Pub. Util. Comm'n of Tex. v. Luminant Energy Co.

691 S.W.3d 448

PUBLIC UTILITY COMMISSION OF TEXAS, Petitioner,

v.LUMINANT ENERGY COMPANY LLC, Respondent

No. 23-0231

Supreme Court of Texas.

Argued January 30, 2024

OPINION DELIVERED: June 14, 2024

On Petition for Review from the Court of Appeals for the Third District of Texas

J. Mark Little, Macey Reasoner Stokes, George Harold Fibbe, Houston, Patrick Leahy, Andrea Moore Stover, Austin, for

Petitioners Calpine Corporation, Talen Energy Corporation.

William Peacock III, Pro Se.

Kurt Kuhn, Lisa Hobbs, Austin, Michael J. Jewell, for Intervenor RWE Renewables Americas LLC.

Carter Gantt, Samuel W. Cooper, Houston, for Amicus Curiae EDF Trading North America, LLC.

Mark Oakes, Austin, Warren S. Huang, Houston, James Hughes, for Intervenors Pattern Gulf Wind LLC, Pattern Panhandle Wind, LLC, Logan’s Gap Wind LLC, Pattern Energy Group LP.

Conor Harvey, Michelle Stratton, for Amicus Curiae Quality Sausage Company, LLC.

Ben Barnes, Dallas, Anna Rotman, Houston, Andrea DeLorimier, Austin, George W. Hicks, Jr„ Jamie Aycock, for Petitioner TexGen Power, LLC.

Chrysta L. Castaneda, Dallas, Nicole Michael, for Petitioners DGSP2 LLC, Distributed Generation Solutions LLC.

Chrysta L. Castaneda, Dallas, Nicole Michael, for Amicus Curiae Aspire Commodities, LP.

John F. Bash Hl, Austin, Szymon S. Barnas, Lindsay May Weber, James C. Tecce, for Amicus Curiae Just Energy Texas LP, Fulcrum Retail Energy, LLC, Hudson Energy Services LLC, Just Energy Texas I Corp., and Just Energy Group, Inc.

Lara D. Pringle, Ewaen Woghiren, Jazmine Gomez, Houston, for Amicus Curiae Via Renewables, Inc.

Michael Boldt, Lino Mendiola, Austin, for Intervenor Exelon Generation Company, LLC.

David Benjamin Gerger, Houston, for Amicus Curiae The Chamber of Commerce of The United States of America.

Joseph A. Garnett, Houston, for Amicus Curiae JSW Steel (USA) Inc.

Michael J. Jewell, for Intervenor TX Hereford Wind, LLC.

Eric B. Storm, Austin, William W. Russell, Houston, Robert Scott Potosky, for Intervenor Texpo Power LP.

Mark Foster, Austin, Henry Joel Simmons, for Amicus Curiae B&B Theatres Operating Company, Inc., Boles Children’s Home, Brooklet Energy Distribution, LLC, Eligo Energy TX, LLC, Hartman Income REIT Management, Inc., Tubes, Inc., and Young Energy, LLC.

Angela V. Colmenero, Austin, Brent Webster, Houston, Kyle D. Highful, Lanora C. Pettit, Sara B. Baumgardner, Atty. Gen. W. Kenneth Paxton Jr., A. Lee Czocher, Lisa A. Bennett, Judd Stone II, Ryan Baasch, for Petitioner Public Utility Commission of Texas.

Ron Beal, Pro Se.

Elliot Clark, Wallace B. Jefferson, Elin Isenhower, Austin, Rachel Anne Ekery, Houston, for Amicus Curiae Electric Reliability Council of Texas, Inc.

Jay Quine, for Amicus Curiae Hartman vREIT XXI, Inc.

Denis Fallon, Paul Pantano Junior, Neal E. Kumar, for Amicus Curiae Futures Industry Association, Inc.

William A. Moore, Melissa A. Lorber, Austin, Allyson N. Ho, Elizabeth Kiernan, Dallas, Daniel Jude Kelly, Irving, Joseph Barakat, Katherine Montoya, Amy Leila Prueger, Michael Lawrence Raiff, Trenton Van Oss, Stephanie Renee Zapata, for Respondent.

Warren S. Huang, Houston, Mark Oakes, Eric B. Storm, Austin, James Hughes, for Intervenor Pattern Panhandle Wind 2 LLC.

Joseph Cecere, for Amicus Curiae South Texas Electric Cooperative.

Chief Justice Hecht delivered the opinion of the Court.

During Winter Storm Uri, with the Texas electric grid on the brink of collapse, the Public Utility Commission issued two orders, the effect of which was to raise the market price of electricity to the regulatory ceiling of $9,000/MWh ¹ to reflect the scarcity of supply, thereby incentivizing generators capable of adding supply to do so and large industrial users to reduce their demand. Some market participants went bankrupt. Litigation ensued.²

In this case, the court of appeals held that the Commission’s orders exceeded its authority under Chapter 39 of the Public Utility Regulatory Act (PURA) because the statute prohibits price-setting.³ We disagree. We also hold that the Commission substantially complied with the Administrative Procedure Act’s (APA) procedural rulemaking requirements, an issue the court of appeals did not reach. We reverse the judgment of the court of appeals and render judgment affirming the orders.⁴

I

A

The Legislature added Chapter 39 to PURA in 1999 as part of Texas’ transition to a competitive retail electric market.⁵ Though its provisions are wide-ranging, only a few are at issue here. Among subchapter A’s "General Provisions" is Section 39.001, which includes several statements of "Legislative Policy and Purpose". There, in subsection (a), the Legislature states its finding that "the public interest in competitive electric markets requires", with some exceptions, that "electric services and their prices should be determined by customer choices and the normal forces of competition."⁶ Continuing that theme, subsection (d) states 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."⁷

Subsections (c), (e), and (f) address rules. Subsection (c) prohibits regulatory authorities from "mak[ing] rules or issu[ing] orders regulating competitive electric services, prices, or competitors or restricting or conditioning competition except as authorized in this title".⁸ Subsections (e) and (f) authorize "[j]udicial review of competition rules"⁹—a concept we return to later—and set out the procedure for initiating such review directly in the court of appeals.¹⁰

The other provisions at issue are in subchapter D, which addresses "Market Structure". Section 39.151(c) requires the Commission to "certify an independent organization"—here, ERCOT ¹¹ —"to perform the functions prescribed by this section."¹² Four functions are listed in subsection (a). The second is "ensur[ing] the reliability and adequacy of the regional electrical network".¹³ The fourth is "ensur[ing] that electricity production and delivery are accurately accounted for among the generators and wholesale buyers and sellers in the region."¹⁴

Section 39.151(d) sets out the Commission’s oversight of ERCOT. "The 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", or it may delegate that responsibility to ERGOT.¹⁵ ERCOT "is directly responsible and accountable to the commission", which "has complete authority to oversee and investigate [ERCOT's] finances, budget, and operations as necessary to ensure the organization’s accountability and to ensure that the organization adequately performs the organization’s functions and duties."¹⁶ If ERCOT "does not adequately perform [its] functions or duties or does not comply with this section," the Commission can "take appropriate action", including decertification.¹⁷

B

As set out above, two of ERCOT’s statutory duties are ensuring the adequacy and reliability of the electric grid and ensuring that electricity production and delivery are accurately accounted for among the generators and wholesale buyers and sellers in the region.¹⁸ Relatedly, the Commission is charged with making rules addressing those duties or delegating the rulemaking responsibility to ERCOT, over which the Commission has complete authority.¹⁹ Under the Commission’s rules, "ERCOT shall determine the market clearing prices of energy", "[e]xcept as otherwise directed by the commission".²⁰ "The protocols and other rules" adopted by ERCOT "shall promote economic efficiency in the production and consumption of electricity; support wholesale and retail competition; support the reliability of electric service; and reflect the physical realities of the ERCOT electric system."²¹

Texas maintains an "energy only" market in which generators are compensated only for the energy they actually produce, as opposed to a "capacity market" in which generators are paid to maintain capacity for times of high demand. In an energy-only market, generators are incentivized to come online in times of high demand by higher prices for wholesale electricity. To ensure sufficient power generation during times of high demand, the Commission by rule established a scarcity-pricing mechanism—or SPM—and directed ERCOT to administer it.²²

The SPM is a mathematical formula run on ERCOT’s computers that sends price-based signals to energy generators regarding whether additional power is needed. Its goal is to ensure that in times of energy shortage, prices adequately account for high demand and the amount of reserves needed to keep the lights on. The formula should result in an inverse correlation between energy capacity in the grid and the price of electricity—the less energy available, the higher the price to incentivize generators to add power.

The SPM is complex, but only a few of its components need explanation here. The Commission by rule sets a ceiling on the price of energy, called the high system-wide offer cap, or HCAP. In February 2021, the HCAP was $9,000/MWh.²³ Another component of the SPM is the value of lost load or VOLL, which reflects the hypothetical price a customer would pay to avoid the loss of electrical service. The SPM was designed so that in times of extreme scarcity, when forced blackouts are imminent or occurring due to an insufficient supply of electricity to meet demand, the wholesale price of electricity approaches the VOLL. By Commission rule, the VOLL in February 2021 was set to be equal to the HCAP of $9,000/MWh.²⁴

C

For the ERCOT grid to remain functional, electricity supply and demand must remain balanced at a frequency of 60 hertz. The grid can operate at a frequency of 59.4 hertz for up to nine minutes before grid failure occurs.

Winter Storm Uri descended upon Texas over Valentine’s Day weekend of 2021,...