Texas Appeals Court Grants ERCOT Sovereign Immunity in Panda Temple Case

Practical Law Legal Update w-014-4129 (Approx. 5 pages)

Texas Appeals Court Grants ERCOT Sovereign Immunity in Panda Temple Case

by Practical Law Finance

Background

Panda Power is a corporation that owns several merchant power plants in Texas. ERCOT is a Texas non-profit corporation that is certified by the Public Utility Commission of Texas (PUC) as the independent system operator (ISO) responsible for overseeing the electrical grid in Texas. Part of ERCOT's responsibilities include the publishing of market data relating to the supply and demand of electrical power in its capacity, demand, and reserve reports (the CDRs). These are biannual reports that estimate the region's electrical power margins.

In 2011 and 2012, the CDRs projected a shortage in electrical power supply. According to Panda Power, it relied on these CDRs to invest $2.2 billion in the building of three power plants:

The 758 megawatts (MW) Panda Temple project.
The 758 MW Panda Sherman project.
The 758 MW Temple II project.

For more information on these projects, see Articles, US Project Finance: Key Developments and Trends from 2012 and the Outlook for 2013 and US Project Finance Round-Up: Mid-year 2013.

Because of a lack of long-term power purchase agreements, these projects rely on merchant sales to generate the revenue. To mitigate the risk of these projects and to provide some revenue stability, these projects have hedges in place with third parties (see Practice Note, Mitigating Merchant Risk in Power Projects: Hedging Contracts).

After Panda Power initiated its construction of the power plants, ERCOT admitted that the 2011 and 2012 CDRs were incorrect and published new CDRs that indicated a projected oversupply of power, instead of the previously reported shortage. Panda Temple Power filed for bankruptcy protection in April 2017. While the other projects have not filed for bankruptcy, they have also suffered financial difficulty. In January 2016, Moody's downgraded the Panda Temple II and Panda Sherman B loans to B– from B, in part because of deteriorating market conditions (low natural gas prices and cheap wind power) in the ERCOT region.

Basis of the Lawsuit

In February 2016, Panda Power brought suit against ERCOT, alleging that ERCOT:

Negligently or fraudulently published the market representations, and/or negligently or fraudulently failed to disclose the falsity of its representations in a timely manner.
Breached fiduciary duties to Panda Power "to act independently and competently in the performance of its responsibilities as an ISO."

After a jurisdictional plea was denied by the trial court, ERCOT filed a motion for reconsideration, claiming that Panda Power's claims were barred by sovereign immunity. The trial court denied ERCOT's motion for reconsideration and alternative plea to the jurisdiction. ERCOT then filed this consolidated interlocutory appeal and writ of mandamus.

ERCOT claims that it is a governmental unit for purposes of an interlocutory appeal. ERCOT also claims that it is entitled to mandamus relief, arguing that the trial court abused its discretion by denying ERCOT's jurisdictional plea. ERCOT further argues that it is entitled to sovereign immunity because:

It performs an essential public service as a quasi-governmental regulator.
Federal courts have held, in similar cases involving self-regulating organizations (SROs), that quasi-governmental regulators are entitled to sovereign immunity.
The justifications of sovereign immunity, including protecting the public fiscal interest, preserving separation of powers, and the proper functioning of government services, apply to ERCOT.
It is not an independent contractor and thus the Texas Supreme Court's holding in Brown & Gay Engineering, Inc. v. Olivares that independent contractors generally lack sovereign immunity does not apply (461 S.W.3d 117 (Tex. 2015)).

Panda Power argues that ERCOT is not entitled to sovereign immunity because:

Brown & Gay is the controlling standard for whether private companies may be granted sovereign immunity, and according to Brown & Gay, ERCOT should not be granted immunity since it was exercising private discretion in the publishing of the CDRs.
The justifications of sovereign immunity do not apply to ERCOT.
The SRO cases that ERCOT cites do not apply because those cases arise from the federal "absolute immunity" doctrine and not the state sovereign immunity law, and even if the SRO cases did apply, ERCOT was exercising a function that would not be protected by immunity.

Outcome

The Fifth Court of Appeals disagreed with ERCOT that it is a governmental unit for purposes of the interlocutory appeal, and therefore dismissed the interlocutory appeal for lack of jurisdiction. However, the court agreed with ERCOT that it is entitled to sovereign immunity and conditionally granted ERCOT's petition for writ of mandamus.

The court reasoned that ERCOT is entitled to sovereign immunity for the following reasons:

The underlying rationale of Brown & Gay does not apply to ERCOT because it is based on government contracting, and ERCOT is a private entity that exclusively performs functions assigned by the legislature and the PUC.
Extending sovereign immunity to ERCOT would be consistent with the nature and purpose of the doctrine, which "protects the public as a whole by preventing potential disruptions of key government services that could occur when government funds are unexpectedly and substantially diverted by litigation" (Brown & Gay, 461 S.W.3d at 121). This is because:
- ERCOT is a necessary part of the legislature's regulation of the electric utility industry; and
- a substantial judgment could disrupt ERCOT's resources and potentially cause it to be decertified by the PUC.
The extension of sovereign immunity in this case is consistent with the federal cases involving SROs since:
- ERCOT is a private corporation carrying out the regulatory goal delegated to it by the PUC pursuant to legislation;
- ERCOT has delegated rulemaking authority that is binding on market participants; and
- the PUC broadly oversees ERCOT and can decertify it from carrying out its regulatory goals.

The court reasoned that this particular lawsuit is barred by sovereign immunity since ERCOT's complained of actions, or the publication of the CDRs, were part of ERCOT's regulatory responsibilities. Therefore, the trial court's denial of ERCOT's plea to the jurisdiction based on sovereign immunity constituted an abuse of discretion.

Texas Appeals Court Grants ERCOT Sovereign Immunity in Panda Temple Case | Practical Law