Sovereign immunity shields Texas power overseer from liability for now: not so privatized after all

NASA satellite image of Houston with area blackouts, Feb. 16

The cold-induced electric-power disaster in Texas is raising questions about the accountability of "ERCOT," the Electric Reliability Council of Texas.

ERCOT is responsible for about 90% of the Texas electricity market.  During the storm and record cold of last week, Texans experienced rolling outages and some prolonged blackouts.  Deaths and injuries, from hypothermia and carbon monoxide poisoning, are attributed to the cold and blackouts, as well as billions of dollars in property damage.  Governor Greg Abbott has blamed ERCOT for failure to prepare the state's electrical system for a foreseeable winter weather event and promised an investigation.

National Weather Service Tower Cam, Midland, Feb. 20

Naturally, many Texans are wondering about legal liability for ERCOT.  I noticed a tweet from Houston Chronicle business reporter Gwendolyn Wu, who said that ERCOT has "sovereign immunity."  I found that hard to believe.  Wu cited a Chronicle story (subscription), from the bygone innocent age of fall 2019, in which business writer L.M. Sixel said just that.  As it turns out, the problem of ERCOT immunity is sitting, undecided, in the Texas Supreme Court at this very moment.

Legally, ERCOT is a nonprofit corporation formed in 1970 to oversee electric power distribution in Texas.  Because Texas has its own grid that doesn't cross state lines, the power system is not regulated by the federal government.  ERCOT has been at the heart of Texas's love affair with deregulation and privatization, a push that began in earnest in 1999 and found no bounds at the threshold of critical infrastructure.  State legislation in 1999 called on the Texas Public Utility Commission (PUC) to designate an exclusive "independent system operator" to oversee the Texas power grid, and ERCOT easily got the job that it more or less already had.

Yet ERCOT is neither wholly private nor a success story.  Its near monopoly control of Texas power comes with PUC oversight.  Despite that oversight, ERCOT has posted a remarkable record of abuse and failure.  As Sixel recounted in the Chronicle, executives went to prison in the 20-aughts for a financial fraud aggravated by lack of transparency and exposed by whistleblowers.  About the same time, Texans saw rolling blackouts, even while their deregulated electricity prices shot 30% over the national average.  Then, in 2011, a winter storm with single-digit temperatures caused blackouts across Texas.  It was that event that led federal regulators to recommend that ERCOT and the PUC winterize the system, a recommendation that was never heeded.

Frmr. Gov. Rick Perry tours ERCOT on March 14, 2012.

(photo by Gov. Rick PerryCC BY-NC-ND 2.0)

Apparently, an embarrassing record has not dampened the mood at ERCOT.  The "nonprofit," which is run by a board majority comprising power industry heavyweights, brought in $232m in revenue in 2018, Sixel reported in 2019, and chief executive Bill Magness took home $750,000 in 2017.  Sixel described ERCOT HQ (pictured below) near real-estate-red-hot Austin: "Its sprawling, modern glass and metal building has plush interiors with on-site fitness facilities that include a gym and sport court for volleyball, basketball and pickleball."  In contrast, the PUC "operates from two floors of crammed cubicles in ... a dilapidated structure close to the campus of the University of Texas at Austin.  DeAnn Walker, the commission chairman, earns $189,500 a year."

It was also in 2011 that ERCOT set out toward the immunity question now pending.  After the rolling outages of the 20-aughts, ERCOT wanted to see new sources of power added to the system.  Enter Panda Power, which invested $2.2bn to construct three power plants.  Alas, Panda later alleged in court, ERCOT had deliberately inflated market projections to incentivize investments; the power plants delivered only a fraction of the anticipated returns.  Panda sued ERCOT for $2.7bn in damages on theories including fraud and breach of fiduciary duty.

After almost a year of defending the case, ERCOT devised a new theory of sovereign immunity in Texas common law.  ERCOT performs exclusively governmental, not private, functions, it alleged, and works wholly under the control of the PUC.  Despite its statutory role as an "independent system operator," ERCOT insisted that it is not an independent contractor.  Rather, ERCOT styled itself as "a quasi-governmental regulator, performing an essential public service."  Panda argued that ERCOT is not entitled to sovereign immunity because it is "a non-governmental, non-profit corporation that receives no taxpayer dollars and retains discretion," particularly, Panda exhorted, when it furnishes false market data to power providers. 

In April 2018, reversing the district court, the Texas Court of Appeals agreed with ERCOT.  In a functionalist analysis, the intermediate appellate court grounded its decision in the legislative delegation of ultimate fiscal authority over ERCOT in the PUC.  The court wrote (citations omitted):

[A]s to separation-of-powers principles, [the statute] shows the legislature intended that determinations respecting system administration fees and ERCOT's fiscal matters, as well as any potential disciplinary matters or decertification, should be made by the PUC rather than the courts. Further, as the certified [independent service operator] provided for in [the statute], ERCOT is a necessary component of the legislature's electric utility industry regulatory scheme. A substantial judgment in this case could necessitate a potentially disruptive diversion of ERCOT's resources or a decertification of ERCOT not otherwise intended by the PUC.

According to Sixel, that decision rendered ERCOT "the only grid manager in the nation with sovereign immunity."

Pixabay image by Clker-Free-Vector-Images

Panda appealed to the Texas Supreme Court, which heard oral argument (MP3, PDF) on September 15, 2020, but has not ruled.

Meanwhile, a curious procedural imbroglio arose in the lower courts to gum up the works.  While Panda was busy lodging its appeal with the Texas Supreme Court, it didn't head off the intermediate appellate court's mandamus order to the district court to dismiss the case, which it did.  Panda then appealed that dismissal on a separate track, and the intermediate appellate court stayed oral argument on that second appeal, waiting to see what the Supreme Court would do with the first appeal.

One month after the Supreme Court heard oral argument, it ordered the parties to file supplemental briefs, which they did in November 2020 (ERCOT, Panda), to answer whether the district court's dismissal mooted the case in the Supreme Court.  Panda insisted that there is a live controversy still before the court.  ERCOT wrote that Panda should have asked for a stay of dismissal in the lower court, and it didn't.  Bad Panda.

House chamber in the Texas Capitol (picryl)

It looks to my outsider eyes like the Supreme Court badly wants not to decide the case.  And that was before the winter storm of 2021.  If the court does kick the case, the intermediate appellate court's ruling for sovereign immunity will stand, and any 2021 complainants will be out of luck.  ERCOT's supplemental brief read anyway with a good deal of confidence about how things would go in the Supreme Court, so maybe it's only a question of which appellate court will bear the people's ire.  While the courts dithered, Panda Energy, a division of Panda Power Funds, folded, and Texas froze.

The best answer to the people's woes lies in their state legislature.  Maybe Texas legislators can be made to understand that privatization is not really privatization when the reins, along with sovereign immunity and a market monopoly, are simply handed over to a nominally independent and hardly nonprofit oligarchy.

Or maybe legislators are on their way to Cancún and points warmer.

The case is In re Panda Power Infrastructure Fund, LLC, No. 18-0792 (now pending), appealing Panda Power Generation Infrastructure Fund, LLC v. Electric Reliability Council of Texas, Inc., No. 05-17-00872-CV (Tex. Ct. App. 5th Dist. Dallas Apr. 16, 2018), reversing No. CV-16-0401 (Tex. Dist. Ct. 15th Grayson County 2017).  The latter appeal is Electric Reliability Council of Texas v. Panda Power Generation Infrastructure Fund, LLC, No. 05-18-00611-CV (oral argument stayed Aug. 20, 2019).

[UPDATE, April 3, 2021.] The Texas Supreme Court ducked the immunity issue in ERCOT v. Panda with a "hotly contested" "non-decision."  DLA Piper has the story (Mar. 29, 2021).

Courts extend European accountability laws to private actors: Italian soccer federation, Irish wind farm

Two recent court decisions in Europe construed European directives on public accountability to reach ostensibly private actors, the Italian soccer federation and an Irish wind-power producer.

Stocksnap by Michal Jarmoluk CC0

The problem of accountability for private actors performing public functions is as old as the corporate form.  Burgeoning corporatocracy in the electronic era has rendered new challenges to the classical public-private dichotomy, in recent years, especially, in the area of social media regulation (e.g., pro and con).  I have written about rethinking this problem in the context of access to information, regarding reform in both the United States and Europe, and I continue to research emerging models in the developing world.  As a general matter, Europe has been much less reticent than the United States to breach the public-private line with accountability mechanisms such as transparency laws.

In early February, the Court of Justice of the European Union (CJEU) in Luxembourg ruled that the Italian Football Federation, or Federazione Italiana Giuoco Calcio (FIGC), an ostensibly private entity, is sometimes a public body for purposes of the 2014 European directive on public procurement.  The directive defines public bodies within its purview:

(a) they are established for the specific purpose of meeting needs in the general interest, not having an industrial or commercial character;

(b) they have legal personality; and

(c) they are financed, for the most part, by the State, regional or local authorities, or by other bodies governed by public law; or are subject to management supervision by those authorities or bodies; or have an administrative, managerial or supervisory board, more than half of whose members are appointed by the State, regional or local authorities, or by other bodies governed by public law.

The definition is not unlike formulations in state freedom of information acts in the United States, which tend to press harder against the public-private line than the federal Freedom of Information Act (FOIA) does.  A classic example of disparate approaches in the states concerns access to the wealthy private foundations that lurk behind public universities.  My colleague Professor Robert Steinbuch has been bearing the transparency standard on this front in Arkansas and is supporting a bill there now.

At issue in the Italian case was a contract for porter services when foreign squads visit Italy.  A disappointed contractor challenged the process and won a round in Italy's high administrative court, and the appellate Council of State in Italy referred the interpretation question to the CJEU.  Both in the United States and globally, governing bodies in sport, often set up as private or quasi-public entities, have posed aggravating challenges in public accountability like the university-foundation problem.  Inapplicability of the FOIA to the US Olympic Committee has been cited as a contributing factor in sexual-assault cover-ups, and last summer, I took in no fewer than three books and a TV series on the intractable corruption in world soccer.

The CJEU opinion determined that the FIGC, constituted under private law, can act as a private body when it has autonomy to form private contracts.  However, the Italian National Olympic Committee (NOC) is a public body and has supervisory power, sometimes with a controlling stake, over some FIGC functions.  Insofar as the NOC is calling the shots on contracts, the FIGC is a public body, subject to public procurement rules.  The CJEU opinion now goes back to the Italian courts to parse the specifics. 

Cronelea Wind Farm in County Wicklow, 2008

(Geograph photo by Jonathan Billinger CC BY-SA 2.0)

Meanwhile, in late January, the High Court of Ireland ruled that electric company Raheenleagh Power DAC (RP) is a "public authority" for purposes of the Irish enactment of the European directive on public access to environmental information.  The law and directive define public authorities:

(a) government or other public administration, including public advisory bodies, at national, regional or local level;

(b) any natural or legal person performing public administrative functions under national law, including specific duties, activities or services in relation to the environment; and

(c) any natural or legal person having public responsibilities or functions, or providing public services, relating to the environment under the control of a body or person falling within (a) or (b).

Reversing the Irish Commissioner for Environmental Information, the High Court determined that RP came within the definition's latter terms.  The court explained, "RP is a joint-venture company which operates a wind farm in a forest in the Wicklow Mountains. The wind farm supplies electricity to the national grid."  Complicating the analysis, the RP venture includes a one-half stake by the national-monopoly Electricity Supply Board (ESB), which the court described as "an independent semi-State company."

Like in the Italian case, the court reasoned that ESB control and management of RP brought it within the purview of public accountability law.  The ruling is important for the example it sets amid the wide range of public-private hybrids providing critical utility and infrastructure across Europe and the world.

Even so, I would like to have seen the court hang its hat more firmly on the functional analysis of the cited paragraph (b), rather than resorting to the paradigm of state control.  The urgent communal interests at stake in environmental protection have been a salient inducement to the extension of transparency law in Europe and Africa.  Western social democracies have been keen to ameliorate the effects of climate change, and many African regimes have awakened to lasting environmental damage inflicted by colonial enterprises.

The Italian case is FIGC v. De Vellis Servizi Globali Srl, nos. C‑155/19 and C‑156/19, ECLI:EU:C:2021:88 (CJEU Feb. 3, 2021).  Cain Burdeau has coverage for Courthouse News.  Sven Demeulemeester, William Timmermans, and Matthias Ballieu have commentary for Altius in Belgium.

The Irish case is Right to Know CLG v. Commissioner for Environmental Information, [2021] IEHC 46 (High Ct. Jan. 25, 2021) (Ireland).  Mr. Justice Alexander Owens delivered the judgment.  Right to Know is a transparency advocacy organization headed by activist, blogger, and entrepreneur Gavin Sheridan and former and working journalists.  Jonathan Moore and Patrick Reilly have commentary for Field Fisher in Dublin.