RWE Renewables Americas, LLC and TX Hereford Wind, LLC v. Public Utility Commission of Texas ( 2023 )

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN
NO. 03-21-00356-CV
RWE Renewables Americas, LLC and TX Hereford Wind, LLC, Appellants
v.
Public Utility Commission of Texas, Appellee
DIRECT APPEAL FROM THE PUBLIC UTILITY COMMISSION OF TEXAS
PROJECT NUMBER 52307
OPINION
In this direct appeal, we consider a challenge to the validity of an Order issued by
the Public Utility Commission relating to scarcity pricing in the wholesale electricity market
during certain extreme weather events. Appellants RWE Renewables Americas, LLC, and TX
Hereford Wind, LLC, contend that the Order constitutes a “competition rule” the adoption of
which exceeds the Commission’s statutory authority. In addition, they contend the Order was
adopted in violation of rulemaking provisions in the Administrative Procedure Act (APA). See
Tex. Gov’t Code §§ 2001.0225-.034. We will reverse the Commission’s Order and remand the
case to the Commission for further proceedings.
FACTUAL AND PROCEDURAL BACKGROUND
A detailed discussion of the Texas electricity market appears in this Court’s recent
opinion in Luminant Energy Co., LLC v. Public Utility Commission, 665 S.W.3d 166, 170–74
(Tex. App.—Austin 2023, pet. filed), and will not be repeated here. Relevant for the present
case is the Legislature’s statutory finding that “the production and sale of electricity is not
a monopoly warranting regulation of rates, operations and services and that the public interest
in competitive electric markets requires that . . . electric services and their prices should
be determined by customer choices and the normal forces of competition.” Tex. Util. Code
§ 39.001(a). The statute directs the Commission to “authorize or order competitive rather
than regulatory methods to achieve the goals of [Chapter 39] to the greatest extent feasible and
[] adopt rules and issue orders that are both practical and limited so as to impose the least impact
on competition.” Id. § 39.001(d). Chapter 39 “is enacted to protect the public interest during
the transition to and in the establishment of a fully competitive electric power industry.” Id.
§ 39.001(a).
In February 2021, a series of weather conditions in Texas resulted in a major
winter storm referred to as Winter Storm Uri. See Luminant, 665 S.W.3d at 173–76 (describing
formation of Winter Storm Uri and its impact on Texas power grid). This became what is called
a “load-shed event,” which occurs when the Electric Reliability Council of Texas (ERCOT), the
Independent System Operator for Texas’s electrical grid, directs operators of the transmission
system to reduce electricity consumption by involuntarily disconnecting customers from the grid.
During the storm, the Commission’s members concluded that its “scarcity pricing mechanism”
was not functioning as had been expected. Id. at 175-76.1 Specifically, although maximum
demand for available power had been reached, the market clearing prices were only at
$1,200/MWh, well below the high system-wide offer cap of $9,000/MWh. Id. “Finding that the
1
As this Court stated in Luminant, the scarcity pricing mechanism is intended to
(1) create incentives for idle generation capacity to come online when demand threatens to
exceed supply by offering windfall prices to peak generators, and (2) encourage conservation by
institutional consumers that have elasticity of demand by “imposing sticker-shock costs on
consumption.” Luminant Energy Co., LLC v. Public Util. Comm’n, 665 S.W.3d 166, 173 (Tex.
App.—Austin 2023, pet. filed).
2
electricity market was clearing as low as $1,200 and that this outcome was ‘inconsistent with
the fundamental design of ERCOT,’ the Commission directed ERCOT ‘to ensure that firm load
that is being shed in EEA3 [Energy Emergency Alert Level 3—ERCOT’s highest alert level] is
accounted for in ERCOT’s scarcity pricing signals.’” Id. (quoting Order Directing ERCOT to
Take Action and Granting Exception to Commission Rules, PUC Project No. 51617 (Feb. 15,
2021) (First Order)). The First Order stated that “[i]f customer load is being shed, scarcity is at
its maximum, and the market price for the energy needed to serve that load should also be at its
highest.” First Order at 1. In response to the First Order, ERCOT “adjusted its price algorithm
to cause the market to clear at the $9,000/MWh cap.” Luminant, 665 S.W.3d at 176. The next
day, the Commission issued a second order that “was substantially identical to the first, except
that it rescinded language in the First Order that would have required retroactive repricing.” Id.
(citing Second Order Directing ERCOT to Take Action and Granting Exception to Commission
Rules, PUC Project No. 51617 (Feb. 16, 2021) (Second Order)). The Second Order again
“directed ERCOT that, if there was load shed, the market price for the energy needed to
serve that load should also be ‘at its highest.’” Id. ERCOT responded by “issuing settlement
statements to market participants reflecting the $9,000/MWh clearing price.” Id.
In the months following Winter Storm Uri, the Legislature, which was then in
session, amended Section 39.151 of the Texas Utilities Code to require that, for ERCOT to
maintain certification as an independent organization for the Texas power grid—ERCOT’s
role—its governing body “must establish and implement a formal process for adopting new
protocols or revising existing protocols” and that process “must require that new or revised
protocols may not take effect until the commission approves a market impact statement
describing the new or revised protocols.” Tex. Util. Code § 39.151(g-6). The amendment to
3
Section 39.151 also provided that the Commission “may delegate to an independent organization
responsibilities for adopting or enforcing” rules relating to the reliability of the regional
electricity network, and that “[r]ules adopted by an independent organization [] under delegated
authority from the commission are subject to commission oversight and review and may not
take effect before receiving commission approval.” Id. § 39.151(d). These amendments were
effective as of June 8, 2021.
Shortly after the amendments became effective, ERCOT and Potomac
Economics, ERCOT’s Independent Market Monitor (IMM),2 filed a Nodal Protocol Revision
Request (NPRR) to “modify the calculation of the Real-Time On-Line Reliability Deployment
Price Adder.” This request for a revision to ERCOT’s Nodal protocols was designated as
“NPRR 1081.” When they submitted NPRR 1081 for consideration, ERCOT and the IMM
explained that, “consistent with the action directed by [the Commission]” during Winter Storm
Uri, the revision constitutes “a more permanent solution that will modify the calculation of the
Real-Time On-Line Reliability Deployment Price Adder” so 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 was $9,000/MWh. As the
Commission explained in its brief on appeal, the rationale for ensuring that wholesale market
prices are at the high system-wide offer cap during periods of load shed is that during those
times, “not all demand could be served with available generation supply” and, therefore,
“wholesale market prices should reflect that extreme scarcity and rise to the high systemwide
2
As the independent organization certified under Section 39.151, ERCOT was required
to “contract with an entity selected by the commission to act as the commission’s wholesale
electric market monitor to detect and prevent market manipulation strategies and recommend
measures to enhance the efficiency of the wholesale market.” Tex. Util. Code § 39.1515(a).
Potomac Economics served that function and is referred to as the Independent Market Monitor.
4
offer cap.” Put another way, under the scarcity pricing mechanism for the ERCOT market,
during extreme scarcity conditions, such as when load is being shed to safeguard the grid,
wholesale prices should be at their maximum.
On June 10, 2021, ERCOT’s Protocol Revision Subcommittee (PRS) voted to
grant NPRR 1081 “urgent” status and to recommend approval of the revision as submitted.
ERCOT thereafter posted NPRR 1081 on its website and notified a limited list of interested
parties of the proposal. Several provided comments. After the PRS forwarded NPRR 1081 to
ERCOT’s Technical Advisory Committee (TAC), the TAC voted to recommend its approval.
The ERCOT Board of Directors approved NPRR 1081 at its June 28, 2021 meeting. Consistent
with the Legislature’s recently enacted statutory directive that rules adopted by ERCOT under
delegated authority from the Commission “are subject to commission oversight and review and
may not take effect before receiving commission approval,” see Tex. Util. Code § 39.151(d),
the Commission opened Docket No. 52307, which Commission Staff explained was to “facilitate
Commission review and approval of the rules adopted through the ERCOT stakeholder process,”
which included NPRR 1081. Commission Staff noted that newly passed legislation “requires
both the Commission and [ERCOT] to establish processes for Commission approval of any
rules or protocols adopted under authority delegated from the Commission to the independent
organization.” Commission Staff recommended that the Commission approve NPRR 1081.
On July 16, 2021, the Commission issued its Order Approving Nodal Protocols
[Nos. 1080 and 1081] (the Order). The Order states in pertinent part:
Effective June 8, 2021, rules adopted by ERCOT under delegated authority from
the commission are subject to commission oversight and review and may not take
effect before receiving commission approval.
....
5
The Commission finds that these revisions are necessary for the proper
functioning of the ERCOT market as demonstrated by the supporting material and
the Commission issues the following orders:
...
2. The Commission approves NPRR 1081 and the accompanying market
impact statement.
RWE and TX Hereford Wind then filed this direct appeal challenging the validity of the
Commission’s Order approving NPRR 1081. See id. § 39.001(e).
Section 39.001(e) of the Utilities Code limits judicial review of the validity of
competition rules to the Commission’s “rulemaking record” and sets out what comprises the
rulemaking record in such a review:
“Judicial review of the validity of competition rules . . . shall be limited to the
commission’s rulemaking record. The rulemaking record consists of:
(1) the notice of the proposed rule;
(2) the comments of all interested persons;
(3) all studies, reports, memoranda, or other materials on which the commission
relied in adopting the rule; and
(4) the order adopting the rule.”
Id. § 39.001(e).
The Commission’s “rulemaking record” from which we are to decide this appeal
is meager, to say the least, consisting of only two documents: (1) a PUC “Staff Memo and
Proposed Order Approving Nodal Protocols,” which was delivered to members of the
Commission on July 14, 2021, and (2) the Commission’s “Order Approving Nodal Protocols,”
which was signed by the commissioners on July 16, 2021. In filing these documents with this
Court, the Commission asserted its position that NPRR 1081 does not constitute a “rule” and
therefore “there is no ‘rulemaking record’ for the Commission to file.” The Commission then
explained why it chose to file these two documents: “Because there is no ‘rulemaking record,’
6
the Commission has prepared the attached compilation of documents, which consists of the two
documents filed in Project No. 52307 from the records of the agency that relate to the protocols
approved in the July 16, 2021 order.”
DISCUSSION
The Texas Utilities Code permits challenges to “competition rules” adopted by
the Commission. See id. § 39.001(e) (“Judicial review of competition rules adopted by the
commission shall be conducted under Chapter 2001, Government Code, except as otherwise
provided by this chapter.”). The Commission asserts that its Order of July 16, 2021, is not a
competition rule within the meaning of section 39.001(e) and therefore is not subject to the
direct-appeal process provided by that statute. If it is not, this Court lacks jurisdiction over
the present direct appeal. We therefore must first decide whether the Order constitutes a
“competition rule” such that it may be challenged in this direct appeal. We do that using the
APA’s definition of “rule.”3
Whether NPRR 1081 is a rule
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).
It is undisputed that NPRR 1081 could have no effect until it received
Commission approval. See Tex. Util. Code § 39.151(d) (providing that rules adopted by ERCOT
3
No party argues that there is any material distinction between a “competition rule” as
used in Section 39.001(e) of the Utilities Code and a “rule” as defined in the APA.
7
under delegated authority from Commission “may not take effect before receiving commission
approval”). Thus, the Order, which gave effect to 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 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. See Luminant,
665 S.W.3d at 187–89 (explaining that similar interim orders at issue in that case “were intended
to affect the rights of private parties and in fact did so”). Thus, the Commission’s Order, which
approved NPRR 1081 and thereby put it into effect, implements or prescribes law or policy
within the APA’s definition of a “rule.”
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 Commission seeks to distance its acts from those of ERCOT and to suggest
that ERCOT’s actions and proposals are not attributable to the Commission and do not represent
the Commission’s statements or policies. This ignores the reality of the relationship between the
8
Commission and ERCOT, the independent organization established and certified by the
Commission to manage the Texas power grid. See Tex. Util. Code § 39.151(a) (providing that
power region must establish one or more “independent organizations” to, among other things,
ensure reliability and adequacy of regional electrical network).4 As part of the transition to a
deregulated energy market, the Legislature determined that an “independent organization” must
oversee the new wholesale electricity market to ensure the adequacy and reliability of the
power grid. See id. § 39.151(a). The Commission certified ERCOT to fill that statutory role,
and it currently performs what are essentially public functions pursuant to power delegated to it
by the Commission. See id. § 39.151(d) (ERCOT establishes protocols governing power grid
“under delegated authority” from Commission). ERCOT’s protocols have been held to have
the “force and effect of statutes,” see Electric Reliability Council of Tex., Inc. v. CPS Energy,
648 S.W.3d 520, 530 (Tex. App.—San Antonio 2021, pet. granted) (quoting Public Util.
Comm’n v. Constellation Energy Commodities Grp., Inc., 351 S.W.3d 588, 595 (Tex. App.—
Austin 2011, pet. denied)), and market participants must obey them or incur administrative
penalties, see Tex. Util. Code § 39.151(j). ERCOT’s bylaws must be approved by the
Commission and “must reflect the input of the Commission.” Id. § 39.151(g-1). The
Commission’s Chairman is, by statute, a member of ERCOT’s Board of Directors. See id.
§ 39.151(g-1)(1). And, as already discussed, ERCOT’s protocols governing the power market
must be approved by the Commission before they can take effect. This Court has described
ERCOT as “something akin to a subagency between [the Commission] and market participants”
4
Importantly, the term “independent organization” does not mean independent of
the Commission but, rather, independent of other market participants. See Tex. Util. Code.
§ 39.151(b) (“Independent organization means an independent system operator or other person
that is sufficiently independent of any producer or seller of electricity that its decisions will not
be unduly influenced by any producer or seller.”).
9
and noted that ERCOT, while a separate entity, is one “over which [the Commission] has
‘complete authority.’” Luminant, 665 S.W.3d at 187. In the regulatory context at least, there is
little daylight between the Commission and ERCOT.
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.”
We conclude that NPRR 1081 falls within the APA’s definition of “rule” and,
concomitantly, within the term “competition rule” as used in Section 39.001(e) of the Utilities
Code. Accordingly, we hold that NPRR 1081 can be challenged through the direct-appeal
process provided by that Code. See Tex. Util. Code § 39.001(e).
Whether the Commission had the authority to adopt NPRR 1081
In their first issue, RWE and TX Hereford Wind assert that the Commission does
not have the statutory authority “when ordering load shed under EEA3, to replace the price of
electricity being set by the market with an inflated, fixed price set by the government.” They
argue that the Commission does not have statutory authority to set a non-market-based price for
wholesale electricity under any circumstances and, therefore, that NPRR 1081, which effectively
sets the market clearing price for electricity at the high system-wide offer cap during EEA3
10
periods when ERCOT is ordering transmission systems to shed load, is not a valid exercise of the
Commission’s rulemaking authority.
We presume that an agency rule is valid, and the party challenging the rule has the
burden of demonstrating its invalidity. See Texas State Bd. of Examiners of Marriage & Fam.
Therapists v. Texas Med. Ass’n, 511 S.W.3d 28, 33 (Tex. 2017). To establish a rule’s facial
invalidity, the challenger must show that the rule (1) contravenes specific statutory language;
(2) is counter to the statute’s general objectives; or (3) imposes additional burdens, conditions, or
restrictions in excess of or inconsistent with the relevant statutory provisions. See id. A state
administrative agency has only the authority expressly provided by statute or necessarily implied
in order to carry out the express powers the Legislature has given it. See Public Util. Comm’n v.
City Pub. Serv. Bd., 53 S.W.3d 310, 315 (Tex. 2001); Public Util. Comm’n of Tex. v. GTE- Sw.,
Inc., 901 S.W.2d 401, 407 (Tex. 1995). An agency may not exercise what is effectively a
new power on the theory that such exercise is expedient for the agency’s purposes. GTE- Sw.,
901 S.W.2d at 407.
As mentioned, the 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.” Tex. Util. Code § 39.001(a), (c). The Commission counters
that it had the authority to approve NPRR 1081 as part of its “complete authority” over ERCOT
and that NPRR 1081 merely reflects the policy underlying the Commission’s scarcity pricing
11
mechanism “that has been part of the agency’s rules since 2006.” The Commission further
argues that NPRR 1081 is a tool that puts in place a “market price”—the high system-wide offer
cap—during times of artificially suppressed demand during load shed, i.e., “a tool that makes
sure that the actual scarcity of generation is reflected in the pricing model.”
As an initial matter, we note that “this Court does not decide matters of policy; we
are limited to evaluating whether the Commission acted contrary to the statute.” Office of Pub.
Util. Counsel v. Public Util. Comm’n, 131 S.W.3d 314, 321 (Tex. App.—Austin 2004, no. pet.).
Thus, the Commission’s policy reasons for implementing NPRR 1081 do not inform our analysis
of whether the Commission’s action exceeded its statutory authority.
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.”
See Luminant, 665 S.W.3d at 191–92. We are bound by that precedent. See Mitschke v.
Borromeo, 645 S.W.3d 251, 256 (Tex. 2022). 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.
Whether the Commission substantially complied with mandatory APA rulemaking
procedures
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. See Tex. Gov’t Code §§ 2001.023-.034. The Commission does not dispute that
12
NPRR 1081 was not adopted in accordance with all the APA’s rulemaking procedures. Instead,
it has consistently argued that it did not have to follow those procedures because NPRR 1081 is
not a “rule” under the APA’s definition. As discussed above, we reject that argument. In the
alternative, however, the Commission contends that even if its Order adopting NPRR 1081
constitutes a rule, the “protocol development process” employed by ERCOT substantially
complied with the APA’s requirements for agency rulemaking. See APA §§ 2001.023–.034.
This argument necessitates an examination of the relevant statutory provisions to see if the
Commission’s actions, including its Order, “accomplish[] the legislative objectives underlying
the requirement[s]” and “come[] fairly within the character and scope of each of the statute’s
requirements in specific and unambiguous terms.” National Ass’n of Indep. Insurers v. Texas
Dep’t of Ins., 925 S.W.2d 667, 669 (Tex. 1996) (“NAII”); see also Texas Shrimp Ass’n v. Texas
Parks & Wildlife Dep’t, No. 03-04-00788-CV, 2005 WL 1787453, at *2 (Tex. App.—Austin
July 27, 2005, no pet.) (mem. op.) (“Substantial compliance with a statutory requirement
contemplates acts that secure the legislative objectives while coming fairly within the character
and scope of each action or thing required in concise, specific, and unambiguous terms.”).
When adopting a rule, an agency is commanded by the APA to follow numerous
requirements, which fall into three general categories relevant to this appeal: (1) notice, see
APA §§ 2001.023–.025; (2) public participation, see id. §§ 2001.029–.030; and (3) contents of
the agency order, see id. § 2001.033. 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. Nonetheless, because the Commission argues that
the procedures utilized by ERCOT to submit and approve NPRR 1081 can be considered in
determining whether the Commission substantially complied with APA rulemaking mandates,
13
we will discuss these three categories of requirements both in terms of their satisfaction by the
Commission and in terms of their satisfaction by ERCOT.
I. Notice
(1) By the Commission
The administrative record does not reveal that the Commission gave any notice to
the public of NPRR 1081 before approving the rule.
(2) By ERCOT
From the administrative record and the procedures described on ERCOT’s
website, it appears that when an NPRR is administratively complete, the request is posted
on ERCOT’s website and distributed to ERCOT’s Protocol Revision Subcommittee, which
currently consists of approximately 14 representatives from seven different types of interested
groups.5 From this we can infer that in the weeks preceding July 16, 2021, ERCOT notified
these “stakeholders” of NPRR 1081. Nothing in the administrative record, however, indicates
that affirmative notice was given to anyone else.
The APA, however, requires that a state agency “file notice of the proposed rule
with the secretary of state for publication in the Texas Register” at least 30 days before it adopts
a rule. See APA § 2001.023(a), (b). Moreover, the required notice must include a host of details
designed to inform the public about the proposed rule, including the text of the proposed rule, the
authority under which it is adopted, and the public benefits and costs. See id. § 2001.024. The
5
According to ERCOT’s website, these groups currently include consumers,
cooperatives, independent generators, independent power marketers, independent retail electric
providers, investor-owned utilities, and municipals.
14
notice must also include “a request for comments on the proposed rule from any interested
person.” See id. § 2001.024(a)(7).
We reject the notion that posting an NPRR somewhere on ERCOT’s website
could, without more, constitute substantial compliance with the APA’s notice requirements.
Members of the public know from the provisions of the APA that they can look to the Texas
Register to find proposed agency rules or rule changes. The public does not know to search
on the website of an individual agency or sub-agency for that information. Accordingly, a
notice that is buried on an agency’s website does not “accomplish[] the legislative objectives
underlying the requirement[s],” nor “come[] fairly within the character and scope of each of the
statute’s requirements in specific and unambiguous terms.” See NAII, 925 S.W.2d at 669.
We conclude that providing notice to a few “interested stakeholders” and posting
documents on ERCOT’s website, even if such actions could somehow be attributed to the
Commission, do not substantially comply with the APA’s mandatory rulemaking procedures.6
II. Public Participation
(1) By the Commission
The administrative record does not reveal that the Commission solicited or
received any public participation, or even allowed the opportunity for such participation, before
adopting NPRR 1081.
(2) By ERCOT
Section 2001.029 of the APA establishes three public-comment requirements
related to rulemaking. First, Section 2001.029(a) of the APA requires a state agency to give “all
6
Nor can we countenance the idea that providing notice to two members of a group
called “consumers” is substantial compliance with the APA’s mandatory notice to the public.
15
interested persons a reasonable opportunity to submit data, views, or arguments, orally or in
writing,” before adopting a rule. See APA § 2001.029(a). But Section 21.4.4(1) of ERCOT’s
“Revision Request Process,” as described on its current website, specifically identifies who is
authorized to comment on a NPRR:
Any ERCOT Member, Market Participant, the Public Utility Commission of
Texas (PUCT) Staff, the Reliability Monitor, the North American Electric
Reliability Corporation (NERC) Regional Entity, the Independent Market
Monitor (IMM), or ERCOT may comment on a Revision Request.[7]
In other words, not only were members of the public not affirmatively invited to comment on
NPRR 1081, ERCOT’s own rules expressly disallowed them from doing so.
We conclude that the administrative record does not support a conclusion that the
Commission substantially complied with Section 2001.029(a).
Second, Section 2001.029(b) of the APA requires a state agency to grant an
opportunity for a public hearing before it adopts a substantive rule if a public hearing is
requested by: (1) at least 25 persons; (2) a governmental subdivision or agency; or (3) an
association having at least 25 members. The administrative record contains no indication that
ERCOT gave anyone an opportunity to request a public hearing before adopting its rule. We
conclude that the administrative record does not support a conclusion that the Commission
substantially complied with Section 2001.029(b).
Third, Section 2001.029(c) requires a state agency to consider fully all written and
oral submissions about a proposed rule. Although the administrative record contains evidence
that comments from a handful of “stakeholders” were delivered by ERCOT to the commissioners
7
This section of ERCOT’s website is dated January 1, 2021, so it would likely have been
in effect at the time NPRR 1081 was proposed.
16
shortly before the Commission’s Order was signed, this cannot take the place of a full and fair
opportunity for comments from the public at large. And since ERCOT did not give notice to the
public, there is no way to determine who else besides a few of ERCOT’s stakeholders might
have desired to submit comments. We conclude that the administrative record does not support a
conclusion that the Commission substantially complied with Section 2001.029(c).
III. Contents of the Agency’s Order
Section 2001.033(a) of the APA requires that a state agency order finally adopting
a rule must include the following:
(1) a reasoned justification for the rule as adopted consisting solely of:
(A) a summary of comments received from parties interested in the rule that shows
the names of interested groups or associations offering comment on the rule and
whether they were for or against its adoption;
(B) a summary of the factual basis for the rule as adopted which demonstrates a
rational connection between the factual basis for the rule and the rule as adopted;
and
(C) the reasons why the agency disagrees with party submissions and proposals;
(2) a concise restatement of the particular statutory provisions under which the rule is
adopted and of how the agency interprets the provisions as authorizing or requiring the
rule; and
(3) a certification that the rule, as adopted, has been reviewed by legal counsel and found
to be a valid exercise of the agency’s legal authority.
Id. § 2001.033(a). This Court has held on numerous occasions that the items listed in section
2001.033(a) must appear in the four corners of the agency’s order. See, e.g., Gulf Coast Coal. of
Cities v. Public Util. Comm’n, 161 S.W.3d 706, 713 (Tex. App.—Austin 2005, no pet.) (“The
question of substantial compliance is a question of law determined solely from the face of the
adopting order.”); Lambright v. Texas Parks & Wildlife Dep’t, 157 S.W.3d 499, 504 (Tex.
App.—Austin 2005, no pet.) (“A reviewing court must confine its search for a reasoned
justification to the four corners of the order finally adopting the rule . . . .”); Office of Pub.
17
Util. Couns., 131 S.W.3d at 327, (“Our review is limited to the face of the order finally adopting
the rule.”).
Section 2001.033(a) contains one of the most important requirements imposed by
the APA, that the order adopting an agency rule must state a “reasoned justification” for the rule,
including the specific elements quoted above in Section 2001.033(a)(1). The Texas Supreme
Court has emphasized the importance of this requirement:
Without an explanation by the Board of its reasoning, we cannot know, and just as
importantly, the public cannot know, why the Board reached the conclusions that
it did. . . . [T]he Legislature has mandated that the reasoning an agency actually
relied on appear in the order. If courts allow agencies to adopt conclusory rules
. . . , the purposes of section 2001.033—to provide meaningful public
participation in the rulemaking procedure, to allow opponents of the rule to
formulate specific challenges, and to ensure that the agency carefully considers
and analyzes a rule before adopting it—will be eviscerated.
NAII, 925 S.W.2d at 670. Although Section 2001.033(a) was slightly modified in 1999, the
Texas Supreme Court has continued to adhere to the principles enunciated in the NAII opinion:
[T]he order must include how and why the agency reached the conclusions it did
for adopting the rule, and the conclusions must be presented in a relatively clear,
precise, and logical fashion. Nat’l Ass’n of Indep. Insurers v. Tex. Dep’t of Ins.,
925 S.W.2d 667, 669 (Tex. 1996). The order also must provide (1) a summary
of the comments received from interested parties; (2) a restatement of the
factual basis for the rule; and (3) the reasons why the agency disagrees with
the comments. Tex. Gov’t Code § 2001.033(1)(A)-(C); Nat’l Ass’n of Indep.
Insurers, 925 S.W.2d at 669. If an order fails to substantially comply with these
requirements, the rule is invalid. Tex. Gov’t Code § 2001.035(a); Nat’l Ass’n of
Indep. Insurers, 925 S.W.2d at 669. Requiring an agency to demonstrate a
rational connection between the facts before it and the agency’s rules promotes
public accountability and facilitates judicial review. Nat’l Ass’n of Indep.
Insurers, 925 S.W.2d at 669.
Texas Workers’ Comp. Comm’n v. Patient Advocates of Tex., 136 S.W.3d 643, 648 (Tex. 2004).
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Requiring an agency to demonstrate a rational connection between the facts
before it and the agency’s rules promotes public accountability and facilitates
judicial review. It also fosters public participation in the rulemaking process, see
Tex. Gov’t Code § 2001.001, and allows interested parties to better formulate
“specific, concrete challenges” to a rule.
NAII, 925 S.W.2d at 669–70.
This Court, too, has held that the reasoned-justification requirement is not an
empty platitude:
The essential legislative objective of the reasoned justification requirement is
“to give notice of the factual, policy, and legal basis for the rule, as adopted or
construed by the agency, in light of all the evidence gathered by the agency
and submitted by interested parties during the comment period. This overall
objective can be broken down into two fundamental goals of the reasoned
justification requirement: (1) to ensure the agency fully considered the
comments submitted and (2) to provide the factual basis and rationality of the
rule as determined by the agency.”
Reliant Energy, Inc. v. Public Util. Comm’n, 62 S.W.3d 833, 841 (Tex. App.—Austin 2001, no
pet.) (quoting Railroad Comm’n of Tex. v. ARCO Oil & Gas Co., 876 S.W.2d 473, 492 (Tex.
App.—Austin 1994, writ denied)).
(1) By the Commission
In the present case, the Commission’s Order does not contain any of the matters
required by Section 2001.033(a). The Order is a two-page, stand-alone document. It did not
incorporate by reference any document that contained the necessary matters. It merely recited
generally that the ERCOT board of directors had approved NPRR 1081, that “NPRR 1081
revised ERCOT Nodal Protocol § 6.5.7.3.1,” and that “[t]he Commission approves NPRR 1081
and accompanying market impact statement.” But the term “NPRR 1081” was simply the
19
number assigned to this particular NPRR. By itself, this reference gave no information that
could satisfy the requirements of Section 2001.033(a). A member of the public reading the
Commission’s Order would have no idea what the revision did, why the Commission had taken
its action, whether it was a valid exercise of the Commission’s legal authority, who commented
on the proposed rule, or any of the other requirements of Section 2001.033(a).
Thus, the Commission’s Order does not, within its four corners, include anything
that qualifies as a clear, precise, and logical presentation of the Commission’s justification for
NPRR 1081 as required by Section 2001.033(a). The Commission points instead to a separate
PUC Staff memorandum, with attachments prepared by ERCOT Staff, that were delivered to
commissioners two days before the Order was signed.
(2) By ERCOT
The Commission asserts that actions taken by ERCOT constitute substantial
compliance with Section 2001.033(a), including the requirement that the Order implementing
NPRR 1081 include a reasoned justification for the rule. The Commission’s Order itself recites
only that “Commission Staff filed a memorandum on July 13, 2021 related to these revisions
in which it recommends that the Commission approve the revisions to the Nodal Protocols
and to the Other Binding Documents. Attached to the Commission Staff’s memorandum were
supporting ERCOT documents, which constitute the market impact analysis.”
The referenced PUC Staff Memorandum, dated July 14, 2021, was generated in
preparation for the commissioners’ July 15 meeting. Attached to the Memorandum were three
documents: (1) an “Impact Analysis Report,” dated June 3, 2021, (2) comments by PUC staff,
dated June 22, in support of NPRR 1081, and (3) a “Board Report,” dated June 28, summarizing
ERCOT’s June 28 Board of Directors meeting at which the board approved NPRR 1081.
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Even were we to determine that these separate documents were somehow part
of the four corners of the Commission’s Order, the documents do not themselves constitute
substantial compliance with APA rulemaking requirements. The Impact Analysis Report
summarizes various estimated impacts on ERCOT but does not address any of the matters
required by Section 2001.033(a). The PUC staff comments arguably address the factual basis
for NPRR 1081, as required by Section 2001.033(a)(1)(B), but nothing more. The Board
Report contains a summary of comments received by ERCOT regarding NPRR 1081, see APA
§ 2001.033(a)(1)(A), and addresses the factual basis for the rule, see APA § 2001.033(a)(1)(B).
It does not, however, contain any statement of reasons why ERCOT disagreed with party
submissions. See APA § 2001.033(a)(1)(C). And neither the Board Report nor the other two
documents address the matters required by APA §§ 2001.033(a)(2) and (a)(3).
Section 2001.033(a) is intended to give notice of the factual, policy, and legal
bases for the rule as adopted by the agency in light of all the evidence gathered by the agency
during the comment period to ensure that the agency fully considered the comments submitted
by interested parties and to provide the factual basis, legality, and rationality of the rule as
determined by the agency. Reliant Energy, 62 S.W.3d at 841. As discussed above, “[t]o
substantially comply with the reasoned-justification requirement, the four corners of the agency’s
final notice must present the agency’s justification in a relatively clear, precise, and logical
fashion.” Office of Pub. Util. Counsel, 131 S.W.3d at 328.
As stated in Section 2001.035, an agency rule is invalid if it is not in “substantial
compliance” with the APA’s rulemaking requirements. But substantial compliance requires
more than a faint effort or hollow rhetoric. “An agency’s order substantially complies with the
reasoned justification requirement if it (1) accomplishes the legislative objectives underlying the
21
requirement and (2) comes fairly within the character and scope of each of the statute’s
requirements in specific and unambiguous terms.” NAII, 925 S.W.2d at 669 (citing Arco Oil &
Gas Co., 876 S.W.2d at 492; Methodist Hosps. v. Texas Indus. Accident Bd., 798 S.W.2d 651,
654 (Tex. App.—Austin 1990, writ dism’d w.o.j.)). Professor Beal has stated it this way:
[T]he test of substantial compliance should not allow an agency to “fill in the
blanks” with meaningless rhetoric and thereby frustrate the legislative intent of
reasoned decision making. The legislative intent undisputably requires a focused
analysis by the agency of all relevant factual, policy and legal issues resulting not
only in a justification, but a reasoned justification of the rule.
Ron L. Beal, The Scope of Judicial Review of Agency Rulemaking: The Interrelationship of
Legislating and Rulemaking in Texas, 39 Baylor L. Rev. 597, 688 (1987).
Thus, even if the PUC Staff memorandum and its attachments had been within the
four corners of the Commission’s Order, those documents do not substantially comply with the
requirements of Section 2001.033(a) of the APA.
Finally, the Commission argues that requiring it to follow APA rulemaking
procedures would be a “massive waste of precious Commission resources,” requiring a
duplication of effort between ERCOT and the Commission. Although forcing the Commission
to abide by the APA’s mandatory rulemaking procedures would undoubtedly take some time and
effort, that misses the point. The importance of the APA requirements cannot be overstated.
The detailed process set forth in the foregoing statutory provisions “assures notice to the public
and affected persons and an opportunity to be heard on matters that affect them.” El Paso Hosp.
Dist. v. Texas Health & Human Servs. Comm’n, 247 S.W.3d 709, 715 (Tex. 2008); accord
Rodriguez v. Service Lloyds Ins. Co., 997 S.W.2d 248, 255 (Tex. 1999). Indeed, the Legislature
deemed it important enough to specify that an express purpose of the APA is to provide for
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public participation in the rulemaking process: “It is the public policy of the state through
this chapter to . . . provide for public participation in the rulemaking process . . . .” APA
§ 2001.001(2).
We are not persuaded by the Commission’s sky-is-falling argument. First, many
of ERCOT’s protocol amendments will, in all likelihood, fall outside the APA’s definition of
“rule.” Moreover, given the close association between the Commission and ERCOT, it would
seem to be a readily achievable task to accomplish the mandated APA requirements of notice,
public participation, and order contents in an efficient, coordinated process.
From our review, we conclude the Commission complied with few, if any, of the
requirements of APA Sections 2001.023-033. The myriad ways in which the Commission failed
to comply with mandatory APA requirements for adopting or amending a rule cannot be
characterized as “technical defect[s],” see id. § 2001.035(d), and, as discussed above, its actions
in approving NPRR 1081 do not qualify as “substantial compliance” with the APA’s mandatory
rulemaking procedures, see id. § 2001.035(c).
The Legislature could have exempted the Commission from the APA
requirements, at least with respect to the adoption or approval of ERCOT protocols, but it did
not. And that is the Legislature’s call, not that of this Court. The job of the courts is to ensure
that the law—as passed by the Legislature—is followed when agencies adopt rules. The Texas
Supreme Court has recognized the importance of that job:
Judicial review of administrative rulemaking is especially important because,
although the executive and legislative branches may serve as political checks on
the consequences of administrative rulemaking, the judiciary is assigned the task
of policing the process of rulemaking. . . . Given the vast power allocated to
governmental agencies in the modern administrative state, and the broad
discretion ordinarily afforded those agencies, judicial oversight of the rulemaking
23
process represents an important check on government power that might otherwise
exist without meaningful limits.
NAII, 925 S.W.2d at 670 (citing P.M. Schenkkan, When and How Should Texas Courts Review
Agency Rules?, 47 Baylor L. Rev. 989, 1113 (1995)).
Because we conclude that the Commission has failed to demonstrate that it
substantially complied with the APA rulemaking procedures, we hold that NPRR 1081 is, for
that separate reason, an invalid rule.
CONCLUSION
For the reasons stated above, we reverse the Commission’s Order and remand the
case to the Commission for further proceedings consistent with this opinion.8
8
Citing Section 2001.040 of the APA, the Commission requests that if we reverse for a
failure to follow APA rulemaking procedures, we should remand and give the Commission a
reasonable time to readopt the rule using the proper procedure. See APA § 2001.040 (“If a court
finds that an agency has not substantially complied with one or more procedural requirements of
Sections 2001.0225 through 2001.034, the court may remand the rule, or a portion of the rule, to
the agency and, if it does so remand, shall provide a reasonable time for the agency to either
revise or readopt the rule through established procedure.”). Since our initial holding is that the
Commission exceeded its statutory rulemaking authority, Section 2001.040 is not applicable. If
a higher court overturns our decision that the Commission exceeded its authority but upholds our
decision that the Commission did not substantially comply with the rulemaking procedures of
Sections 2001.0225–.034, that court will have the opportunity to address Section 2001.040.
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_________________________________________
J. Woodfin Jones, Justice
Before Justices Baker, Theofanis, and Jones*
Reversed and Remanded
Filed: June 1, 2023
*
Before J. Woodfin Jones, Chief Justice (Retired), Third Court of Appeals, sitting by assignment.
See Tex. Gov’t Code § 74.003(b).
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