City of San Antonio ex rel. City Public Service Board v. Public Utility Commission (506 S.W.3d 630, 2016)

OPINION

STEVEN L. HUGHES, Justice

The City of San Antonio, acting by and through City Public Service Board a/k/a CPS Energy (CPS Energy), appeals a district court judgment affirming a final order of the Public Utility Commission of Texas (PUC), in which the PUC imposed a $25,000 administrative penalty on CPS Energy for violating the PUC’s Wholesale Market Oversight Rule (the WMO Rule). CPS Energy raises several challenges to the validity of the PUC’s final order, contending, among other things, that the PUC misinterpreted the WMO Rule,-, that its application of the WMO Rule deprived CPS Energy of due process, and that the PUC’s final order was not supported by substantial evidence. We affirm.

BACKGROUND

In order to address the dispute over the proper interpretation and application of the WMO Rule, it is necessary to understand the nature of the electricity market in Texas. Prior to the adoption of Chapter 39 of the Texas Utilities Code, also known as the Public Utility Regulatory Act or PURA, the electricity market in Texas essentially operated as a monopoly. TXU Generation Co., L.P. v. Pub. Util. Comm’n of Texas, 165 S.W.3d 821, 827 (Tex.App.Austin 2005, pet. denied). When it enacted PURA, the Texas Legislature made the determination to deregulate the production and sale of electricity for a large portion of the state, but chose not to deregulate the “transmission of energy.” Tex. Util. Code Ann. § 39.001 (West 2016). In carving out an exception for the transmission of energy, the Legislature recognized, that this aspect of the electricity industry is unique, and by its nature must ,be subject to some form of regulation. TXU Generation Co., L.P., 165 S.W.3d at 827. In particular, the Legislature recognized that because electricity cannot be easily stored once it is generated, the industry must rely on a complex transmission grid to provide needed energy to consumers throughout the state. In turn, it recognized that the grid must be constantly balanced by either adding or removing power to ensure a smooth and uninterrupted flow of energy to consumers, and that- it was therefore necessary to assign an entity to be responsible for ensuring that balance. Id. at 828.

The Legislature assigned the task of overseeing and regulating this aspect of the industry to the PUC. Tex. Util. Code Ann. § 35.004 (West 2016). As part of its authority, the PUC is authorized to certify independent organizations to perform various functions on its behalf to ensure the “reliability and adequacy of the regional electrical network” within a particular power region. Id. at § 39.151(a),. (c). (West 2016). For most of the state, that independent organization is the Electric Reliability Council of Texas (ERCOT), which manages the flow of electric power to approximately 23 million Texas customers within its region. TXU Generation Co. L.P., 165 S.W.3d at 831.

The Utilities Code also authorizes independent organizations, such as ERCOT, to adopt rules, subject to the PUC’s oversight and review, to ensure the reliability of the electrical grid within its region. Tex. Util. Code Ann. § 39.151(d) (West 2016). Those rules are commonly referred to as ERCOT “protocols.” 16 Tex Admin, Code § 25.503(c)(3). The various entities, such as CPS -Energy, that choose to participate in the transmission of energy within the ER-COT region are referred to as “market participants” and are subject to those protocols. Id. at § 25.503(c)(5, 6). In particular, the Code provides that market participants must observe all ERCOT rules and procedures, and that a failure to comply may, among other things, result in an enforcement action and ultimately the imposition of an administrative penalty. Tex. Util, Code Ann. § 39.151 (j) (West 2016).

In turn, ERCOT is required to contract with an entity selected by the PUC to act as the PUC’s “wholesale electric market monitor” to prevent and detect violations of the ERCOT protocols. Id. at § 39.1515 (West 2016). ERCOT contracted with Texas Reliability Entity, Inc. (“Texas RE”) to investigate potential ERCOT protocol violations and report those violations to PUC staff.

Also as part of its duty to oversee and monitor the various participants in this aspect of the electricity industry, the PUC adopted a global administrative rule, entitled the “Oversight of Wholesale Market Participants,” more commonly known as the ‘WMO Rule,” which has the stated purpose of establishing “the standards that the [PUC] will apply in monitoring the activities” of these participants. 16 Tex. Admin. Code § 25.503. The WMO Rule sets forth various duties of market participants, and in particular, requires that each “market participant shall be knowledgeable about ERCOT procedures,” and expressly requires all market participants to “comply with ERCOT procedures and any official interpretation of the Protocols issued by ERCOT or the [PUC].” Id. at § 25.503 (f)(1) and (2).

The WMO Rule nevertheless provides in subsection (f) that a market participant may be “excused” from compliance with ERCOT instructions or Protocol requirements under the following relevant circumstances:

• When such non-compliance is due to communication or equipment failure beyond the reasonable control of the market participant;

• When compliance would jeopardize public health and safety or the reliability of the ERCOT transmission grid, or create risk of bodily harm or damage to the equipment;

• When compliance would be inconsistent with facility licensing, environmental, or legal requirements^]

Id. at § 25.503(f)(2)(C). The Rule, however, states that the market participant is excused under this subparagraph only for so long as the condition continues. Id.

In addition, the WMO Rule contains a separate section providing two affirmative defenses to any prohibited act set forth in subsection (f) of the Rule. Id. at § 25.503(h). In particular, subsection (h) of the WMO Rule provides that a market participant may avoid liability for engaging in an act prohibited by the Rule, if the participant establishes that: (1) its “conduct served a legitimate business purpose ... and that it did not know, and could not reasonably anticipate, that its actions would ... adversely affect the reliability of the regional electric network”; or (2) it “exercised due diligence to' prevent the excluded act or practice.” Id.

The WMO Rule also provides an enforcement structure, which allows the Reliability Monitor (in this case Texas RE) to investigate possible ERCOT protocol violations, and provide its findings to PUC staff. Id. at § 25.503(k). The PUC staff is given the discretion to initiate an informal fact-finding review to investigate whether a market participant has violated the WMO Rule, including the provision requiring compliance with ERCOT protocols. Id. at § 25.503(o). If PUC staff finds that a possible violation exists, it may request that the PUC take appropriate enforcement action against the market participant, and may, among other things, recommend an administrative penalty against the participant. Id. at § 25.503(o )(4). The PUC may then initiate a formal enforcement proceeding against the market participant. Id. at § 25.503(o). Following a hearing, if a final order is entered against it, the market participant is entitled to judicial review of that order. Tex. Util, Code ANN. §§ 15.001 (West 2016), 15.026 (West 2016).

The ERCOT Protocol

In the present case, following initial investigations conducted by Texas RE and the PUC staff, the PUC initiated an enforcement action against CPS Energy based on its alleged violation of an ER-COT Protocol relating to ancillary or reserve energy services, which in turn violated subsection (f) of the WMO Rule requiring compliance with all ERCOT protocols. Reserve services are used by ERCOT in various situations, including weather emergencies, in which. reserve energy may be needed to balance the grid to ensure that customers in the ERCOT region are provided with sufficient energy on a continuing basis. Market participants, such as CPS Energy, who have become certified to offer reserve energy to ERCOT are known as Qualified Scheduling Entities (QSEs). When the need for reserve energy is predicted, a QSE may offer the use of reserve or standby energy services to ERCOT, including non-spinning reserve services (commonly referred to as NSRS services), which are defined as ancillary services that can be “ramped to a specified output level within 30 minutes,” and can operate at a specified output level for at least an hour, In exchange for a fee, a QSE agrees to stand ready to provide NSRS to ERCOT during a specific timeframe, and agrees that it will initiate deployment of NSRS upon receiving a deployment instruction by ER-COT. Once the instruction is given to deploy NSRS, ERCOT Protocol § 6.5.7.6.2.3(4) provides a precise time-line for deployment of the NSRS by a QSE:

• Within 20 minutes of deployment, the generator must update the NSRS schedule to indicate the unit’s deployment;

• Within 25 minutes of deployment, the generator must reach its Low Sustained Limit [“LSL”]; and

• Within SO minutes of deployment, the generator must change the resource status for the generating unit from offline to “on,” thus allowing ERCOT to dispatch it.

The ERCOT protocol itself contains one relevant exception, providing that: “Except as otherwise stated in this Section ,.. each QSE shall comply fully and promptly with a Dispatch Instruction issued to it, unless in the sole and reasonable judgment of the ... QSE, such compliance would create an undue threat to safety, undue risk of bodily harm or undue damage to equipment!)]” ERCOT Protocol § 6.5.7.2(1).

The February 2011 Cold Weather Event

On January 27, 2011, in anticipation of predicted record cold temperatures in the ERCOT region beginning February 1 and lasting through February 3, ERCOT took steps to address the situation by, among other things, notifying its market participants and QSEs of the impending cold weather event to allow them to take necessary steps to prepare for it. In addition, ERCOT made arrangements with various QSEs, including CPS Energy, to provide reserve NSRS services at a specific time during the cold weather event. In particular, CPS Energy agreed to provide 96 megawatts of NSRS services by. utilizing two of its Braunig Combustion Turbines, the Braunig CT5 and the Braunig CT8, to be available from 4 to 5 a.m. on the morning of February 2, upon receiving a deployment instruction from ERCOT.

At 4:26 a.m., due to unprecedented demands on the grid due to the cold weather event, ERCOT provided instructions to the various QSEs, including CPS Energy, to deploy their NSRS services to ensure the ability to continue providing electricity to its customers in the region. CPS Energy immediately initiated the start-up sequence of both units two minutes later. The Braunig CT8 deployed successfully within the 30-minute timeframe required by the ERCOT Protocols. However, the Braunig CT5 failed to deploy within the required 30-minute timeframe, and instead, was not deployed until 6:09 a.m., approximately one and a half hours after CPS Energy received ERCOT’s initial deployment instruction.

CPS Energy’s generator was not the only NSRS generator that did not timely deploy that morning, and in fact, over half of the NSRS generators that ERCOT attempted to deploy that morning either failed to deploy or delayed in deploying. Further, throughout the entire cold weather event, 225 generating units experienced a failure to start during freezing conditions, and at its lowest point, approximately one-third of the total ERCOT generation fleet was unavailable for deployment. This caused ERCOT to take action to reduce demand on the grid, and led to rolling blackouts that affected 3.2 million customers in the ERCOT area.

PUC Proceedings

Following the February cold weather event, Texas RE initiated an investigation into whether CPS Energy had violated ERCOT protocols on the morning of February 2 when the CT5 unit failed to timely deploy. Texas RE initially notified CPS Energy of the possible violation, but when it could not reach an agreement with CPS Energy, it referred the matter to PUC staff. PUC staff thereafter conducted its own informal investigation of the matter, and ultimately initiated a formal enforcement proceeding against CPS Energy for allegedly violating the WMO Rule requiring compliance with the ERCOT protocols, and recommended the imposition of an administrative penalty of $25,000. The matter was then referred to the State Office of Administrative Hearings (SOAH), and a SOAH Administrative Law Judge (ALJ) held a hearing in January 2013.

At the hearing, there was no debate over whether the Braunig CT5 had failed to timely deploy within the time frame set forth in the ERCOT Protocol. However, CPS Energy sought to be excused from compliance based on the various exceptions and excuses set forth in the ERCOT protocols and the WMO Rule. CPS contended that the CT5’s failure to deploy was caused by an equipment failure—a non-functioning damper fan—that was unforeseen and beyond its “reasonable control,’! and that compliance would have posed health, safety, and environmental concerns because deployment of the unit without a functioning damper fan could have caused the unit to explode or emit hazardous particles into the air.

At the hearing, CPS Energy relied primarily on the testimony of two of its employees who explained the events leading up to the CT5’s failure to timely deploy on the morning of February 2. Samuel Hernandez, the operations manager for the Braunig Plant site, acknowledged that he had received “alerts” from ERCOT before February 1 regarding the cold weather event that was projected to occur, and that CPS Energy’s management took steps in advance to prepare the plant for that event. According to Hernandez, CPS Energy had previously prepared the plant for winter, but upon receiving the alerts from ERCOT, it took additional actions to “further reinforce winter preparedness procedures” at the plant in general, and in particular, took steps to recheck the Brau-nig CT units to ensure their readiness.

Hernandez also testified that in anticipation of the cold weather event, he directed additional staff to be present at the Brau-nig plant site on the night of February 1 through the early morning hours of February 2. According to Hernandez, a “normal” operating night consists of six operators and one supervisor, but he directed the presence of two additional operators, two additional technicians, and an unspecified number of additional electricians. Hernandez further explained that many of his staff members had already worked “significant.hours” to .prepare the plant for the cold weather event before February 1, and in order to balance their shifts, he sent home an unspecified number of staff members that day, so they would be available for work the next day, as the cold weather event was anticipated to last at least three days.

Hernandez recalled that due to the extreme cold weather, CPS Energy began having issues with several of its generating units on the night of February 1, at both the Braunig plant site and other sites as well. Hernandez left the Braunig plant site at approximately 10:45 pun. that night to assist with the “cold start” of other units at a different facility. He was therefore not at the Braunig plant site when- ERCOT issued its instruction to deploy the two Braunig CT units early the next morning.

The undisputed evidence established that ERCOT provided its instruction to deploy the two Braunig CT generators at 4:26 a.m. on February 2, thereby requiring the units to be online at the LSL level by 4:51 a.m. Although the Braunig CT8 timely deployed, the Braunig CT5 did not. The facts are undisputed that an operator in CPS Energy’s control room made three failed attempts to start the CT5 unit as follows:

• 4:28: CPS control room staff initiated start sequence of the CT5.

• 4:39: Start sequence of the CT5 was interrupted.

• 4:41: Start sequence was initiated a second time.

• 4:47: Start sequence was again interrupted.

• 4:49: Start sequence was initiated a third time.

• 5:04: Start sequence was interrupted again.

At approximately 5:01 a.m., the CPS Energy operator spoke with an ERCOT staff member in a recorded conversation, and advised him that the unit was not starting, that it was “tripping offline,” and that the unit was indicating a problem with “[l]ow temperature pressures.” The ERCOT staff member informed the operator of the urgent need to get the unit online, and advised the operator to “keep firing on it.”

At the hearing, various CPS employees explained that the CT5 unit contained an automated computer-based control system built into the unit that was designed and installed by CPS Energy and outside experts to monitor conditions during startup to detect unsafe conditions. They explained that this automated safety system had automatically shut down the start sequence because it had detected an unsafe condition. CPS Energy contended that absent the assistance of a technician who could troubleshoot or investigate the cause of the failure, its operator in the control room had no choice but to keep trying to start the unit. According to Hernandez, there were no technicians available to troubleshoot the problem with the CT5 at the time because the other two technicians who were onsite at the time had been assigned to address problems with the other larger generating units at the plant site. Hernandez further explained that CPS Energy decided to have the two technicians focus on the larger units at the plant site since the larger units were capable of providing more needed electricity to the grid than the Braunig CT5.

Hernandez recalled that he was contacted by a senior plant manager at the Brau-nig plant site at approximately 4:30 a.m. on February 2, requesting that he return to the plant site to address the various problems occurring at the plant, shortly after ERCOT gave its instructions to deploy the Braunig CT units but before the startup faitee occurred. The record reflects that it took Hernandez approximately one hour to reach the Braunig plant site after receiving the call, and he reported to the control room at approximately 5:30 a.m. Upon arrival, he was told that there were problems with the CT5 unit and at least three other units at the plant site. Hernandez immediately directed the control room operator to locate an Instrument and Controls (“I&C”) technician to assist in troubleshooting the failed start-up of the CT5 unit.

The I&C technician who ultimately assisted in troubleshooting the problem with the CT5 was William L. Warnke, who had been called to come to the plant site at approximately 4 a.m. Warnke arrived at the plant site at approximately 5:25 a.m. and reported to the control room where he was informed about the problem with the CT5. After discussing the problem with the other two onsite technicians, Warnke physically went to the unit itself to investigate the problem at approximately 5:46 a.m., and found that a tempering air fan discharge damper and its “associated linkage” were frozen and would not move. Warnke was able to break away some of the ice from the unit with a large wrench, allowing the damper to open. Shortly thereafter, the start sequence was initiated for a fourth time, and by 6:09 a.m. the CT5 was online generating electricity.

Warnke explained that it would have been impossible for the unit to operate with a frozen discharge damper because the damper is necessary for the unit’s tempering air fans to operate; in turn, the fans are essential to the unit’s operation because they regulate the temperature control for the catalyst in the turbine exhaust duct. Warnke further explained that the built-in safety system in the unit is designed to automatically terminate the start-up process if an air fan discharge damper fails to open, and acknowledged that the control room operator had received an “alarm” signaling that a tempering air fan discharge damper had failed to open, thereby alerting him of the particular problem. Warnke testified that several negative outcomes could have occurred if the unit had been operated without the tempering air fans, including explosions, equipment damage, and air pollution emissions.

At the hearing, both Warnke and Hernandez expressed their opinions that the unit’s failure to start on the morning of February 2 was unforeseeable, asserting that CPS Energy had no reason to anticipate that there were be a damper failure of this nature. According to Hernandez, during his 33 years of plant operation experience, he had never seen a similar damper failure occur due to freezing weather. Warnke testified that “not once in CPS history has a damper of, that type linkage froze over and caused issues with the damper opening.”

Both Hernandez and Warnke testified that although the Braunig CT units were only designed to operate at 20 degrees and above, the damper fans themselves were rated at zero degrees and were therefore designed to open regardless of the temperature. Warnke did acknowledge, however, that “[t]he weather forecast is an important consideration for all units,” and that the “ambient temperature surrounding the unit” is a factor to consider in ensuring the reliability of plant operations.

In response to CPS Energy’s arguments regarding the foreseeability of the equipment failure, the PUC did not focus simply on whether it was foreseeable for the damper to freeze over and fail to open. Instead, the PUC focused on the more general question whether it was foreseeable that the Braunig plant site would experience start-up failures due to the anticipated cold weather event, and in turn, whether CPS Energy should have taken steps to ensure that it had adequate staff at the plant to address those potential issues. In particular, the PUC presented the testimony of Greg-D. Graham, a Senior Protocol Compliance Analyst with Texas RE, who was responsible for investigating CPS’s violation of the ERCOT protocol. In his testimony, Graham focused on the fact that CPS Energy had several days’ advance notice of the severe cold weather event, and was therefore on notice that it could experience potential problems with all of its generators, including the Braunig CT units; Graham also pointed out that the Braunig CT units had just been declared commercial in December 2010, and had not been operated in cold weather,, therefore rendering the units essentially untested. Graham further pointed out that the weather forecast was projecting temperatures below the “design criteria” for the Braunig units for the morning of February 2. In light of this forecast, Graham expressed his disagreement with CPS Energy’s conclusion that it could not have anticipated that its equipment might freeze, or that it could not have anticipated that it might experience other start-up failures at the plant.

Given the known potential for such problems, Graham posited that CPS Energy should have had more staff on hand for the cold weather event, and in particular, more technicians to troubleshoot and investigate the start-up problems CPS Energy encountered on both February 1 and 2. Graham found it significant that CPS Energy’s problems with the cold weather at the plant site surfaced as-early as 10:55 p.m. on the night of February 1, when multiple generators failed to startup due to the cold weather. Graham opined that because CPS Energy had already assigned its only two technicians at the plant site to work on those failed generators, CPS Energy was on notice that it needed additional staff to address potential problems that might occur with the Braunig .CT units when they would be needed the next morning. Graham pointed out that the entire plant site began failing hours before ERCOT gave its instruction to deploy the Braunig CT units, and he therefore believed that there was still time for CPS Energy to call in additional staff to remedy the situation at that time, but that CPS Energy failed to call for any additional help until' houi's later, when it was essentially too late.

Graham particularly faulted Hernandez, noting that when he left the Braunig plant site at 10:45 p.m. on February 1 to address the start-up problems at another plant site, he was already aware that the Brau-nig plant site was having significant issues and that both technicians at the site were busy addressing problems with other generators. Graham therefore believed- that Hernandez, knowing he had no other available technicians at the plant site to address potential problems with the Braunig CT units, could have avoided the ERCOT protocol violation by reevaluating his staffing plan at that point and calling in additional personnel to ensure that the CT units successfully deployed.

Graham further emphasized that during the first three failed attempts to start the Braunig CT5, which began at 4:28 a.m., CPS Energy admittedly had no technicians available to investigate the problem, and took no action to address the issue until almost an hour and a half later when Hernandez and Warnke arrived on the scene. Graham believed the ERCOT violation could have been avoided if CPS Energy had taken steps to ensure that it had sufficient staff on hand to either inspect the CT units before the ERCOT instruction t deploy was given, or at least to enable CPS Energy staff to take reasonable steps to investigate the startup failure immediately after it occurred. Graham further opined that the need for additional staff was illustrated by the fact that CPS Energy “significantly increased” its staff the next day after the failure to deploy occurred.

Graham concluded that it was CPS Energy’s choice to offer the reserve energy to PUC on the morning in question, knowing the weather conditions at hand, and that it was therefore CPS Energy’s responsibility to adequately prepare to ensure that it met its obligation, knowing it would, be subject to administrative penalties if it did not. In his opinion, that responsibility extended not only to ensuring that the units were mechanically sound, but also to ensuring that adequate staff was on hand to make certain the units deployed in a timely manner.

At the hearing, the PUC also presented the testimony of Ernest Garcia, the PUC staff member who investigated CPS Energy’s alleged protocol violation. Garcia testified that when he recommended that the ■PUC initiate enforcement proceedings against CPS Energy, his focus was also, on CPS Energy’s failure to adequately staff the Braunig plant site in anticipation of the cold weather event, which he viewed as the ultimate cause of the ERCOT violation. Garcia noted that it was within CPS Ener-g-y’s control to have a technician available to address potential start up issues with its units, and he concluded that if the plant had been adequately staffed in anticipation of the cold weather event, “we would not be here today.” Garcia further explained that he considered CPS Energy’s violation serious, and he therefore recommended the maximum penalty, in part to deter future violations of the ERCOT protocol.

In rebuttal, both Hernandez and Warnke denied that the staffing levels had any effect on the equipment failure. Hernandez testified that they did have additional staff on site the morning of the incident, which he believed was sufficient under the circumstances known to CPS Energy at the time. Warnke also opined that having even more staff on site would not have helped CPS Energy avoid the ERCOT protocol violation. In particular, Warnke explained that the Braunig CT units typically take 20 minutes to reach LSL levels, and in his opinion, even if a technician had been standing at the unit at the time of start-up, it would have been virtually impossible for the technician to have investigated, diagnosed, and repaired the unit after it first tripped and to have the unit restarted within the required 25-minute period of time,

Warnke also explained that, as part of its increased staffing, CPS Energy had three operators at the plant site during the cold weather event who were specifically assigned to make hourly rounds of the plant, checking heat-tracing insulation, enclosures, portable heaters, heat lamps, and “anything that’s out there to prevent freezing.” However, he also acknowledged that when making their rounds, these operators would not have inspected the damper fans, because they were considered mechanical items not likely to freeze, and because they were located between two motors in an area that operators would not normally inspect. He therefore concluded that having additional operators at the plant would not have changed the outcome.

CPS Energy also presented the testimony of an industry expert witness, John Allen Moore. Moore acknowledged that plant operations may be affected by severe cold weather, and that staffing is a factor that a market participant should take into consideration in ensuring reliable plant operations when faced with a severe weather event, such as the event in February 2011. He therefore acknowledged that in light of thé warnings it had received regarding the anticipated cold weather event, CPS Energy was obligated to provide “additional preparation and staffing to ensure or to help ensure as reliable operations as possible ... [a]s reasonably possible.” Moore expressed his opinion, however, that CPS Energy did in fact take adequate “supplemental steps,” by having additional operators and technicians available at the plant to monitor operations and address conditions as they arose during the cold weather event. In Moore’s opinion, CPS Energy reacted to the CT5’s failure to deploy in an “efficient and responsible manner” in light of the conditions that were occurring at the plant site at the time.

The Ruling

Following the SOÁH hearing, the ALJ issued its Proposal for Decision. The ALJ found that CPS Energy had violated the ERCOT Protocol when the CT5 unit admittedly failed to deploy within the time-frame required by the Protocol. The ALJ further concluded that CPS Energy had failed to establish an excuse under the WMO Rule. In particular, the ALJ concluded that CPS Energy had failed to establish that its non-compliance resulted from any. health, safety, or environmental concerns. The ALJ also concluded that CPS Energy was not excused based on the exception in the WMO Rule for “equipment failure beyond the reasonable control of the market participant.” In making that determination, the ALJ agreed with CPS Energy that it was not negligent in its efforts to protect its equipment during the cold weather event, and that its actions in maintaining and winterizing its equipment were “in alignment with industry standards.” Instead, the ALJ believed that the sole issue in determining whether the equipment failure was beyond its reasonable control was “whether CPS provided adequate staffing in light of the severe weather and the effect it might have on the relatively new plant.” The ALJ noted that CPS Energy, had presented evidence that it had provided additional staffing the morning of the equipment failure, but had failed to “establish a benchmark against which to judge, its actions.” The ALJ believed that without an independent benchmark, it was “impossible to say that the staffing levels employed by CPS were reasonable or prudent.” Noting that CPS Energy had the burden to establish a valid excuse, and therefore to present evidence on that issue, the ALJ concluded that CPS Energy had failed to meet its burden of proving “that the failure to comply with ERCOT Protocols was beyond its reasonable control.”

The ALJ then addressed the serious nature of CPS Energy’s violation in failing to provide the NSRS service in a timely manner as promised to ERCOT, noting that “NSRS is an important tool that ER-COT uses to ensure the reliability of the ERCOT grid.” The ALJ also noted that CPS Energy had obligated itself to provide NSRS electricity during what was essentially an emergency situation, and that failing to take reasonable steps to meet its obligations was a “grave violation warranting the maximum penalty available to the Commission.” The ALJ further concluded that, “CPS’s failure to provide the NSRS it obligated itself to provide on February 2, 2011, contributed to the deterioration of the Grid on that morning, which ultimately led to ERCOT shedding load (i.e., ordering rolling blackouts) to avoid a total system collapse.” In recommending the maximum penalty, the -ALJ factored in the “deterrent effect” the penalty would have to encourage other market participants to avoid engaging in similar conduct in the future.

The PUC subsequently adopted the findings and conclusions of the ALJ. In its final order, the PUC found that CPS Energy had violated two ERCOT protocols:

1) ERCOT Protocol 6.5.7.6.2.3(4), for CPS Energy’s failure to have the CT5 generator dispatching electricity within 30 minutes of ERCOT’s dispatch (or deployment) instructions.

2) ERCOT Protocol 8.1.1.4.3(3)(b) for CPS Energy’s failure to provide a specific resource status to ERCOT within 25 minutes of ERCOT’s deployment instructions.

In its final order, the PUC concluded that CPS Energy bore the “burden of proving by a preponderance of the evidence that it should be excused from compliance with ERCOT dispatch instructions and protocol requirements,” and that CPS Energy had not met its burden to establish an excuse under the ERCOT protocols or the WMO rule. The PUC then concluded that CPS Energy had not met its burden of establishing any excuse under the ER-COT protocols or the WMO Rule. In doing so, the PUC’s order also focused on staffing issues. In particular, the PUC concluded that CPS Energy failed to prove that it had provided adequate staffing at the Braunig site in “light of its choice to offer NSRS from unproven units” during the cold weather emergency. It further concluded that CPS Energy had several opportunities on the morning in question to call in additional staffing “to ensure any start-up failures could be promptly addressed,” but failed to take any such necessary action.

Agreeing with the ALJ that the ERCOT protocol violations were serious, particularly because they occurred in the midst of an emergency situation, the PUC ordered CPS Energy to pay the maximum $ 25,000 administrative penalty for the violations. As permitted by statute, CPS Energy sought judicial review in the Travis County district court in September 2013. See Tex, Util. Code Ann. § 15.001 (West 2016). The trial court affirmed the PUC’s final order, and this appeal followed.

DISCUSSION

On appeal, CPS Energy raises several challenges to the PUC’s final order. In particular, CPS Energy claims the PUC misinterpreted or misapplied the WMO Rule in a manner that conflicted with a prior decision of the Austin Court of Appeals; that it formulated a new or novel interpretation of the WMO Rule and applied that new interpretation during the enforcement proceeding without giving CPS Energy “fair notice” of the interpretation; that the PUC applied the WMO Rule in a manner that was unreasonable, arbitrary, and capricious; and that the PUC’s order was not supported by substantial evidence.

Standard of Review

In their challenges to the PUC’s final order, CPS Energy has raised a variety of issues, which we review under different standards of review. As a general matter, an appellate court must review the PUC’s final order under the “substantial evidence rule,” which requires us to give “significant deference to the agency in its field of expertise.” Tex. Util. Code Ann. § 15.001 (“Any party to a proceeding before the commission is' entitled to judicial review under the substantial evidence rule.”); see also CenterPoint Energy Houston Elec., LLC v. Pub. Util Comm’n of Texas, 408 S.W.3d 910, 916 (Tex.App.-Austin 2013, pet denied) (we review a Commission order under the Administrative Procedure Act’s (APA) “substantial-evidence” standard); City of El Paso v. Pub. Util. Comm’n of Texas, 344 S.W.3d 609, 618 (Tex.App.-Austin 2011, no pet.); State v. Pub. Util. Comm’n of Texas, 246 S.W.3d 324, 331 (Tex.App.-Austin 2008, pet. denied).

In conducting our review, we may not substitute our judgment for that of the agency on matters committed to agency discretion. Tex. Gov’t Code Ann. § 2001.174 (West 2016); H.G. Sledge, Inc. v. Prospective Inv. & Trading Co., Ltd., 36 S.W.3d 597, 602 (Tex.App.-Austin 2000, pet. denied). Further, we must “presume that the agency’s order is valid and that its findings, inferences, conclusions, and decisions are supported by substantial evidence,” and therefore, the party challenging the agency’s order has the burden to overcome this presumption. State, 246 S.W.3d at 331-32 (citing City of El Paso v. Public Util. Comm’n, 883 S.W.2d 179, 185 (Tex. 1994)).

Our review under the substantial evidence rule is limited to determining whether the "record demonstrates some reasonable basis for the agency’s action.” Id. at 332. If “reasonable minds” could have reached the same decision, we'will affirm the agency’s decision. We will reverse the agency’s decision only if it is “not reasonably supported by substantial evidence, in violation of a constitutional or statutory provision, in excess of the agency’s statutory authority, made through unlawful procedure, affected by other error of law, arbitrary or capricious, or characterized by an abuse of discretion.” Id. (citing Tex. Gov’t Code Ann. § 2001.174(2)(A)-(F)).

Although we are required to defer to the agency’s findings of fact when reviewing an agency order, if an issue on appeal involves a question of law, we review that issue de novo. Tex. Dep’t of Pub. Safety v. Allocca, 301 S.W.3d 364, 367 (Tex.App.-Austin 2009, pet. denied). In particular, when an issue turns on the construction of a statute or administrative rule, that issue is considered a question of law requiring de novo review. State, 246 S.W.3d at 332; see also First Am. Title Ins. Co. v. Combs, 258 S.W.3d 627, 631 (Tex. 2008); CenterPoint Energy Houston Elec., LLC, 408 S.W.3d at 916. (when a dispute centers on the agency’s interpretation of its rules, questions of rule construction are reviewed de novo).

In general, a reviewing court must construe administrative rules, which have the same force as statutes, in the same manner as statutes. CenterPoint Energy Houston Elec., LLC, 408 S.W.3d at 916 (“We interpret administrative rules, like statutes, under traditional principles of statutory construction.”). When an administrative rule or statute is unambiguous, it must be interpreted based on its plain language, unless that interpretation would produce an absurd result. Rodriguez v. Service Lloyds Ins. Co., 997 S.W.2d 248, 254 (Tex. 1999); see also CenterPoint Energy Houston Elec., LLC, 408 S.W.3d at 916-17; Fleming Foods of Tex., Inc. v. Rylander, 6 S.W.3d 278, 284 (Tex. 1999); State, 246 S.W.3d at 332. If an agency has failed to .follow the clear, unambiguous language of its own regulation, we must reverse its action as arbitrary and capricious. Rodriguez, 997 S.W.2d at 255; see also CenterPoint Energy Houston Elec., LLC., 408 S.W.3d at 916-17; Pub. Util. Comm’n v. Constellation Energy Commodities Grp., Inc., 351 S.W.3d 588, 595 (Tex.App.-Austin 2011, pet. denied).

However, if the rule is ambiguous or leaves room for policy determinations, we defer to the agency’s interpretation if the interpretation is reasonable, but not if the agency’s interpretation is plainly erroneous or inconsistent with the regulation or its underlying statutes. CenterPoint Energy Houston Elec., LLC, 408 S.W.3d at 916-17 (citing Rodriguez, 997 S.W.2d at 254-55); see also City of El Paso v. Pub. Util. Comm’n of Texas, 344 S.W.3d at 618-19; Railroad Comm’n of Tex. v. Texas Citizens for a Safe Future & Clean Water, 336 S.W.3d 619, 624-25 (Tex. 2011) (although we must give “serious consideration” to a governmental agency’s construction of a statute it is charged with administering, this principle presupposes that the statute is ambiguous and the agency’s construction is reasonable and does not conflict, with the statute’s language). Further, courts “do not defer to administrative interpretation in regard to questions which do not lie within administrative expertise, or deal with a nontechnical question of law.” State, 246 S.W.3d at 332-33 (citing Rylander v. Fisher Controls Int’l, Inc., 45 S.W.3d 291, 302 (Tex.App.Austin 2001, no pet.)).

ANALYSIS

Issue One: Whether the PUC’s Interpretation and Application of the WMO Rule Violated CPS Energy’s Due Process Right to Fair Notice

CPS Energy contends that prior to the current enforcement proceeding, the WMO Rule had been interpreted by the Austin Court, of Appeals in TXU Generation to mean that a market participant could not be held liable for actions resulting from “unforeseen” accidents or mechanical failures. CPS Energy believes that the Austin Court gave “assurances” to market participants that they would not be subject to liability for any such unforeseen events. CPS Energy contends that in the current proceeding, the PUC interpreted and applied the WMO Rule in a new and novel manner, which conflicted with TXU Generation. In particular, it argues that, without any notice of this interpretation, the PUC initiated enforcement proceedings against it for what CPS Energy, believes was an unforeseeable mechanical failure on the morning of February 2, 2011. CPS Energy argues that a regulatory agency is forbidden from giving a new interpretation of a rule for the “first time in an enforcement proceeding,” and that by doing so in this proceeding, the PUC deprived CPS Energy of any “meaningful, prehearing notice,” which undermined the fundamental fairness of the proceeding.

We agree with CPS Energy that a regulated party must be given “fair notice” of what type of conduct will subject it to an enforcement proceeding, and the regulated party must not be forced to guess what type of conduct will subject it to an enforcement proceeding or be clairvoyant in attempting to divine the agency’s interpretation of the rule in advance. Vista Healthcare, Inc. v. Tex. Mut. Ins. Co., 324 S.W.3d 264, 273 (Tex.App.-Austin 2010, pet. denied); see also Christopher v. SmithKline Beecham Corp., 567 U.S. 142, 132 S.Ct. 2156, 2168, 183 L.Ed.2d 153 (2012) (it is improper for a regulatory agency to interpret and apply a rule in a novel manner for the first time in an enforcement proceeding). However, as explained below, we disagree with CPS Energy that it was not on notice that its conduct on the morning of February 2 could subject it to liability. We further conclude the PUC interpreted the WMO Rule in a manner that was consistent with TXU Generation and with the plain language of the Rule itself.

TXU Generation

In TXU Generation, the parties brought a facial challenge to the constitutionality of subsection (g) of the WMO Rule, which provides that market participants are subject to enforcement actions if they engage in “[a]ny act or practice of a market participant that materially and adversely affects the reliability of the regional electric network or the proper accounting for the production and delivery of electricity among market participants[.]” 16 Tex. AdMiN. Code § 25.503(g). Subsection (g) of the WMO Rule contains a list of seven “prohibited activities,” all of which are aimed at preventing unfair trade practices within a power region. The market participants in TXU Generation claimed 'the WMO Rule was unconstitutionally vague on its face, and failed to give market participants fair notice of what type of conduct could subject them to an enforcement proceeding. Among other things, the market participants were concerned about the seventh prohibited activity in subsection (g), which provides that a “[a] market participant shall not engage in market power abuse.” See id. at § 25.503(g)(7). The market participants noted that the Rule did not contain a precise definition of what actions would constitute a “market power abuse.”

The market participants claimed the WMO Rule was unconstitutionally vague because subsection (g) did not clearly define, the type of activities that would be considered a “market power abuse,” claiming that the language in the Rule was too “open-ended,” was “confusing,” created “unknown risks,” and generally did not provide enough specificity to allow market participants to take measures to avoid violations. TXU Generation Co., L.P., 165 S.W.3d at 838-40. As one example of their confusion, the market participants questioned whether they could be found liable for a “market abuse” under subsection (g)(7) of the Rule for “withholding” electricity in situations in which their failure to delivery electricity was due to “accidents or ordinary mechanical breakdowns,” such as “mechanical failures and computer glitches,” pointing out that such events could have an adverse effect on the electricity market through no fault of the market participants. Id. at 839-40.

In addressing that concern, the Austin Court was unable to point to any provision in subsection (g) of the WMO Rule that would excuse the market participants from liability under those circumstances. However, the Court concluded that subsection (g) should not be read “in isolation,” and that it should instead be interpreted in conjunction with subsection (h) of the WMO Rule, which sets forth various affirmative defenses to a violation of subsection (g). Id. at 840. In particular, subsection (h) expressly provides a market participant with two affirmative defenses to a claim of market power abuse if the market participant establishes that its conduct: (1) “served a legitimate business purpose consistent with prices set by competitive market forces; and that it did not know, and could not reasonably anticipate, that its actions would inflate prices, adversely affect the reliability of the regional electric network”; and (2) “if applicable, that it exercised due diligence to prevent the excluded act or practice.” 16 Tex. Admin. Code § 25.503(h).

Paraphrasing subsection (h) as providing a defense when the “adverse effect on reliability, price, or accounting was not known or foreseeable with the exercise of due diligence,” the Austin Court opined that this “provision gives clear notice that the unforeseen accidents described by TXU will not give rise to liability under the [WMO] rule.” TXU Generation Co. L.P., 165 S.W.3d at 840. In concluding that the WMO Rule thereby gives participants notice of what type of conduct will give rise to liability, the Court concluded that the “rule does not require clairvoyance as to whether an action will impact price, reliability, or accounting—only diligence.” Id. at 840.

Although we agree with CPS Energy that important lessons can be derived from TXU Generation, we also note that clear distinctions may be drawn between the issues posed in TXU Generation and the questions before this Court. First, TXU Generation was focused on the facial constitutionality of subsection (g) involving market power abuses, and whether the language used in that section was unconstitutionally vague and failed to give market participants clear notice of what type of conduct would cause a violation of subsection (g).

In the present case, however, CPS Energy was not charged with a violation of subsection (g), and was instead found to have violated subsection (f). Subsection (f) clearly and in plain language informs a market participant that it must “comply with ERCOT procedures and any official interpretation of the Protocols issued by ERCOT or the commission.” 16 Tex. Admin, Code § 25.503(f). There is no ambiguity in subsection (f), and significantly, we note that CPS Energy , does not contend that it was unaware of the ERCOT protocols it was found to have violated, or that it did not have notice of what type of conduct would cause it to be in violation of those protocols. In fact, CPS Energy acknowledges that it was aware that the ERCOT protocols set forth a specific timeline for having NSRS services deployed, and that it failed to comply with that timeline.

What is at issue in this case is whether CPS Energy was on notice of what type of situations would cause it to be excused from that duty. There are two separate provisions in the WMO Rule on which CPS Energy could have relied in seeking to excuse its performance. First, the WMO Rule contains the two affirmative defenses set forth in subsection (h), which were specifically addressed in the TXU Generation opinion, and which may excuse a market participant’s violation if it can demonstrate that it used “due. diligence” to avoid the violation. 16 Tex. Admin. Code § 25.503(h). Second, the WMO Rule contains the specific excuse provisions within subsection (f) itself, which provide excuses for “equipment failure beyond the reasonable control of the market participante,]” and the various excuses based on health, safety, and environmental concerns. Id. at § 25.503(f)'.

In its brief, however, CPS Energy makes.no mention of the affirmative defense provision found in subsection (h) of the WMO Rule, and instead focuses exclusively on whether it was entitled to rely on the excuse provisions found in subsection (f) of the Rule. Although TXU Generation focused exclusively on the affirmative defenses set forth in subsection (h), CPS Energy nevertheless repeatedly attempts to' apply the standards set forth in the Austin Court’s discussion of subsection (h) to its analysis of the excuse provisions found in subsection (f). As discussed in more detail below, however, the particular excuses set forth in subsection (f) are based on different considerations, and warrant a separate and distinct discussion— one that the Austin Court was not called upon to make in TXU Generation. We believe that much of the confusion in this case stems from CPS Energy’s apparent failure to recognize the distinction between these two subsections.

Nevertheless, to the extent that TXU Generation requires us to consider whether the equipment failure in this case was “foreseeable,” which appears to be the primary focus of CPS Energy’s argument in its brief, we turn our attention to that issue.

Whether CPS Energy could have Reasonably Anticipated its Actions Would Adversely Affect the Electric Network

CPS Energy argues throughout its brief that it should not be held liable for the equipment failure that occurred on February 2, as it‘was an “unforeseen” occurrence. In particular, CPS Energy contends that it presented undisputed evidence during the SOAH hearing that its failure to timely deploy the CT5 unit in accordance with the ERCOT protocol was due solely to “unforeseeable equipment failure[.]” CPS Energy points out that the evidence established that the CT5 unit failed to start due to a frozen damper fan, and claims it had no way of anticipating this failure. CPS Energy points out that two of its employees testified that they had never before encountered a frozen damper fan in their years of employment at CPS Energy, and that they had no reason to anticipate that the damper fan would freeze on the morning in .question, CPS Energy also finds it significant that the ALJ expressly found that the equipment failure did not occur due to any maintenance issues or due to any failure by CPS Energy to. prepare its equipment for the cold weather event. CPS Energy essentially believes that because it was not on notice of any preexisting mechanical issues with the damper fan, the PUC was required to find that the damper fan’s failure to open was an unforeseeable occurrence, absolving it of all blame.

We believe, however, that CPS Energy’s focus is too narrow, and is in fact contrary to the actual language used in the WMO Rule. The first affirmative defense in subsection (h) of the WMO Rule (which the Austin Court specifically discussed in TXU Generation) expressly places the focus not on whether a particular piece of equipment might fail, but on whether the market participant could have “reasonably anticipate[d] that its actions would ... adversely affect the reliability of the regional electric network[.]” 16 Tex Admin. Code § 25.508(h).

The real question then is whether CPS Energy could have “reasonably anticipated” that its “actions” leading up to and during the cold weather event would “adversely- affect”, the grid on the morning of February 2. In turn, CPS Energy’s “actions” leading up to the cold weather event consisted both of preparing the plant’s equipment for the event and in making staffing decisions. As set forth above, the PUC had no issue with the actions CPS Energy took in preparing its mechanical equipment for the event, and instead focused exclusively on its actions in staffing its plant. We believe that this was a fair and reasonable focus in light of the language used in subsection (h).

As acknowledged by CPS Energy’s own expert witness, staffing decisions are a factor in preparing a plant for cold weather events. CPS Energy’s operations manager also recognized this when he made the decision to have additional staff on hand in anticipation of the February cold weather event. Further, the PUC also provided-testimony that staffing can affect the reliability of the grid, particularly during severe weather events, as market participants are on notice that they may encounter equipment failures due to cold weather and must therefore consider whether they have sufficient staff on hand to address those failures. Moreover, there was no dispute among the witnesses at the SOAH hearing that CPS Energy could have reasonably anticipated that it would encounter equipment failures, at least of a general nature, as the plant was not rated for the temperatures projected to occur during the event. And finally, and perhaps most importantly, CPS Energy knew that it had promised ERCOT to provide NSRS services during the cold weather event from its two untested Braunig CT units, and it knew that if it did not provide those services as promised, the grid could be adversely affected during what could have been, and in fact ended up being, an emergency situation. Therefore, we conclude that the PUC presented substantial evidence that CPS Energy could have “reasonably anticipated” that its actions in staffing its plant prior to the cold weather event could have adversely affected the grid.

Also, the evidence established that CPS Energy did in fact begin experiencing significant freezing and consequent equipment failures at its plant site the night before it was required to provide the NSRS services to ERCOT, which diverted the attention of its only two technicians at the plant, and as CPS Energy admits, rendered them unavailable to address any issues that might have arisen, and did in fact arise, with the deployment of the CT5 unit. As the PUC noted, this occurred hours before the time CPS Energy had promised to have the CT5 unit ready to deploy, and CPS Energy therefore had sufficient time to take additional actions to ensure that it had a technician available to address potential problems with the CT5, yet it waited several hours before it called in additional staff, and effectively did so at a time when it was too late to avoid the adverse effect of the CT5’s failure to deploy.

Whether CPS Energy Exercised Due Diligence

These same factors are relevant in determining whether the second affirmative defense set forth in subsection (h) of the WMO Rule would apply, ie., whether CPS Energy “exercised due diligence to prevent the excluded act or practice.” 16 Tex. Admin. Code § 25.503(h). Thus, in determining whether CPS Energy exercised due diligence to prevent the ERCOT protocol violation, the PUC was entitled to consider not only whether CPS Energy took reasonable steps to prepare its equipment for the cold weather event, but also whether it took reasonable steps to ensure that'its plant was adequately staffed for that event. Once again, , it is significant to remember that CPS Energy had voluntarily promised to provide NSRS services to ERCOT at a specific time on the morning of February 2, during an extreme cold weather event, and it was therefore incumbent upon CPS ■ Energy to use due diligence to ensure that it. would have an adequate- staff to. meet its obligations, and thereby avoid an ERCOT protocol violation.

In fact, even under normal operating conditions, common sense dictates that market participants, and utility providers in particular, must exercise due diligence in ensuring not only that their equipment is in sound mechanical condition, but that they have adequately staffed their plants to ensure that they are able to comply with the ERCOT protocols so as to avoid WMO Rule violations. Utility providers, such as CPS Energy, are subject on a daily basis to numerous ERCOT protocols that require them to produce electricity at a certain volume, and market participants ...are aware that they may suffer penalties for overproduction or underproduction at any given time. Under CPS Energy’s approach, if a utility provider chose to under-staff its plant, knowing that this could possibly lead to a complete or partial shutdown of its facilities, the provider would be able to escape liability for any consequent ERCOT violation by simply arguing that it maintained its equipment in sound condition, without being held accountable for its lack of staffing.

Similarly, there can be no .doubt that a QSE in particular must exercise due diligence in not only maintaining its equipment, but also in staffing its plant to ensure that it will be able to produce NSRS services to ERCOT at a time when.promised, if it wishes to avoid an ERCOT protocol violation. In this regard, CPS Energy’s obligation to ERCOT was not simply to have an operator initiate a startup process when requested by ERCOT. Instead, as discussed in more detail below, its duties were many and continuing in nature. Under the express terms of the ERCOT protocol, CPS Energy was required to initiate startup within a certain timeframe; ensure that its generator reached the LSL level within a certain timeframe; to ensure that its generator started producing electricity within a certain time; and to continue to produce electricity for a certain time. Therefore, CPS Energy was obligated to have sufficient staff on hand throughout this entire process to ensure that it would be able to meet its obligations to ERCOT.

Further, what constitutes an adequate staff on any given occasion will vary depending on the circumstances, and will require the PUC to make a factual determination on a case-by-ease basis whether due diligence was exercised. At one extreme, there may be some cases where the lack of due diligence is obvious, and other eases where the adequate exercise of due diligence is unquestioned. In most enforcement cases, however, the facts will not be so clear. In those cases, if the market participant desires to excuse its performance, it will be required to present evidence that it exercised due diligence in an attempt to meet its obligations.

In a case involving normal operating conditions, this standard might be fairly low. However, the present case involved anything but “normal” operating conditions, and CPS Energy was aware days in advance that it would be facing an unprecedented severe weather event that called for unique and unusual preparations. As such, we conclude there was substantial evidence from which the PUC could have concluded that, in light of the unique facts of this case, CPS Energy did not adequately staff its plant to ensure that it would be able to meet its obligations to ERCOT.

CPS Energy, however, argues that allowing the PUC to determine whether it had adequate staffing levels at any given time will allow the PUC to “second-guess” a market participant’s decision regarding how to staff its plant; will allow the PUC to use “hindsight” in accusing a market participant of not having an adequate staff; an