas's real-time electricity markets. ERCOT sets the price of electricity on multiple real-time markets unless the PUC directs otherwise. 16 TEX. ADMIN. CODE § 25.501(a). It does so according to a comprehensive set of policies: the ERCOT Nodal Protocols ("Protocols").³ The Protocols set the price of electricity on the markets using a complicated system.

First, ERCOT receives bids for electricity from utility companies and offers of electricity from power generating companies on daily trading markets. See, e.g., Protocols §§ 4.1, 6.1(4). The price of electricity on the markets is set using several variables. See, e.g., id. § 6.6.1.1. One such variable is the "Reliability Deployment Price Adder," which—in broad terms—is one way that ERCOT accounts for scarcity of supply in the grid. Id. § 6.5.7.3.1(2). The Reliability Deployment Price Adder is calculated according to eight factors, but "firm load shed," a term of art for rolling blackouts, is not one of them. See id. § 6.5.7.3.1(1). The goal of adders such as the Reliability Deployment Price Adder is to increase the price of electricity on the market to incentivize power generators to make more offers, thereby addressing the discrepancy between supply and demand that led to the scarcity.

Second, the price of electricity on the open market will be only what buyers pay if the price falls below the High System-Wide Offer Cap ("HCAP"), which is a maximum price set by Texas Law. See id. § 4.4.11(1). Regardless of what the market determines to be a fair price, electricity buyers can never pay more than $9,000/MWh. See id. § 4.4.11(2).

Third, and finally, ERCOT's markets and their prices are subject to the PUC's control. 16 TEX. ADMIN. CODE § 25.501(a). That means the Protocols provide the exclusive mechanism for determining the price of electricity—binding both ERCOT and market participants—unless the PUC orders otherwise. See id.

One way the PUC intervenes in the markets is through its implementation of Texas's "provider of last resort" program ("POLR"). Despite the free-market nature of Texas's grid, state law mandates that every customer of a retail utility "is entitled . . . to be served by a provider of last resort that offers a [PUC]-approved standard service package." TEX. UTIL. CODE § 39.101(b)(4). That means "[i]n the event that a retail electric provider fails to serve any or all of its customers, the [POLR] shall offer th[ose] customer[s]" a PUC-approved "standard retail service package . . . with no interruption of service." Id. § 39.106(g).

The PUC implements the POLR program by requiring ERCOT to transfer a utility's customers to a POLR should the utility default on its obligations under the Protocols. 16 TEX. ADMIN. CODE § 25.43(a). When that happens, it is known as a "Mass Transition." See Protocols § 15.1.3.1; 16 TEX. ADMIN. CODE § 25.43(l).

This entire scheme is subject to review. Challenges to ERCOT's pricing decisions, invoices, or actions under the Protocols must be brought first to ERCOT via the dispute-resolution mechanisms specified in the Protocols. Protocols §§ 9.14.1, 20.9. ERCOT's resolution is then subject to review by the PUC. TEX. UTIL. CODE § 39.151(d-4)(6). The PUC's orders are subject to judicial review as provided in the Texas Administrative Procedure Act. TEX. GOV'T CODE § 2001.176; TEX. UTIL. CODE §§ 11.007(a); 15.001. That review occurs in the Travis County district court or in the newly-created Fifteenth Court of Appeals District. See TEX. GOV'T CODE § 2001.176. ERCOT, however, is provided absolute immunity from damage actions arising out of the implementation of a Mass Transition. See 16 TEX. ADMIN. CODE § 25.43(o)(2).⁴

II.

Entrust is an energy company that provides electricity and natural gas to residential and commercial customers. In 2015, Entrust executed a standard form agreement ("SFA") with ERCOT to purchase electricity on the ERCOT markets. As part of that agreement, Entrust agreed to be bound by the Protocols. ERCOT executes the same agreement with every company that participates in its markets. Things proceeded smoothly until 2021.

In mid-February of that year, Winter Storm Uri descended on Texas. The storm produced abnormally cold weather, and temperatures dropped well below freezing for multiple days. Though ERCOT was aware of the storm's approach and potential for extreme cold, the freeze caused a large portion of the grid's generation capacity to go offline—just as demand began to spike from Texans needing to heat their homes, schools, and businesses. That type of emergency had happened before—in...