Texas Power Market Faces 'Chaos' After Pricing Order Axed

Partners Ben Barnes and Brooksany Barrowes were quoted in Law360 regarding a Texas Court of Appeals' recent decision to invalidate the state's Public Utility Commission's emergency pricing order stemming from Winter Storm Uri in February 2021. 

A Texas appeals court's invalidation of emergency power pricing orders enacted two years ago in the wake of Winter Storm Uri threatens to throw the Lone Star State's electricity market into turmoil and create multibillion-dollar legal and regulatory headaches, experts say.

Texas market watchers say Friday's blockbuster decision by the Third Court of Appeals, which is likely to be appealed itself, could force state regulators and courts to figure how to potentially unwind billions of dollars' worth of transactions. It could also hamstring efforts to ensure Texas' energy-only market supplies enough power during future extreme weather events.

"The word that keeps coming up is 'chaos,'" said Locke Lord LLP partner Carrie Collier-Brown, who focuses on Texas energy and power regulation.

The Third Court of Appeals said that the Public Utility Commission of Texas violated its legislative mandate to use competitive methods to the "greatest extent feasible" in the state's electricity markets when it directed grid operator the Electric Reliability Council of Texas to set the price for power at the market cap of $9,000 per megawatt-hour in order to combat increased demand and low electricity supplies in the immediate aftermath of the deadly storm-induced blackouts in February 2021.

In what it described as a "case of first impression," the appeals court said the legislative requirement that the PUC ensure electricity system reliability isn't an exception to the requirement that competition set power prices, because the reliability requirement is "silent as to whether 'regulatory' rather than 'competitive' methods may be adopted to ensure grid reliability."

Experts say it's a blunt decision that could have major ramifications for Texas power markets.

"If you read that opinion, it says that the commission has no authority to step in and set any prices that isn't set by the normal forces of competition, which means there should not ever be price caps in the ERCOT market," said Diana Liebmann, who leads the power and renewables practice group at Haynes and Boone LLP. "A plain reading of the opinion means that there should not have been a $9,000 [price cap]; it should have been infinity."

Experts say that while the Court of Appeals decision appears to direct the PUC and ERCOT to reprice transactions subject to the invalidated order, it doesn't give much guidance as to how.

ERCOT's independent market monitor Potomac Economics claimed the PUC order ultimately led to market participants being overcharged by $16 billion. The purported overcharges allegedly caused companies and utilities to rack up billions of dollars of debt as they provided electricity to their customers — and forced some into bankruptcy.

"We not only have the transactions that people have entered into directly facing ERCOT, but we have these secondary markets around that," said Ben Barnes, a Texas-based litigation partner at Kirkland & Ellis LLP, which represented power plant owner TexGen Power LLC in an amicus brief supporting the PUC in the case. "People have other commitments they enter into privately based on market prices, and there have been bankruptcies, settlements and ongoing litigation. It's too soon to tell how this is all going to look."

There's also the decision's potential impact on legislation that allowed ERCOT to securitize billions of unpaid bills, the costs of which are spread out among consumers and other market participants for decades.

"Banks spent money buying that product. What are they going to do if suddenly there's a reversal?" said Brooksany Barrowes, an energy regulatory partner at Kirkland. "If, hypothetically, the market gets repriced and prices go down as a result, do the defaults disappear?"

Tyson Slocum, who directs the energy program at consumer advocacy group Public Citizen, said there's a template Texas regulators can follow in unwinding any tainted transactions: the California electricity crisis of 2000-2001, which produced blackouts and soaring power prices and saw federal regulators ultimately secure refunds of billions of dollars' worth of electricity costs.

"Just because a solution is daunting and full of challenges doesn't mean that should preclude pursuing that solution," Slocum said. "There is precedent to undoing massive, unjust, marketwide unfair pricing."

But Barrowes, who has worked on matters related to the California crisis, said the increasing complexity and financialization of electricity markets in the subsequent two decades makes a Texas repricing a much hairier proposition.

"California was just a younger deregulated market than Texas is now. There are a lot more players," Barrowes said. "It was a much simpler financial structure for the electric industry."

Experts say attempts to unwind any transactions will likely add to the wave of Uri-related litigation that has already swamped state and federal courtrooms.

"It's safe to say that if we find ourselves in a world where prices are being reset, there's potential that we find a whole new set of distressed companies as a result and there's basically a second round of the financial hit that the industry took in 2021," Barrowes said.

And the uncertainty created by the Court of Appeals decision extends to the operation of the Texas power market itself, experts say.

There's now a question of whether the PUC's revised, lower price cap of $5,000 per megawatt-hour — one of its post-Uri actions — is authorized by statute. ERCOT also has rules on the books aimed at limiting power prices and ensuring there's enough available electricity, including the ability to order certain electricity generators to run during emergencies.

"With this judgment ... I don't know how ERCOT can order units to run in case of an emergency," said Liebmann of Haynes Boone. "The takeaway from this opinion is that the commission doesn't have the authority to ever set prices because it has to be in a competitive market."

But requiring every price to be set by market competition could actually have anti-competitive results, Liebmann said. The offer caps are designed as a fail-safe during periods where electricity demand is outstripping supply and getting every potential megawatt of power on the grid is critical, such as during Uri.

"But if all of that goes away, you have no way, essentially, of mitigating market power," Liebmann said.

The big caveat is that the Court of Appeals decision likely won't be the last word on the PUC pricing orders. Experts say an appeal to the Texas Supreme Court is all but certain, and there's a good chance the lower court ruling will be stayed until the top court weighs in.

Still, a final court ruling could be a year away, which may prompt calls for the state legislature, which is currently in session, to take action.

"What's clear is that the legislature is going to have to get involved here and clarify statutory protections for consumers," Slocum of Public Citizen said.

But Collier-Brown of Locke Lord said that even if the state legislature has the ability to override the Court of Appeals' decision and reinstate the PUC's price cap orders, lawmakers may not agree to do it.

"There were a lot of bills from the [state] Senate and a lot of rhetoric from the lieutenant governor to undo that and give refunds," Collier-Brown said. "But the governor and the PUC held firm on not repricing and not undoing those orders."

The bottom line is that the Court of Appeals decision has injected fresh uncertainty into the Texas power sector, which could chill new, needed investment, Liebmann said.

"That runs very much counter to what the legislature was trying to do after Uri and what the [PUC] has tried to do after Uri," Liebmann said.