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Fifth Circuit: Bankruptcy Court Cannot Decide Validity of ERCOT, PUC Pricing During Winter Storm Uri

Jan 6, 2023
The Texas Lawbook

Just Energy, a Canadian-owned power retailer operating in Texas, must go through state administrative proceedings and state court in Travis County – not federal bankruptcy court – to challenge the record-high rates that the Electric Reliability Council of Texas charged power companies during Winter Storm Uri in February 2021, the U.S. Court of Appeals for the Fifth Circuit ruled Thursday.

In a unanimous decision, a three-judge panel of the Fifth Circuit ruled that the U.S. Bankruptcy Court does not have the authority under Texas law to decide if power rates charged by ERCOT and the Texas Public Utility Commission are illegal.

“Only one court is permitted to answer Just Energy’s $335-million-dollar question: Travis County district court,” the Fifth Circuit ruled.

The federal appellate court decision comes as the Texas Supreme Court is scheduled to hear oral arguments Monday on whether ERCOT is a state governmental agency and immune from most civil lawsuits. The decision is expected to impact hundreds and hundreds of lawsuits filed across Texas related to monetary damage and personal injuries suffered as a result of Winter Storm Uri.

Just Energy filed for bankruptcy restructuring in Canada after ERCOT increased the price it charged retail electric providers by 650 percent to $9,000 per megawatt hour over the five days of the storm. The price hike cost Just Energy $335 million – a bill it was required to pay immediately or have its supply of power ended.

Just Energy paid the $335 million, but it also filed a petition under Chapter 15 of the U.S. Bankruptcy Code asking a bankruptcy judge in Houston to declare the increased rates illegal and to force ERCOT to give back $274 million.

When U.S. Bankruptcy Judge David Jones in the Southern District of Texas did not immediately dismiss Just Energy’s claims, ERCOT appealed to the Fifth Circuit arguing that the judge had abused his authority.

The case, which was argued Nov. 10, pitted the usually unparalleled authority of federal bankruptcy judges in restructuring cases against the potential sovereignty of Texas energy regulators to set rates.

On Thursday, the Fifth Circuit panel made it clear state law prevails.

“Behind the guise of Just Energy’s bankruptcy action is its challenge to ERCOT’s pricing decision and invoices,” Judge Kurt D. Engelhardt wrote in a 19-page opinion. “Texas law mandates that those types of challenges – i.e., challenges to invoices and regulatory actions – must be filed with ERCOT in the first instance, with a right of appeal to the PUCT, and then to Travis County district court.”

Judge Engelhardt wrote that the “root issue falls within the exclusive jurisdiction of the state court.”

“The only way that Just Energy can get the relief it seeks – at least $274 million of the $335 million paid – is for a court to answer the question central to Just Energy’s case: Did ERCOT charge a lawful filed rate calculated in accordance with market-based protocols? If the answer is yes, the $335 million dollar invoice stands, and no money is returned to Just Energy,” Judge Engelhardt wrote. “If the answer is no, Just Energy can claw black some or all of its money through its bankruptcy action. Only one court is permitted to answer Just Energy’s $335-million-dollar question: Travis County district court.”

Judges Leslie H. Southwick and James E. Graves joined Judge Engelhardt’s opinion.

In a footnote, the Fifth Circuit made a clarification.

“To be sure, we do not conclude that the Travis County district court is the appropriate court to handle Just Energy’s bankruptcy proceeding,” Judge Engelhardt wrote. “Rather, it is the appropriate court to consider the merits of Just Energy’s claims: i.e., whether the ERCOT invoices stand. Without this answer, the bankruptcy proceedings cannot move forward. Because this merits question may only be decided by the Travis County district court, the bankruptcy court must abstain from answering it.”

Lawyers for Just Energy did not respond to inquiries about whether the company will appeal to the U.S. Supreme Court.

During oral arguments seven weeks ago, ERCOT’s lead lawyer, Jamil Alibhai, argued that ERCOT has sovereign immunity as a state agency in Texas and cannot be sued in federal court. They also contend that the judicially created “filed rate doctrine” precludes federal legal claims challenging power rates set by regulators.

Alibhai, a partner at Munsch Hardt Kopf & Harr, told the Fifth Circuit that Just Energy’s adversarial actions “must be dismissed” under the 11th Amendment.

“All rate challenges must proceed before the agency and in the designated judicial-review proceedings to ensure consistency for all market participants,” he said. “Appellees attempt to bypass that process by asking the bankruptcy court to declare these approved rates unlawful, unjust or excessive. In doing so, appellees impermissibly seek to modify a filed rate and achieve a discriminatory rate that benefits only them.”

Just Energy’s lawyers, led by Quinn Emmanuel partner James Tecce, countered that ERCOT ignored the fact that those legal principles do not apply in bankruptcy proceedings, especially those in Chapter 15 cases involving foreign companies such as Just Energy.

“We were forced into bankruptcy, and in bankruptcy we get certain rights,” Tecce told the three-judge panel.

Tecce argued that the U.S. Supreme Court has held that “states waived their sovereign immunity when the Bankruptcy Clause was ratified with respect to the types of claims Just Energy brings.”

“Chapter 15 provides a broad reservoir of power to facilitate foreign insolvency proceedings like Just Energy’s pending in Canada,” Just Energy responded in briefs to the Fifth Circuit. “There is ample authority to support the bankruptcy court’s ultimate conclusion that Just Energy’s lawsuit against ERCOT should proceed.”

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