Brazos' $2 billion bill lawsuit survives ERCOT effort to dismiss

Residents line up in their vehicles to enter a warming center and shelter after record-breaking winter temperatures, as local media reports most residents are without electricity, in Galveston, Texas, U.S., February 17, 2021. REUTERS/Adrees Latif

(Reuters) - Brazos Electric Power Cooperative Inc on Monday largely defeated an effort by the Texas electric operator to dodge a lawsuit over a $2 billion energy bill stemming from the state's historic February storm that knocked out power for millions.

U.S. Bankruptcy Judge David Jones in Houston rejected arguments from the Electric Reliability Council of Texas (ERCOT) and Public Utilities Commission of Texas (PUCT) that the dispute should not be handled in bankruptcy court and that allowing it to continue would infringe upon the state’s sovereignty.

“You’ve all made this far larger than, in my mind, it really is,” Jones said during the hearing.

ERCOT said in a response to a request for comment that it does not comment on pending litigation. The PUCT did not immediately reply to a request for comment.

Brazos, the largest and oldest electric co-op in Texas, filed for Chapter 11 protection in March after it was hit with the massive bill. The bill for the seven days the storm lasted is nearly three times the co-op’s total power cost from 2020, which was $774 million, according to court papers. For several days during the storm, ERCOT set electricity prices at $9,000 per megawatt hour.

In August, the co-op, represented by O’Melveny & Myers and Norton Rose Fulbright, filed a complaint within its bankruptcy aiming to reject ERCOT's claim for the payment of the bill and substantially reduce the amount. It argues that the charges are constructively fraudulent and excessive.

The Public Utilities Commission of Texas says Brazos is trying to re-price the market. Ruling in favor of the coop, Texas Assistant Attorney General Jason Binford argued at Monday's hearing, could create a precedent that would lead to other electric providers seeking bankruptcy to offload their energy bills as well.

Additionally, Binford said, Texas has a specific procedure for resolving this type of dispute. Handling the bill in bankruptcy court infringes upon the state’s sovereign immunity, he argued.

“I can say with zero exaggeration that this is the most important hearing of my career,” Binford said.

Lawyers for Brazos argued that the issue is not related to state regulatory powers and is limited to the terms of the contract between the co-op and ERCOT. Under the contract, they said, ERCOT applied the wrong pricing mechanism for electricity used during the February storm.

Though he mostly denied ERCOT’s motion to dismiss the case, the judge did dismiss one count that objects to the claim based on pricing mechanisms outlined in the contract between the two parties, saying he didn’t understand it. However, he will allow Brazos to revise the count.

The case is In re Brazos Electric Power Cooperative Inc, U.S. Bankruptcy Court, Southern District of Texas, No. 21-30725.

For Brazos: Lou Strubeck and Nick Hendrix of O'Melveny & Myers; Jason Boland, Paul Trahan and Steve Peirce of Norton Rose Fulbright; and Lino Mendiola, Michael Boldt and Jim Silliman of Eversheds Sutherland (US)

For ERCOT: Kevin Lippman, Deborah Perry, Jamil Alibhai and Ross Parker of Munsch Hardt Kopf & Harr

For the committee: Thomas Moers Mayer, Amy Caton, Jennifer Sharret, Sean Coffey and Ronald Greenberg of Kramer Levin Naftalis & Frankel; and John Higgins, Eric Wade, Heather Hatfield and M. Shane Johnson of Porter Hedges

Read more:

Brazos Electric seeks bankruptcy court ruling on winter storm energy prices

Brazos seeks more time to control bankruptcy amid new storm-related laws

Texas power cooperative files for bankruptcy, citing $1.8 billion grid debt

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Maria Chutchian reports on corporate bankruptcies and restructurings. She can be reached at