Texas Supreme Court Rules ERCOT Is a Government Entity, Blocks Suit Stemming From Winter Storm Uri

In the winter of 2021, Winter Storm Uri sent Texas into a deep freeze of such epic proportions that it overwhelmed the power grid. Hundreds died. Some estimates put the death toll as high as 700.[1] It could have been far worse. According to the Electric Reliability Council of Texas (ERCOT), a private nonprofit group made up of utility providers that runs Texas’s power grid, the system was “seconds or minutes away” from complete failure when partial shutdowns were implemented.[2]

Naturally, energy prices skyrocketed. A typical wholesale price for energy might be $30 per megawatt-hour.[3] But under the rates implemented through ERCOT during the storm, the price soared to $9,000 per megawatt-hour.[4] CPS Energy, a municipally owned utility in the San Antonio area that got its power from ERCOT, contended that ERCOT kept the price hiked long after the emergency ended.[5] It argued that this cost ERCOT’s market participants—CPS included—$16 billion in overcharges, and it wanted its money back.[6]

CPS sued ERCOT in March of 2021 for allowing prices to soar during the winter storms.[7] After the trial court denied ERCOT’s arguments that it was protected by sovereign immunity and that only the Texas Public Utilities Commission had jurisdiction over CPS’s claims, ERCOT brought its case to the Texas Supreme Court.[8]

The Texas Supreme Court ruled 5-4 that ERCOT qualified as a governmental unit, despite being a private nonprofit corporation.[9] Based on this holding, ERCOT was allowed to make an interlocutory appeal and was held to be protected by sovereign immunity.[10] The court also found that the Utilities Code was a pervasive regulatory scheme that gave the Commission exclusive jurisdiction over the suit.[11]

Under the test used by Texas courts, a private entity is a governmental unit when it (1) operates as part of a governmental system and (2) performs a “uniquely governmental” function.[12] Under this straightforward test, the Texas Supreme Court held that ERCOT was an organ of government.[13]

The court found that ERCOT operated as part of a governmental system, and thus that it satisfied the first requirement. As a membership organization made up of electric companies that had interconnected their grids in the 1970s, ERCOT essentially operated the state’s system for providing power.[14] Under a restructuring performed by the Texas legislature in decades that followed, the state required the Public Utility Commission to certify an entity to operate the electric market.[15] The Commission designated ERCOT in 2001.[16] ERCOT therefore operated under the oversight and standards of a state commission for public utilities.[17] The Commission also had total authority over ERCOT’s budget, finances, bylaws, and protocols, and the commission’s chairman sat on ERCOT’s board.[18] This collection of facts meant ERCOT met the first factor.

The Texas Supreme Court found that ERCOT met the second factor as well. After all, the regulation of utilities is “uniquely governmental.”[19] ERCOT’s authority over the electric grid had been delegated by the Commission to ensure reliability of the electrical network.[20] The Commission also enforced operating standards and payment procedures for all transactions by the participants in the network.[21] So ERCOT also satisfied the second prong.

Furthermore, although ERCOT was not a statutory creation, its status and authority emanated from the Public Utility Regulatory Act (PURA).[22] This legislative mandate, along with the delegation of rulemaking authority and the imposition of regulatory oversight by the Public Utility Commission, firmly established ERCOT as an integral component of the state’s regulatory framework.[23]

Additionally, ERCOT’s authority to oversee the transmission facilities and coordinate the market, bestowed by PURA, reinforced its governmental character.[24] This delegation of power, coupled with ERCOT’s inability to independently own property or expend funds, underscored ERCOT’s reliance on state authority.

While ERCOT’s organizational form as a private nonprofit did not conform to traditional notions of a state agency, for the majority, the overarching control exercised by the state and the delegation of critical governmental functions left no doubt about ERCOT’s governmental nature.[25]

By successfully establishing its governmental status, ERCOT unlocked a crucial benefit: the ability to invoke the Texas Tort Claim Act’s provision for interlocutory appeals by “governmental units.”[26] This meant ERCOT’s appeal was not premature.

Most importantly for ERCOT, securing its governmental identity meant it could hide behind the shield of sovereign immunity.[27] While this protective cloak is not always available to legislatively authorized entities like ERCOT, the unique role, functions, and powers vested in ERCOT rendered it eligible for such immunity.[28] The Texas Supreme Court, while acknowledging ERCOT’s atypical nature among the private entities it had previously deemed governmental, ultimately concluded that ERCOT’s particular circumstances warranted sovereign immunity.[29] The court also reasoned that granting ERCOT sovereign immunity would safeguard the uninterrupted delivery of governmental services, protect public funds, and uphold the separation of powers.[30]

The last question the Texas Supreme Court had to resolve was whether the Commission had exclusive jurisdiction over CPS’s claims. It held that it did because the Utilities Code was a pervasive regulatory scheme.[31]

Justices Jeff Boyd, John Phillip Devine, Debra Lehrmann, and Brett Busby expressed their disagreement with the majority’s grant of sovereign immunity to ERCOT.[32]

The dissenting justices sharply disagreed with the majority’s expansive interpretation of sovereign immunity.[33] While approving the majority’s conclusions regarding ERCOT’s interlocutory appeal and the Commission’s exclusive jurisdiction over disputes under the Utilities Code, the dissenters argued that ERCOT should not be afforded blanket immunity when no statute specifically designated it as part of the government.[34] The dissenters also believed that granting ERCOT immunity would serve none of the purposes promoted by sovereign immunity, such as the preservation of separation of powers by preventing courts from appropriating public funds.[35] This cautious stance reflected the dissenters’ concern that the majority’s broad grant of immunity could potentially shield ERCOT from accountability for its actions during the winter storm, thereby eroding public trust.[36]

The dissent echoed a growing concern that spans the ideological spectrum about governmental immunity in a constitutional republic. Sovereign immunity is grounded in the notion that a “king can do no wrong,” but in America, the people are sovereign.[37] The majority’s broad grant of immunity, the dissent argued, would effectively shield ERCOT from public scrutiny and accountability, even for actions that fell outside the realm of genuine governmental functions.[38]

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