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In March, Panda Power Funds and certain of its subsidiaries (“Panda Power”) filed a lawsuit against the Electric Reliability Council of Texas, Inc. (“ERCOT”) in the District Court, Grayson County, Texas, 15th Judicial District. The lawsuit alleges that in 2011 and 2012, ERCOT committed negligent misrepresentation, fraud and breach of duty by sponsoring false and misleading market reports and other statements concerning the need for capacity in the ERCOT market that induced Panda Power to invest nearly $2.2 billion in constructing new electricity-generating facilities.¹

Panda Power invested in, financed and constructed three large-scale, natural gas-fueled electricity generation projects within the market operated by ERCOT. ERCOT is an independent system operator that administers an electricity transmission grid located solely within the state of Texas and not synchronously interconnected to the rest of the United States.  

Panda Power contends that in 2011 and 2012, ERCOT issued a “false and misleading” report on Capacity, Demand and Reserves (“CDR”), which projected a serious and long-term scarcity of power supply in the market. The companies allege that these CDRs presented a picture of market conditions that ERCOT knew would lure investors, such as Panda Power, to construct generating facilities based on the belief that the price for power in such short supply would be high enough to cover the cost of construction without any need for a capacity payment. Panda Power further alleges that these CDRs, along with public statements by ERCOT officials supporting the CDR results, induced Panda Power to invest nearly $2.2 billion to build three generating facilities in ERCOT — the Sherman Power Plant, the Temple I Power Plant and the Temple II Power Plant. But for ERCOT’s representations concerning the need for capacity in the market, Panda Power maintains it would not have invested in or built the three generating facilities.

Panda Power asserts that after its investments had closed and the generating facilities were substantially under construction, ERCOT published new CDRs showing a market having extreme overcapacity rather than a need for capacity. In addition, the companies allege that new information showed that ERCOT’s methodology and data used to prepare the 2011 and 2012 CDRs were “either seriously flawed or rigged.” As a result, the energy market reflected in the new CDRs depressed the market price for power both in the short and long term, making it more difficult to hedge against temporary market distortions through selling power into the ERCOT forward markets.

Based on these allegations, Panda Power claims that ERCOT negligently, as well as knowingly or recklessly, made or caused to be made false representations to induce Panda Power to invest and construct electricity-generating facilities in Texas, and further claims that ERCOT breached its fiduciary duty to Panda Power, causing substantial damages.

Panda Power has requested a jury trial and seeks to recover, among other things, actual, consequential and incidental damages from ERCOT.

In order to prevail in its suit against ERCOT, Panda Power will need to demonstrate, among other things, that a fiduciary relationship existed between Panda Power and ERCOT and that it justifiably relied on any representations made by ERCOT. These will be fact-intensive inquiries.

In early April, ERCOT filed a motion to dismiss Panda Power’s lawsuit, and in the alternative, a motion to transfer the case to Travis County, Texas, and an answer to Panda Power’s lawsuit.

In its motion to dismiss, ERCOT argues that Panda Power’s suit should be dismissed based on improper venue. Specifically, ERCOT argues that a forum-selection clause entered into by Panda Power mandates that any suit be filed in Travis County, Texas. In the alternative, ERCOT argues that Panda Power’s case should be moved to Travis County, because none of the events or omissions that form the basis of Panda Power’s claims occurred in Grayson County, Texas, and transferring venue to Travis County would be more convenient for the parties and witnesses.

ERCOT characterizes Panda Power’s lawsuit as the result of having “gambled on future increased demand for power,” having “apparently lost,” and “regretting” its investment decisions.

In its answer to Panda Power’s lawsuit, ERCOT raises a number of affirmative defenses, including that Panda Power’s claims are barred by its failure to exhaust or utilize available administrative remedies, its own acts or omissions that caused or contributed to its purported injury, its failure to comply with applicable statutes of limitations, and its failure to mitigate any purported damage; as well as the express disclaimers contained in the CDRs that are the basis of Panda Power’s claims; the doctrines of waiver and estoppel; and contractual damage waivers and limitations found in the agreements entered into between Panda Power and ERCOT. ERCOT further argues that Panda Power’s claim for breach of fiduciary duty is not cognizable under Texas law and that Panda Power has not specified the maximum damages it seeks to recover from ERCOT.

¹ Panda Power Generation Infrastructure Fund, LLC D/B/A Panda Power Funds, et al., v. ERCOT, No. CV-16-0401.