The Electric Reliability Council of Texas didn’t take Entrust Energy Inc.'s property by transferring tens of thousands of customer contracts without compensation in the wake of 2021’s Winter Storm Uri, a bankruptcy judge ruled.
Entrust liquidating trustee Anna Phillips’ claim that grid operator ERCOT violated retail energy provider Entrust’s Fifth Amendment rights was dismissed in an opinion Thursday by Judge Marvin Isgur of the US Bankruptcy Court for the Southern District of Texas.
The ruling narrows a long-running $300 million dispute brought by the trustee down to a state law claim of gross negligence against ERCOT, the manager of most of Texas’ power grid. Isgur also converted ERCOT’s motion to dismiss the negligence claim into a motion for summary judgment and said both parties should brief the issue more.
“While ERCOT’s actions of terminating its contract and transferring Entrust’s customers damaged the value of the customer contracts, the contracts were not taken by ERCOT for public use,” Isgur said. “Entrust had no property interest in its customers. Such contractual losses are non-compensable under the Fifth Amendment. The Trustee’s takings claim is dismissed because no taking occurred at all.”
Houston-based Entrust filed Chapter 11 in March 2021 after facing more than $400 million in debt. It was one of several Texas energy retailers to file for bankruptcy after Winter Storm Uri in February 2021 incapacitated large swaths of Texas’ power-generating facilities.
ERCOT filed for bankruptcy after it was removed from Texas’ power market for failing to pay a roughly $296 million bill stemming from the storm. ERCOT had set energy prices at the maximum level allowed by law, $9,000 a megawatt-hour, in response to the crisis.
Entrust won approval in December 2021 for a plan to create a trust to liquidate its remaining assets.
Negligence Claim
Phillips sued ERCOT in 2022, accusing it of improperly raising electricity prices during the storm and failing to lower them after the emergency had passed. Among her arguments were that ERCOT unlawfully took Entrust’s customer base without compensation and was grossly negligent for failing to prepare for the storm and for manipulating prices.
The US Court of Appeals for the Fifth Circuit in April 2024 sided with ERCOT and said the bankruptcy court must stay certain questions and defer to Texas state courts to answer questions tied to the storm. The stay was lifted in May following a Texas Supreme Court decision.
After one of Entrust’s financial backers terminated its agreements amid Uri, it was unable to meet its obligations.
Entrust said it was able to sell the equivalent of about 91,000 residential and commercial customers to another Texas retail electric provider, Rhythm Ops LLC. But ERCOT sold Entrust’s remaining 90,000 customer equivalents under its “Provider of Last Resort,” or POLR, program instead, according to the opinion.
Takings Clause
That transition of customers violated the Fifth Amendment’s takings clause, the trustee argued.
The grid operator asked the bankruptcy court to abstain from the case and dismiss it. But Isgur found the court has “virtually unflagging obligation” to exercise jurisdiction, and the Fifth Circuit gave it a specific mandate to deal with claims after state-court issues were resolved.
Isgur dismissed ERCOT’s arguments that the trustee failed to exhaust remedies with the Texas Public Utilities Commission, finding that state law can’t override Congress and deprive a federal court of jurisdiction.
But Isgur dismissed Phillips’ takings claim and said she can’t bring it again, finding that no constitutionally protected property interest was taken by ERCOT because there’s a difference between taking a contract and actions that destroy a contract’s value.
Only the customers—and not the contracts—were transitioned and therefore the damage to the value of Entrust’s customer contracts was a consequential injury from a legal regulatory move by ERCOT, Isgur found.
The trustee also brought an amended state law gross negligence claim, arguing ERCOT failed to prepare the Texas grid for a severe winter storm despite knowing one was likely.
Isgur said ERCOT’s defense that sovereign immunity protects it from that claim needs further briefing. The Fifth Circuit has already ruled ERCOT doesn’t have immunity under the Eleventh Amendment, but there are also issues related to state sovereign immunity, he said.
The liquidating trustee is represented by McDermott Will & Emery LLP. ERCOT is represented by Munsch Hardt Kopf & Harr PC.