The opinion
Opinion issued June 25, 2015.
In The
Court of Appeals
For The
First District of Texas
————————————
NO. 01-14-00102-CV
———————————
NAVARRO COUNTY WHOLESALE RATEPAYERS; M.E.N. WATER
SUPPLY CORPORATION; ANGUS WATER SUPPLY CORPORATION;
CHATFIELD WATER SUPPLY CORPORATION; CORBET WATER
SUPPLY CORPORATION; CITY OF BLOOMING GROVE; CITY OF
FROST; CITY OF KERENS; AND COMMUNITY WATER COMPANY,
Appellants
V.
ZACHARY COVAR, EXECUTIVE DIRECTOR OF THE TEXAS
COMMISSION ON ENVIRONMENTAL QUALITY; THE TEXAS
COMMISSION ON ENVIRONMENTAL QUALITY, ITS
COMMISSIONERS, BRYAN SHAW, CARLOS RUBENSTEIN AND TOBY
BAKER, AND CITY OF CORSICANA, Appellees
On Appeal from the 419th District Court
Travis County, Texas1
1
Pursuant to its docket equalization authority, the Supreme Court of Texas
transferred the appeal to this Court. See Misc. Docket No. 14-001 (Tex. Jan. 7,
Trial Court Case No. D-1-GN-12-000226
MEMORANDUM OPINION
This is an administrative law case in which the plaintiffs, wholesale
purchasers of water from the City of Corsicana, challenge the trial court’s
judgment affirming an order by the Texas Commission on Environmental Quality
that dismissed their rate appeal. At issue was whether the plaintiffs, pursuant to 30
TEX. ADMIN. CODE § 291.133, carried their burden to show that the protested rate
“adversely affected the public interest.” We affirm.
BACKGROUND
The Parties and the Contracts
The City of Corsicana is the regional water provider in Navarro County and
provides service to over 11,000 retail customers and 21 wholesale customers.
Plaintiffs are eight of Corsicana’s wholesale customers [collectively, “the
Ratepayers”]. Of Corsicana’s 11,000 retail customers, 9,000 are residential retail
customers. The average water use of a residential retail user is less than 6,000
gallons per month. In contrast, each of the wholesale ratepayers purchases over
1,000,000 gallons of water per month, which it then resells to its own retail
customers.
2014); see also TEX. GOV’T CODE ANN. § 73.001 (West 2013) (authorizing
transfer of cases).
2
Corsicana sells water to the Ratepayers pursuant to individual contracts.
Since the 1960s, the contracts have given Corsicana the right to raise its rates. In
2001, Corsicana created a “standard contract,” which was intended to be used
whenever a wholesale customer amended its contract. Seven of the Ratepayers—
M.E.N. Water Supply Corporation, Angus Water Supply Corporation, Chatfield
Water Supply Corporation, Corbet Water Supply Corporation, City of Frost, and
Community Water Company—entered into the standard contract. Two of the
Ratepayers—City of Blooming Grove and City of Kerens—did not. The standard
contract provides the following regarding rate changes:
Section 4.02. The rates stated in the contract are the prevailing rates
which “may be changed or modified from time to time by Seller in
accordance with Section 4.03 of this Contract during the time it
remains in effect.
Section 4.03. Rate Revision. Purchaser acknowledges and agrees that
Seller’s city council has the right to revise by ordinance, from time to
time and as needed, the rates charged hereunder to cover all
reasonable, actual, and expected costs incurred by Seller to provide
the potable water supply service to Seller’s customers. Except as
provided in subsection b below, if, during the term of this contract,
Seller revises its minimum inside city retail water rate, then such
revised rate shall likewise apply to water usage by Purchaser under
this Contract.
Early versions of the contracts in the 1960s and 1970s charged all customers
on a declining block rate, i.e., a rate in which the price per 1,000 gallons decreases
as usage increases. Later, Corsicana used a flat volumetric rate for all customers.
From 2006 to 2008, Corsicana raised its volumetric rate from $2.14 per 1,000
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gallons to $3.00 per 1,000 gallons. Nevertheless, by 2008, Corsicana’s “Utility
Fund,” which is comprised of revenues and expenses from its water and
wastewater utilities had a $1 million shortfall. Because Corsicana does not operate
on credit, it must have a cash reserve available to cover potential shortfalls and
emergencies.
The 2009 Rate Increase
One of the ways that Corsicana sought to increase its Utility Fund was to
raise its water rates. Under the rate adopted, Corsicana charges each of its
customers—both wholesale and retail—a monthly base rate that is determined by
the size of the customer’s meter. The base rates range from $17.60 for a 5/8- or
3/4-inch meter to $1,695.52 for a 10-inch meter. Regardless of the meter size, the
base rate includes the first 1,000 gallons used per month. For water use in excess
of 1,000 gallons per month, Corsicana charges tiered volumetric rates, in inclining
blocks. The volumetric rate is $3.00 per 1,000 gallons for 1-10,000 gallons; $3.15
per 1,000 gallons for 10,001-25,000 gallons; and $3.25 per 1,000 gallons for over
25,000 gallons.
The Ratepayers’ Appeals
Arguing that the 2009 rate increase disproportionately affected wholesale
ratepayers when compared to residential retail ratepayers, the Ratepayers appealed
Corsicana’s rate change by filing a Petition with the Texas Commission on
4
Environmental Quality [“the Commission”]. The Commission referred the case to
the State Office of Administrative Hearings [“SOAH”], where an Administrative
Law Judge [“ALJ”] conducted a hearing to determine whether the rate change
“affected a public interest.” See 30 TEX. ADMIN. CODE §§ 291.131-.133. After the
hearing, the ALJ issued a Proposal for Decision [“PFD”] and a proposed order
finding that the Ratepayers failed to show that the 2009 rate increase adversely
affected the public interest. After considering the ALJ’s PFD, the Commission
agreed that the Ratepayers had failed to show that the rate change adversely
affected the public interest, holding that “[t]he public-interest inquiry set out in 30
TAC § 291.133(a)(1)-(4) does not include a comparison of the protested rate’s
impacts on wholesale and retail customers.” The Ratepayers then appealed to the
Travis County District Court, which affirmed the Commission’s order dismissing
the rate appeal. This appeal followed.
PROPRIETY OF COMMISSION’S “PUBLIC INTEREST” RULING
In four issues on appeal, the Ratepayers contend that:
1. Rate discrimination must be considered in a public interest
hearing;
2. If the Commission correctly interpreted the public interest rules to
preclude consideration of rate discrimination, the rules are invalid;
3. Corsicana’s wastewater subsidy is not a “cost of service” issue;
and
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4. Corsicana’s Utility Fund deficit is not a “changed condition” that
may be considered under 30 TAC § 291.133(a)(3)(B) or a factor
that supports Corsicana’s 2009 Rate Increase.
Standard of Review
The substantial-evidence standard of the Texas Administrative Procedure
Act (“APA”) governs our review of the Commission’s final order. See TEX. GOV’T
CODE ANN. § 2001.174 (West 2008). The APA authorizes reversal or remand of an
agency’s decision that prejudices the appellant’s substantial rights because the
administrative findings, inferences, conclusions, or decisions (1) violate a
constitutional or statutory provision, (2) exceed the agency’s statutory authority,
(3) were made through unlawful procedure, (4) are affected by other error of law,
or (5) are arbitrary or capricious or characterized by abuse of discretion or clearly
unwarranted exercise of discretion. Id. § 2001.174(2)(A)-(D), (F). Otherwise, we
may affirm the administrative decision if we are satisfied that “substantial
evidence” exists to support it. Id. § 2001.174(1), (2)(E).
We review the agency’s legal conclusions for errors of law and its factual
findings for support by substantial evidence. Heat Energy Advanced Tech., Inc. v.
W. Dallas Coal. for Envtl. Justice, 962 S.W.2d 288, 294–95 (Tex. App.—Austin
1998, pet. denied). Substantial evidence “does not mean a large or considerable
6
amount of evidence, but rather such relevant evidence as a reasonable mind might
accept as adequate to support a conclusion of fact.” Lauderdale v. Tex. Dep’t of
Agric., 923 S.W.2d 834, 836 (Tex. App.—Austin 1996, no writ) (quoting Pierce v.
Underwood, 487 U.S. 552, 564–65, 108 S. Ct. 2541 (1988)) (internal quotation
marks omitted). We consider the reliable and probative evidence in the record as a
whole when testing an agency’s findings, inferences, conclusions, and decisions to
determine whether they are reasonably supported by substantial evidence. Graff
Chevrolet Co. v. Texas Motor Vehicle Bd., 60 S.W.3d 154, 159 (Tex. App.—
Austin 2001, pet. denied); see TEX. GOV’T CODE ANN. § 2001.174(2)(E). We
presume that the Commission’s order is supported by substantial evidence, and the
Ratepayers bear the burden of proving otherwise. See Tex. Health Facilities
Comm’n v. Charter Med.–Dallas, Inc., 665 S.W.2d 446, 453 (Tex. 1984). The
burden is a heavy one—even a showing that the evidence preponderates against the
agency’s decision will not be enough to overcome it, if there is some reasonable
basis in the record for the action taken by the agency. Id. at 452. Our ultimate
concern is the reasonableness of the agency’s order, not its correctness. Firemen’s
& Policemen’s Civil Serv. Comm’n v. Brinkmeyer, 662 S.W.2d 953, 956 (Tex.
1984).
To the extent that appellants’ issues address the construction of the
Commission’s rules, we review these questions de novo. Rodriguez v. Serv. Lloyds
7
Ins. Co., 997 S.W.2d 248, 254 (Tex. 1999). In general, “[w]e construe
administrative rules, which have the same force as statutes, in the same manner as
statutes.” Id.; see also State v. Shumake, 199 S.W.3d 279, 284 (Tex. 2006)
(addressing statutory construction). “Unless the rule is ambiguous, we follow the
rule’s clear language.” Rodriguez, 997 S.W.2d at 254 (citation omitted). “If there is
vagueness, ambiguity, or room for policy determinations in a statute or regulation,
. . . we normally defer to an agency’s interpretation unless it is plainly erroneous or
inconsistent with the language of the statute, regulation, or rule.” TGS–NOPEC
Geophysical Co. v. Combs, 340 S.W.3d 432, 438 (Tex. 2011).
Whether the agency’s order satisfies the substantial-evidence standard is a
question of law. Id. Thus, the district court’s judgment that there was substantial
evidence supporting the Commission’s final order is not entitled to deference on
appeal. See Tex. Dep’t of Pub. Safety v. Alford, 209 S.W.3d 101, 103 (Tex. 2006)
(per curiam). On appeal from the district court’s judgment, the focus of the
appellate court’s review, as in the district court, is on the agency’s decision. See
Montgomery Indep. Sch. Dist. v. Davis, 34 S.W.3d 559, 562 (Tex. 2000); Tave v.
Alanis, 109 S.W.3d 890, 893 (Tex. App.—Dallas 2003, no pet.).
Applicable Principles of Law
The Commission’s jurisdiction in this case arose from Sections 11.036 and
11.041 of the Texas Water Code, which provide:
8
(a) A person . . . having in possession and control any storm water,
floodwater, or rainwater that is conserved or stored as authorized
by this chapter may contract to supply the water to any person . . .
having the right to acquire use of the water.
(b) The price and terms of the contract shall be just and reasonable
and without discrimination . . . .
TEX. WATER CODE ANN. § 11.036(a)-(b). (Vernon 2008) (emphasis added).
(a) Any person entitled to receive or use water . . . from any conserved or
stored supply may present to the commission a written petition showing:
(1) that he is entitled to receive or use the water;
(2) that he is willing and able to pay a just a reasonable price for the
water;
(3) that the party owning or controlling the water supply has water not
contracted to others and available for the petitioner’s use; and
(4) that the party owning or controlling the water supply fails or refused
to supply the available water to the petitioner, or that the price or
rental demanded for the available water is not reasonable and just
or is discriminatory.
TEX. WATER CODE ANN. § 11.041(a) (Vernon Supp. 2014) (emphasis added).
In Texas Water Comm’n v. City of Fort Worth, 875 S.W.2d 332, 335 (Tex.
App.—Austin 1994, writ denied), the court recognized that the Texas Constitution
limits the State’s ability to pass laws that impair contractual obligations to
instances wherein the public safety and welfare must be protected. The court then
held that before the Commission could modify a rate set by contract, the
Commission must first make a finding that the challenged rates “adversely affect
the public interest by being unreasonably preferential, prejudicial, or
discriminatory.” Id. at 336.
9
In the wake of the City of Fort Worth case, the Commission adopted the
wholesale-service rules found in Subchapter I of Chapter 291 of the Texas
Administrative Code, which are applicable to this case because it involves a
petition to review rates charged for the sale of water for resale. See 30 TEX. ADMIN.
CODE §§ 291.128-291.138. The wholesale service rules set up a two-step process
for reviewing challenged rates set by contract: (1) there must be a determination
that a public interest is adversely affected, and only if such a public interest is
found; 2) will the Commission review the rate. Id.
For a petition to review a rate that is charged pursuant to a written contract,
the executive director of the Commission will forward the petition to SOAH to
conduct a hearing on public interest, and SOAH will conduct an evidentiary
hearing to determine whether the protested rate adversely affects the public
interest. 30 TEX. ADMIN. CODE §§ 291.131(b), 291.132(a). The ALJ then prepares
a proposal for decision and order with proposed findings of fact and conclusions of
law concerning whether the protested rate adversely affects the public interest and
submits this recommendation to the commission. 30 TEX. ADMIN. CODE §
291.132(c). The Commission determines whether the challenged rate adversely
affects the public interest by applying section 291.133 of the Administrative Code,
which provides as follows:
(a) the commission shall determine the protested rate adversely
affects the public interest if after the evidentiary hearing on public
10
interest the commission concludes at least one of the public interest
criteria have been violated:
(1) the protested rate impairs the seller’s ability to continue to
provide service, based on the seller’s financial integrity and
operational capability;
(2) the protested rate impairs the purchaser’s ability to continue to
provide service to its retail customers, based on the purchaser’s
financial integrity and operational capability;
(3) the protested rate evidences the seller’s abuse of monopoly
power in its provision of water or sewer service to the purchaser.
In making this inquiry, the commission shall weigh all relevant
factors. The factors may include:
(A) the disparate bargaining power of the parties, including the
purchaser’s alternative means, alternative costs,
environmental impact, regulatory issues, and problems of
obtaining alternative water or sewer service;
(B) the seller’s failure to reasonably demonstrate the changed
conditions that are the basis for a change in rates;
(C) the seller changed the computation of the revenue
requirement or rate from one methodology to another;
(D)where the seller demands the protested rate pursuant to a
contract, other valuable consideration received by a party
incident to the contract;
(E) incentives necessary to encourage regional projects or water
conservation measures;
(F) the seller’s obligation to meet federal and state wastewater
discharge and drinking water standards;
(G) the rates charged in Texas by other sellers of water or sewer
service for resale;
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(H) the seller’s rates for water or sewer service charged to its
retail customers, compared to the retail rates the purchaser
charges its retail customers as a result of the wholesale rate
the seller demands from the purchaser;
(4) the protested rate is unreasonably preferential, prejudicial, or
discriminatory, compared to the wholesale rates the seller charges
other wholesale customers.
(b) The commission shall not determine whether the protested rate
adversely affects the public interest based on an analysis of the
seller’s cost of service.
30 TEX. ADMIN. CODE § 291.133.
The public interest does not require that a wholesale rate be equal to the
seller’s cost of providing that service, thus a cost-of-service analysis is
inappropriate unless and until the Commission determines that the challenged rate
affects a public interest. See 30 TEX. ADMIN. CODE § 291.133(b). The petitioner
has the burden of proof in a public-interest hearing. Id. at § 291.136.
In their petition, the Ratepayers relied only upon § 291.133(a)(3), arguing
that Corsicana’s rate evidences its abuse of monopoly power.
Disparate Treatment between Retail Customers and Wholesale Customers
In two related issues on appeal, the Ratepayers contend that the Commission
erred in deciding that rate discrimination cannot be considered in the public
interest analysis under § 291.133, and that, if § 291.133 does in fact preclude
consideration of rate discrimination, the rule is contrary to statutory authority.
12
Critical to the Ratepayers argument is their own definition of rate discrimination as
“the disparate treatment of retail and wholesale customers.”
In his proposal for decision, the ALJ concluded that “the public-interest
inquiry is limited to the factors set out in 30 TAC § 291.133(a)(1)-(4). It does not
include a comparison of protested rate’s impacts on wholesale and retail
customers.” The Commission’s final order did not limit the public interest inquiry
to the factors set out in § 291.133(a), but did agree that “[t]he public-interest
inquiry set out in 30 TAC § 291.133(a)(1)-(4) does not include a comparison of the
protested rate’s impacts on wholesale and retail customers.”
We agree that the factors listed in § 291.133(a)(3) are non-exclusive, and
other factors may be considered if appropriate. Section 291.133(a)(3) provides that
when determining whether the seller has abused its monopoly power, “the
commission shall weigh all relevant factors[,] which “may include” the eight
factors specifically set forth in the rule. See 30 TEX. ADMIN. CODE §
291.133(a)(3)(A-H). The use of the word “may” “creates discretionary authority
or grants permission or a power.” See TEX. GOV’T CODE ANN. § 311.016 (Vernon
2013). Nothing in the rule limits the Commission to considering only the factors
listed, and indeed, the Commission is not required to consider all of the factors
listed, only those that are relevant. However, the fact that the Commission may
13
consider factors other than those listed does not answer the question of whether it
should have done so in this case.
The issue before this Court is not—as the Ratepayers argue—whether the
trial court refused to consider rate discrimination as a factor. It clearly did not
refuse to consider rate discrimination because the very purpose behind a public
interest hearing is to determine whether the challenged contractual rate “adversely
affect[s] the public interest by being unreasonably preferential, prejudicial, or
discriminatory.” City of Fort Worth, 875 S.W.2d at 336. The issue, properly
framed, is whether the Commission must consider the disparate impact of a rate
change on wholesale and retail customers as a factor when determining whether
there has been an abuse of monopoly power by the seller under § 291.133(a)(3).
The Ratepayers base their rate discrimination argument on language found
in the preamble to the Commission’s adoption of the Wholesale Water or Sewer
Service Rules, specifically focusing on 30 TEX. ADMIN. CODE § 291.133(a)(3)(A-
H), the abuse of monopoly power provision that is the basis for the Ratepayers’
petition. The portion of the preamble relied on by Ratepayers provides as follows:
One commenter argued that the public interest criteria in § 291.133(a)
(4) should concern unreasonable discrimination between customers,
but should only focus on wholesale customers. The commission
agrees that a comparison of the protested rate with rates the seller
charges other wholesale customers is relevant to the public interest
inquiry, and the statutory language gives sufficient guidance
concerning the scope of the inquiry. The public interest inquiry
under paragraph § 291.133(a)(3) should sufficiently cover whether
14
any disparity in treatment between retail and wholesale customers
adversely affects the public interest. Accordingly, the adopted rules
includes a revised paragraph § 291.133(a)(4) which uses the statutory
language found in the Water Code, § 13.047(j), that the rate shall not
be unreasonably preferential, prejudicial, or discriminatory and
specifies that under the subsection the inquiry shall be limited to a
comparison of seller’s rates charged to wholesale customers. A
commenter argued that § 291.133(a)(4) imposed an unlawful standard
to determine the public interest because the subsection inquired
concerning the mere appearance of discrimination, as opposed to the
existence of discrimination. This issue has been resolved by the
adopted changes which inquire whether the protested rate is
unreasonable preferential, prejudicial, or discriminatory.
19 Tex. Reg. 6229 (1994) (emphasis added). The Ratepayers argue that the
highlighted sentence in the preamble above is proof that § 291.133(a)(3)—the
abuse-of-monopoly power section—is intended to consider disparate treatment of
wholesale and retail customers as a factor in an abuse-of-monopoly power analysis
even though that factor is not one of those listed.
Corsicana responds that, taken in context, the preamble does not support an
expansion of the factors listed in §291.133(a)(3) to include a consideration of the
disparate impact of a rate change on retail and wholesale customers. We agree
with Corsicana.
The portion of the preamble relied upon by the Ratepayers was in response
to comments submitted regarding the original proposed version of § 291.133(a)(4),
which provided that the public interest would be violated if:
15
The protested rate appears to discriminate between the purchaser and
others who purchase water or sewer service from the seller, and the
seller does not provide reasonable support for such discrimination.
19 Tex. Reg. 3899 et seq. (1994). As originally proposed, section 291.133(a)(4)
would have permitted the analysis the Ratepayers urge here, i.e., a comparison of
the impact of a protested rate on wholesale and retail customers and whether such
disparate treatment was discriminatory. However, the commenter suggested that
this analysis should be confined to comparing the treatment of wholesale
customers, and the Commission agreed, stating in the preamble that “a comparison
of the protested rate with rates the seller charges other wholesale customers is
relevant to the public interest inquiry.” Therefore, in response to the comment to
the originally proposed § 291.133(a)(4), the Commission adopted the current
version, which provides that the public interest criteria has been violated if:
[t]he protested rate is unreasonably preferential, prejudicial, or
discriminatory, compared to the wholesale rates the seller charges
other wholesale customers.
30 TEX. ADMIN. CODE § 291.133(a)(4). If we were to interpret § 291.133(a)(3) to
include a comparison of the impact of a rate on wholesale and retail customers, it
would effectively negate the change that the Commission made to § 291.133(a)(4),
which was intended to narrow the comparison to consider the effect as between
wholesale customers only.
16
Our conclusion that § 291.133(a)(3) does not include a comparison of the
impact of the rate on wholesale versus retail customers is supported by looking at
the terms of § 291.133(a)(3) itself. One of the factors that is listed requires a
comparison of “the seller’s rates for water or sewer service charged to its retail
customers, compared to the retail rates the purchaser charges its retail customers as
a result of the wholesale rates the seller demands from the purchase.” 30 TEX.
ADMIN. CODE § 291.133(a)(3)(H). In other words, the Commission determines
whether the rate unfairly discriminates against wholesalers by comparing the rate
Corsicana charges its own retail customer with the rate that the Ratepayer charge
their retail customers as a result of the wholesale rate it pays Corsicana. This
analysis compares “apples to apples” by looking at whether Corsicana favors its
own retail customers at the expense of the Ratepayers’ retail customers, thereby
recognizing that the Ratepayers’ costs of acquiring the water will eventually be
passed along to its own retail customers. In other words, if the Ratepayers’
customers pay the same or less than Corsicana’s own retail customers, that factors
weighs against a finding that the contracted for rate is discriminatory.
At the public interest hearing, there was evidence that, assuming an average
6,000 gallon use per month, an average retail customer pays the Ratepayers $3.45
or less per 1,000 gallons of water due to the wholesale rate that Corsicana charges
the Ratepayers, while Corsicana’s own average retail customer pays Corsicana an
17
average of $5.43 per 1,000 gallons.2 As such, the Ratepayers’ retail customers
actually pay less for water than Corsicana’s own retail customers.
Also, we note that the public interest rule requires the Commission to
determine whether the protested rate adversely affects the public interest.
Corsicana’s rates are the same for both retail and wholesale customers. The
difference in the impact of the rate is attributable to water usage, not the
customer’s status as a wholesale or retail customer. Indeed, there was evidence
that 31 of Corsicana’s 50 highest volume water customers were retail customers
who paid the same higher rates as the wholesale customers. Thus, the Ratepayers
claim that the disputed rate treats wholesale and retail customers differently is not
supported by the record.
The Ratepayers also point to a comment by Corsicana’s mayor as evidence
of Corsicana’s intent to discriminate against wholesale buyers. When questioned
about why Corsicana adopted an inclining block volumetric rate, there was
evidence that the Mayor responded that it was because the wholesale customers
“don’t vote.” However, the mayor’s individual mental process, subjective
knowledge, or motive is irrelevant to a legislative act of Corsicana’s city counsel.
See City of Corpus Christi v. Bayfront Assocs., Ltd., 814 S.W.2d 98, 105 (Tex.
2
This difference is largely attributable to the fact that the Ratepayers are able to
apportion their base rate among their retail customers. Thus, the base rate by the
Ratepayers’ retail customer is less than the base rate paid by Corsicana’s own
retail customers even though their volumetric rate may be higher.
18
App.—Corpus Christi 1991, writ denied) (stating that “an individual city council
member’s mental process, subjective knowledge, or motive is irrelevant to a
legislative act of the city, such as the passage of an ordinance”); Mayhew v. Town
of Sunnyvale, 774 S.W.2d 284, 298 (Tex. App.— Dallas 1989, writ denied)
(“These principles are consistent with the basic doctrine that the subjective
knowledge, motive, or mental process of an individual legislator is irrelevant to a
determination of the validity of a legislative act because the legislative act
expresses the collective will of the legislative body.”).
In related issue two, the Ratepayers argue that “[i]f the Commission
correctly interpreted the public interest rules to preclude consideration of rate
discrimination, the rules are invalid.” However, the Commission did not conclude
that rate discrimination was irrelevant; instead it decided that comparing the
disparate impact of a rate on wholesale versus retail customers was not a proper
consideration for determining rate discrimination.
We agree with the Commission that “[t]he public-interest inquiry set out in
30 TAC § 291.133(a)(1)-(4) does not include a comparison of the protested rate’s
impacts on wholesale and retail customers.” The rule, as written, adequately
addresses the issue of rate discrimination by comparing (1) the treatment of
wholesale customers to other wholesale customers [in § 291.133(a)(4)] and (2) the
treatment of the seller’s own retail customers to the wholesale buyer’s retail
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customers [in § 291.133(a)(3)(H)]. The Commission did not err by deciding that a
comparison of the impact of the challenged rate on wholesale as opposed to retail
customers was inappropriate.
Accordingly, we overrule issues one and two.
“Cost of Service” Issues
When the Commission sets utility rates, the rates are based on the utility’s
cost of rendering service; two components of cost of service are allowable
expenses and return on invested capital. 30 TEX. ADMIN. CODE § 291.31(a). “Only
those expenses that are reasonable and necessary to provide service to the
ratepayer may be included in the allowable expenses.” 30 TEX. ADMIN. CODE §
291.31(b). “The commission shall not determine whether the protested rate
adversely affects the public interest based on an analysis of the seller’s cost of
service.” 30 TEX. ADMIN. CODE § 291.133(b). A cost-of-service analysis is
inappropriate unless and until the Commission determines that the challenged rate
affects a public interest. Id. Therefore, cost-of-service evidence is irrelevant to
determining whether a protested rate adversely affects the public interest.
The “Wastewater Subsidy” Evidence
The Ratepayers claim that Corsicana adopted the protested water rates to
shift a shortfall in its wastewater service revenue to its out-of-city wholesale water
customers. They claim that a shortfall in Corsicana’s Utility Fund, which is
20
comprised of revenues and expenses from both its water and wastewater utilities,
was due to its rates for wastewater utility service being too low to cover the
expenses of wastewater service. The gist of the Ratepayers’ claim is that the rates
they pay are actually subsidizing Corsicana’s wastewater service and are not
necessary and reasonable to provide water service to them.
In issue three, the Ratepayers contend the Commission erred in deciding that
their “wastewater subsidy” argument and evidence proffered in support thereof
was a cost-of-service issue and could not be considered as part of its public interest
analysis. We disagree. In order for the Commission to determine whether there
was in fact a subsidy, it would necessarily have to examine the costs and revenues
of both the water and wastewater services, because both are combined in the
Utility Fund. Section 291.133(b) clearly prohibits such an inquiry. Thus, we
conclude that the Commission properly refused to consider the Ratepayers’
“wastewater subsidy” evidence and argument in conducting its public interest
analysis.
We overrule issue three.
The “Changed Conditions” Issue
One of the factors that the Commission may consider in determining
whether there has been abuse of monopoly power affecting the public interest is
“the seller’s failure to reasonably demonstrate that changed conditions are the basis
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for a change in rates[.]” 30 TEX. ADMIN. CODE § 291.133(a)(3)(B). At the
hearing, Corsicana presented evidence of “changed conditions,” i.e., the fact that
its Utility Fund had a $1 million shortfall and that Corsicana needs a cash reserve
available to deal with emergencies. In issue four, the Ratepayers contend that the
Commission erred by considering the Utility Fund deficit as a changed condition
while excluding consideration of its “wastewater deficit” as prohibited cost-of-
service evidence. We disagree.
The “wastewater subsidy” argument would have required the Commission to
delve into the cause of the Utility Fund deficit, which would necessarily have
required consideration of the costs of service of both water and wastewater
services. However, in considering the Utility Fund as a “changed circumstance,”
the fact of the deficit, not its cause, is important. Indeed, in its proposal for
decision, the ALJ noted that there were several possible causes for the Utility Fund
deficit:
It is certainly possible that the deficit in the Utility Fund was cause
wholly or partially by water-service rates that were too low to cover
the cost of providing that service. The deficit could also have been
caused in whole or in party by sewer service rates that were too low or
by unreasonably high water or sewer expenses, or both. Drilling
down further, it might be that the deficit in the Utility Fund was due to
rates for certain types of customers being lower than the cost of
serving them while other customers paid rates that were sufficient to
cover the cost of their service. However, those are all cost-of-service
issues that are outside the scope of the current proceeding to
determine whether the protested rates adversely affect the public
interest.
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Regardless of its cause or causes, the uncontradicted evidence shows
that the shortfall in the Utility Fund existed at the time Corsicana
raised its water rates. Since the evidence also shows that an operating
reserve is necessary to pay for emergencies and shortfalls in the cost
of providing water service and that the Utility Fund served as
Corsicana’s operating reserve for that purpose, the ALJ concludes that
the deficit in the Utility Fund, regardless of its cause or causes, was a
changed condition that gave Corsicana a reasonable basis for
increasing its water rates.
The Commission agreed with the ALJ, stating that “[t]he $1 million deficit in
Corsicana’s Utility Fund, regardless of its cause or causes, was a changed
condition that gave Corsicana a reasonable basis for increasing its water rates.”
Because considering the depleted Utility Fund as a changed circumstance did not
require an inquiry into the cause of its deficit, whereas the “wastewater subsidy”
argument did, the ALJ and the Commission did not run afoul of the prohibition
against “cost-of-service” evidence in considering it, and in concluding that
Corsicana had shown changed circumstances justifying its challenged rate.
We overrule issue four.
CONCLUSION
We affirm the trial court’s judgment.
Sherry Radack
Chief Justice
Panel consists of Chief Justice Radack and Justices Brown and Lloyd.
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