Texas Appeals Court Reverses PUC Approval Of NPRR Setting ERCOT Price At Cap During EEA3

June 5, 2023

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Copyright 2010-23 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

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The Texas Court Of Appeals, Third District has on appeal reversed the Texas PUC's approval of NPRR 1081, which generally sets the ERCOT energy price at the cap during load shed which occurs during EEA3, as the Court remanded the case to the PUC

NPRR 1081 relates to the calculation of the Real-Time On-Line Reliability Deployment Price Adder such that, when ERCOT is directing operators of transmission systems to shed load during EEA3, the Real-Time energy prices would clear at the high system-wide offer cap, which at the time of adoption was $9,000/MWh.

Appellants RWE Renewables Americas, LLC and TX Hereford Wind, LLC had challenged the PUC's approval of NPRR 1081. Notable in the Court's determination of the case is the change, adopted in the 2021 legislative session, which requires PUC approval prior to any NPRR taking effect. The Court held that, with respect to NPRR 1081, the PUC's action constituted adoption of the rule, but the PUC did not follow the Administrative Procedure Act (APA) required for adoption of a rule (the issue of NPRRs as "rules" is novel in so far as PUC approval was not required for NPRRs to take effect prior to the 2021 legislative change)

Addressing concerns that now all NPRRs would need to follow an APA process, the Court said, "We are not persuaded by the Commission’s sky-is-falling argument."

"[M]any of ERCOT’s protocol amendments will, in all likelihood, fall outside the APA’s definition of 'rule,'" the Court said, with such definition discussed further below

The Court found that having the PUC set prices in the market, via the mechanism of the NPRR, is contrary to the legislature's directive that competitive forces set prices, citing the appeals court's recent finding concerning the PUC's emergency orders during winter storm Uri (see discussion here)

"This Court held in Luminant that the Commission exceeds its statutory authority when it 'set[s] a single price at the rule-based maximum price' because such action 'violate[s] the Legislature’s requirement in the Utilities Code Section 39.001(d) that the Commission use competitive methods to the greatest extent feasible and impose the least impact on competition,'" the Court said

"[T]he Texas Utilities Code mandates that the wholesale price of electricity should, if possible, be set by the market, not by government regulators. RWE and TX Hereford Wind assert that NPRR 1081 is contrary to Section 39.001 of the Code, in which the Legislature stated its intent that the price of electricity should be set by 'the normal forces of competition' and that regulatory authorities 'may not make rules or issue orders regulating competitive electric services, prices, or competitors or restriction or conditioning competition except as authorized in this title,'" the Court said

"Accordingly, we hold that NPRR 1081, which effectively sets the market price for wholesale power at periods of ERCOT-ordered load shed during EEA3 at the high system-wide offer cap, exceeds the Commission’s statutory authority and is therefore an invalid rule," the Court said

To be able to make such a finding, the Court had to determine whether the NPRR constituted a rule

The Court noted that the Texas Utilities Code permits challenges to "competition rules" adopted by the Commission.

The APA provides that the term "rule" means "a state agency statement of general applicability' that 'implements, interprets, or prescribes law or policy." Tex. Gov’t Code § 2001.003(6)(A). The definition "includes the amendment or repeal of a prior rule" but does not include "a statement regarding only the internal management or organization of a state agency and not affecting private rights or procedures." Id. § 2001.003(6)(B), (C), the Court noted

As noted above, under 2021 legislation, NPRRs must receive approval from the PUC before they may take effect

The Court said that the PUC's order adopting NPRR 1081, which gave effect to the provisions of NPRR 1081, "constituted an act by the Commission that 'implement[ed]' a pricing policy for periods when ERCOT is directing transmission systems to shed load during EEA3."

The Court said, "The Commission disagrees, arguing that the Order constituted only the Commission’s review and approval of a revision ERCOT made to its own operating protocols and that the Commission’s 'approval of ERCOT action is not a rule.' But it is not the Commission’s approval per se that is relevant here. Rather, it is the effect of that approval, which was to put into effect -- i.e., 'implement' -- ERCOT’s action. NPRR 1081 is not 'a statement regarding only the internal management or organization of a state agency' but is a pricing policy that is intended to, and will, affect the rights of private parties."

"The Commission also maintains that the Order is not a rule because it is not a 'state agency' statement but is simply an agency’s 'validation of ERCOT’s operating standard.' We disagree. The Commission’s Order did not merely 'validate' ERCOT’s new protocol, it gave it life. Without the Commission’s Order, NPRR 1081 could never have taken effect. The Commission’s action was essential to the implementation of the policy announced in NPRR 1081," the Court said

The Court cautioned that, "Permitting an ERCOT-sponsored protocol, which is essentially a 'proposed rule,' to evade the APA rulemaking process simply because it originated at ERCOT would allow the Commission to bypass APA rulemaking procedures completely simply by delegating to ERCOT the task of proposing a rule, which would then be implemented by a Commission order that would not be reviewable for APA compliance. The fact that NPRR 1081 was proposed and approved by ERCOT before being approved by the Commission does not, ipso facto, insulate the Commission’s Order approving it from being a 'state agency statement of general applicability' for purposes of the APA’s definition of a 'rule.'"

"A second—and independent—basis on which we conclude that NPRR 1081 is an invalid rule is the Commission’s failure to follow the mandatory rulemaking procedures set forth in the APA," the Court added

The Court said, "The Commission has statutory rulemaking authority; ERCOT does not. As a result, we believe that only the actions taken by the Commission can satisfy the APA’s rulemaking requirements."

Even if ERCOT's actions could be used to satisfy the PUC's obligations under the APA, the Court found that such ERCOT actions did not meet requirements of the APA. Among other things, the Court cited the lack of "public" notice of NPRR 1081 in the form required under the APA -- publication in the state register. Notice to ERCOT stakeholders does not constitute public notice under the APA, the Court said

No. 03-21-00356-CV

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