Viewpoint: Subrogating Freeze Damage When Texas Power Plants Are Not Dressed For Winter

Successful subrogation against power companies is not a given. In determining whether the Electric Reliability Council of Texas (ERCOT) may be sued for its clear negligence in failing to properly winterize power production facilities and the power grid that it runs in Texas, the issue is currently in limbo. The Texas Supreme Court is currently reviewing whether ERCOT will be granted governmental immunity.

There are a myriad of reasons Texas has seen power outages, but many of the failures are likely tied to simply being unprepared for extreme cold weather. In Texas, power is generated from natural gas, coal, nuclear, and wind. This is not unsimilar to power generation in states that inhibit colder climates. It is clear that all of this equipment has the capability to be winterized and made to operate in sub-freezing temperatures. The issue is that the power providers in Texas have not undertaken the time and investment necessary to properly winterize their equipment.

The Federal Energy Regulatory Commission (“FERC”) and the North America Electric Reliability Corporation (“NERC”)warned Texas a decade ago that its power plants couldn’t be counted on to reliably churn out electricity in bitterly cold conditions, when the last deep freeze in Texas plunged four million people into the dark. The FERC and the NERC had both recommended that utilities use more insulation, heat pipes, and take other steps to winterize plants — strategies commonly observed in cooler climates but not in normally warmer weather climates such as Texas.

ERCOT clearly mishandled the winter storm that rolled through Texas over the past week. ERCOT’s failures left millions of Texas residents without power and without heat for days in below-freezing temperatures.

On February 16, 2021, Governor Greg Abbott declared the reform of ERCOT an emergency item this legislative session. In declaring this item an emergency, the Governor is calling on the legislature to investigate ERCOT and ensure Texans never again experience power outages on the scale they saw last week.

Governor Abbot stated that “Far too many Texans are without power and heat for their homes as our state faces freezing temperatures and severe winter weather. This is unacceptable. Reviewing the preparations and decisions by ERCOT is an emergency item so we can get a full picture of what caused this problem and find long-term solutions. I thank my partners in the House and Senate for acting quickly on this challenge, and I will work with them to enhance Texas’ electric grid and ensure that our state never experiences power outages like this again.”

As noted above, the Texas Supreme Court will be reviewing whether or not ERCOT will be given governmental immunity. ERCOT is the agency tasked with management of the state’s primary electric grid. ERCOT operates under a quasi-governmental fashion. ERCOT has some of its responsibilities set forth in Texas law and also has a board of directors that answers directly to the Texas Public Utility Commission, a state agency.

ERCOT was sued by a company alleging that it improperly manipulated projections of the state’s future power needs after coming under political pressure to encourage new power plant construction. ERCOT raised the affirmative defense of sovereign immunity. An appeals court agreed with this position and the case has been appealed to the Texas Supreme Court to decide.

The Dallas Court of Appeals ultimately held that (1) ERCOT is a private corporation exercising power delegated to it by an administrative agency pursuant to legislation; (2) ERCOT’s power includes rulemaking authority that is binding on market participants; and (3) ERCOT is subject to broad oversight by the Public Utilities Commission (“PUC”), which can decertify it. Based on the reasoning of the SRO immunity cases described above and the “nature and purposes” of sovereign immunity, the court of appeals concluded ERCOT is entitled to sovereign immunity from private damages suits in connection with the discharge of its regulatory responsibilities. Electric Reliability Council of Texas, Inc. v. Panda Power Generation Infrastructure Fund, LLC, 552 S.W.3d 297 (Tex. App. – Dallas 2018).

If ERCOT is deemed to have sovereign immunity, they will be protected from tort liability for their actions leading up to the power outages that affected millions and led to what will ultimately be damages in the hundreds of millions of dollars from burst pipes and the subsequent property damages. If not, ERCOT will be able to be sued just like any other corporation. Given that they operate in a quasi-governmental capacity, ERCOT’s status as a governmental entity entitled to tort immunity will rest solely in the hands of the Texas Supreme Court.

This is likely to be a difficult task. The Texas PUC controls ERCOT’s funding, budget, operations, discipline, and governance. Nothing ERCOT does today is free from the state’s direct oversight. The Texas PUC has vast authority over ERCOT. ERCOT is essentially doing the State of Texas’ work with the state’s money and under the state’s supervision and regulation.

The liability for governmental units is controlled by the Texas Tort Claims Act, which is addressed in Chapter 101 of the Texas Civil Practice & Remedies Code. The specific section spelling out the limited circumstances when the government can be held liable is as follows:

Sec. 101.021. GOVERNMENTAL LIABILITY. A governmental unit in the state is liable for:

(1) property damage, personal injury, and death proximately caused by the wrongful act or omission or the negligence of an employee acting within his scope of employment if:

(A) the property damage, personal injury, or death arises from the operation or use of a motor-driven vehicle or motor-driven equipment; and

(B) the employee would be personally liable to the claimant according to Texas law; and

(2) personal injury and death so caused by a condition or use of tangible personal or real property if the governmental unit would, were it a private person, be liable to the claimant according to Texas law.

The Texas Tort Claims Act does not create new legal duties; it only waives governmental immunity in circumstances where a private person similarly situated would be liable. In order to establish tort liability, a plaintiff must prove the existence and violation of a legal duty owed to him by the defendant. The existence of a legal duty is a question of law for the court although in some instances it may require the resolution of disputed facts or inferences which are inappropriate for legal resolution. Fort Bend County Drainage Dist. v. Sbrusch, 818 S.W.2d 392 (Tex. 1991).

Certain public utilities, e.g., electric utilities, are considered proprietary functions and their activities may not be entitled to immunity under the Tort Claims Act. However, this typically applies to municipalities. ERCOT is not a municipality.

It should be noted that under the Texas Tort Claims Act, notice must be given within six months after the date of the incident. See Tex. Civ. Prac. Rem. Code § 101.101. The notice must reasonably describe: (1) the damage or injury claimed; (2) the time and place of the incident; and (3) the incident.

The potential exposure from the losses sustained by property owners as a result of the power outages will be in the hundreds of millions of dollars. The ruling of the Texas Supreme Court will have overreaching implications for the residents of Texas and the insurance companies who cover those citizens. A favorable ruling will open the door for subrogation claims to proceed forward. An unfavorable ruling will shut that door completely. Given the six-month notice requirement, companies will need to act fast in putting ERCOT on notice of their claims, so as to protect any potential right they might have in the future.

Another obstacle which must be navigated is the existence of subrogation-killing tariffs which contain limitations of liability. Electric utilities in Texas, as they do elsewhere, operate pursuant to publicly filed tariffs. Texas is unique because for the last 22 years, it has operated under a system of deregulation. Control of the entire state’s power generation and delivery system is given to a market-based assemblage of private generators, transmission companies, and energy retailers. This frontier system of power distribution resulted in cheaper power for Texas residents; but it also apparently allowed the energy catastrophe of last week. There was little incentive and no oversight of investing in weather protection or maintenance. A winter event like the one just experienced was not planned for. Tariffs often limit liability for negligence, but retain liability for gross negligence and/or willful misconduct. These obstacles will create interesting subrogation challenges for the many property subrogation claims which are already being referred to MWL.