Gte-Sw

IN THE COURT OF APPEALS, THIRD DISTRICT OF TEXAS,

AT AUSTIN

ON MOTION FOR REHEARING

NO. 3-90-084-CV

PUBLIC UTILITY COMMISSION OF TEXAS,

STATE PURCHASING AND GENERAL SERVICES COMMISSION,

OFFICE OF PUBLIC UTILITY COUNSEL AND

CITIES OF ABERNATHY, ET AL.,

APPELLANTS

vs.

GTE-SW,

APPELLEE

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 201ST JUDICIAL DISTRICT

NO. 406,115, HONORABLE JOSEPH H. HART, JUDGE PRESIDING

We withdraw our previous opinion, handed down June 19,

1991, and substitute this opinion in order to respond more

conveniently to matters raised in the parties' motions for

rehearing, which we hereby overrule.

In a suit for judicial review authorized by the Public

Utility Regulatory Act (PURA), Tex. Rev. Civ. Stat. Ann. art.

1446c, § 69 (Supp. 1991), the district court affirmed in part and

reversed in part a final order issued by the Public Utility

Commission in a rate proceeding, remanding the cause to the

Commission with instructions that it "take such action and enter

such orders as are consistent with" the district-court judgment.

We affirm that part of the district-court judgment reversing the

Commission order. We reverse that judgment to the extent it

affirms the Commission's order. We remand the cause to the

district court with instructions that the cause be remanded to the

Commission for further proceedings not inconsistent with our

opinion.

THE CONTROVERSY

In 1984, General Telephone Company of the Southwest

applied to the Commission for an order increasing the rates it is

permitted to charge its customers for intrastate telecommunication

services. PURA § 43. Several parties appeared in opposition to

the application. After an intervening lawsuit in district court,

and a subsequent appeal, involving certain aspects of the

controversy, the Commission concluded the contested case by a final

order dated April 7, 1989. The Commission order required the

Company to reduce its rates to the extent necessary to diminish its

annual revenues by about $59 million. The Commission purported to

make the new rates retroactive by assigning them an effective date

of January 1, 1987. To effectuate that element of the order, the

Commission required the Company to refund about $140 million to its

customers through credits on future invoices.

After the Commission overruled various motions for

rehearing, numerous parties in the contested case sued for judicial

review of the order in the statutory cause of action authorized by

PURA § 69. The district court consolidated the several causes.

After final hearing, the court reversed that portion of the agency

order which required a refund but affirmed the remainder of the

order. Several litigants appeal to this Court: the Commission,

the Company, the State Purchasing and General Services Commission,

the Office of Public Utility Counsel, and 86 municipalities. (1)

See

Texas Administrative Procedure and Texas Register Act (APTRA), Tex.

Rev. Civ. Stat. Ann. art. 6252-13a, §§ 19(e), 20 (Supp. 1991).

The appellants assail, by various points of error, those

parts of the Commission order adverse to their respective

interests. We will discuss below the several points of error. To

assist in understanding our discussion, however, we should set out

first the general statutory context in which the Commission arrived

at its final order in the contested case.

RATEMAKING IN THE COMMISSION

In PURA, the Legislature directed the Commission to

accomplish two objectives: (1) protect the public interest in

state-wide availability of an adequate, efficient, safe, and

reasonable telecommunications service; and (2) assure that the

rates charged and paid for such service are "just and reasonable."

See PURA §§ 18(a), 35(a), 38. In PURA § 37, the Legislature

empowered the Commission to "fix and regulate" the rates a utility

charges for intrastate telecommunication services.

The Legislature placed in the Commission a rather large

discretion in rate matters, if one looks only to certain broadly

worded provisions of PURA. For example, a telecommunications

utility must prove that any rates it proposes are "just and

reasonable," which is to say that they permit "a reasonable

opportunity to earn a reasonable return on . . . invested capital

. . . over and above . . . reasonable and necessary operating

expenses." PURA §§ 18(a), 39, 40. Concurrently with such broad

criteria, however, the Legislature circumscribed Commission

discretion by defining in PURA itself such essential terms as

"invested capital," "net income," and "expenses disallowed." PURA

§ 41. See generally Texas Alarm & Signal Ass'n v. Public Utility ,

603 S.W.2d 766 (Tex. 1980); Southwestern Bell Tel. Co. v. Public

Utility Com'n , 571 S.W.2d 503 (Tex. 1978).

In addition, the Legislature directed the Commission to

consider specified factors in fixing the rates that a public

utility may charge. In PURA § 39(b), for example, the Legislature

required the Commission to "consider, in addition to other

applicable factors," several aspects of a utility's operations,

namely: "[the utility's] efforts to comply with the statewide

energy plan, the efforts and achievements of such utility in the

conservation of resources, the quality of the utility's services,

the efficiency of the utility's operations, and the quality of the

utility's management."

Still other factors may become applicable from sources of

law outside PURA. The Constitution of the United States precludes,

of course, any rate that is "confiscatory" of the utility's

property. Public Service Com. v. Great Northern Util. Co. , 289

U.S. 130, 135 (1933). And the Commission has provided by its own

regulations for the consideration of such additional factors as

inflation, deflation, service-area growth rate, and a utility's

need to attract new capital. 16 Tex. Admin. Code § 23.21 (c)(1)(C)

(Supp. 1991).

We believe our observations in reference to a similar

statutory scheme apply to the rate-setting provisions of PURA. The

applicable law and facts may require "the Commission to ascertain

the existence, absence, and interaction of any number of factors.

These factors may vary from case to case and time to time,

requiring perhaps a different orchestration in each instance."

Morgan Exp. v. Railroad Com'n of Texas , 749 S.W.2d 134, 137 (Tex.

App. 1987, writ denied). In view of the complexity inherent in the

subject-matter, "[w]asteful and fruitless attempts at perfection

are neither expected nor required" of the Commission. Id.

RATE OF RETURN

The terms of PURA § 39(a) required the Commission to

calculate and fix the Company's charges to its customers according

to the Commission's determination of the level of "overall

revenues" necessary to permit the Company "a reasonable opportunity

to earn a reasonable return on" its rate base, or the "invested

capital used and useful in rendering service to the public over and

above its reasonable and necessary operating expenses." (2)

See

generally Butler, The Rate of Return in Texas--The Neglected Issue ,

28 Baylor L. Rev. 937 , 938 (1976).

The Commission concluded that a rate of 11.05% would

yield a "reasonable return" within the meaning of PURA § 39(a).

The Company challenges, on appeal, the Commission findings on which

the conclusion rests. These relate to only one criterion of what

constitutes a "reasonable return": whether the rate is sufficient

to yield a level of earnings that is high enough to attract new

capital from external sources. The Company's complaint pertains

even more narrowly to a single technique or method by which the

Commission might estimate a rate that is sufficient to attract new

capital: the "double leverage" method sometimes employed when the

capital stock of a utility is owned wholly by another corporation.

See generally Foster, Fair Return Criteria and Estimation , 28

Baylor L. Rev. 883 , 886-90 (1976).

The evidence may be summarized by the following table

displaying the Company's capital structure and the 11.05% "cost of

capital" upon which the Commission's findings rest. The table,

which we have altered somewhat, is taken from the examiner's

proposal for decision, incorporated in the Commission's final

order:

COST OF CAPITAL--GTE SOUTHWEST CORPORATION

(After the Subsidiary Risk Adjustment)

Amount Weighted

Component 000's Ratio Cost Cost

Long-Term Debt $ 779,910 41.56% 10.01% 4.16%

Short-Term Debt 15,500 .83 7.54 .06

Preferred Stock 31,530 1.68 7.13 .12

Common Equity 1,049,517 55.93 11.99 6.71

Total 11.05%

While the remaining figures in the table appear to be actual

figures, the 11.99% "cost" for "common equity" (3)

or common stock is

artificial, rendering artificial as well the 6.71% "weighted cost"

of that element and the resulting total of 11.05%, or the rate of

return arrived at by the Commission, in its final order, as a

"reasonable return."

The artificial figure of 11.99% was derived from the

testimony of witnesses who explained their various expert opinions

of what a "reasonable return" would be, the figures ranging from

10.54% to 15.0%. Three witnesses buttressed or explained their

opinions by referring to the "double leverage" method of estimating

the "cost of capital" for a utility corporation when, as here, its

common stock is owned entirely by another corporation. That method

simply imputes to the utility a cost of "common equity" equal to

the parent corporation's total weighted cost of capital, based on

an assumption that the parent supplies that component of the

utility's capital from the aggregate of the parent's own capital

structure, and not any particular component thereof. See Foster,

supra , at 889. In the present case, for example, the capital

structure of the Company's parent, consisting of debt, preferred

stock, and "common equity" or common stock, was shown to have a

total weighted cost of 12.49%. The "double leverage" method of

estimating the Company's cost would have required that the 12.49%

be inserted in the table above as the Company's cost of "common

equity."

The 11.05% rate of return selected by the Commission does

not result from this manner of using the "double leverage" method

of estimating cost of capital. The Commission employed instead the

theory of a witness who varied the "double leverage" method in

arriving at her opinion of the Company's cost of capital--she

reduced the parent corporation's total weighted cost of capital

(12.49%) to account for the fact that the Company was a public

utility with a diminished economic risk. While the Commission

adhered to the theory of a reduced economic risk, it did not merely

adopt the exact reduction or rate of return arrived at by the

witness. The Commission determined rather to reduce the 12.49% to

11.99% to account for the diminished economic risk (the latter

figure being shown in the table above). The ultimate 11.05% rate

of return follows from simple arithmetical calculations.

The Company argues that the diminished-risk factor was

already reflected in the capital structure of its parent, in the

minds of investors, and thus in the 12.49% total weighted cost of

capital. Accordingly, any further reduction to account for the

diminished-risk factor amounted to a double reduction for the same

factor, an abuse of discretion requiring reversal of the

Commission's final order. APTRA § 19(e)(6).

We believe, however, that the argument misses the

essential point that both the "double leverage" method itself and

the theory of a reduction to account for the Company's diminished

economic risk were only instruments employed in estimating the

Company's hypothetical cost of capital in a situation in which the

Company's actual cost of capital would not serve the purpose of

determining the "reasonable return" required by PURA § 39(a).

The method and the reduction were neither required nor

prohibited by statute or regulation. No one was bound in a

statutory sense by the techniques employed by any expert witness or

a resulting opinion. For example, the several expert witnesses

gave their respective opinions that a proper hypothetical rate of

return on "common equity capital" for the Company was 15%, 12.1%,

10.85%, (4) and 10.54%, the last three being based, at least in part,

on the witness's use of the "double leverage" method. The figure

chosen by the Commission, 11.99%, was no more than the Commission's

own estimate converted into a finding, an estimate within the range

made by the testimony of the various expert witnesses. We hold the

Commission did not abuse its discretion.

The Company argues next that the Commission acted

contrary to its established policy by making the diminished-risk

adjustment mentioned above. It is not suggested that the policy

was one of general applicability, laid down in a formal rule

previously promulgated by the Commission to govern in all cases of

a particular class. Rather, the policy is found, according to the

Company, in the Commission's own precedents in similar contested

cases. The Commission's unexplained departure from established

policy, the Company contends, also amounted to an abuse of

discretion. APTRA § 19(e)(6).

We might accurately compare the circumstances in the

Company's case with those of the other contested cases referred to,

only if we had before us the agency record compiled in those other

cases. Those records are not before us, and were not before the

district court. Instead, the Company refers to so much of the

record in those cases as is reflected in a publication entitled

Public Utility Commission Bulletin . We have read the report of

those cases and other cases in the bulletin which indicate that the

Commission did make the adjustment mentioned. Given the resulting

doubt about whether such an administrative policy exists at all,

and the absence of any means of determining the similarity of the

other contested cases to the present case, we reject the Company's

argument.

In a separate point of error, the Company contends the

Commission's choice of 11.05%, as a rate sufficient to yield a

reasonable return, was "not reasonably supported by substantial

evidence of record." APTRA § 19(e)(5). The Company argues the

point jointly with its abuse-of-discretion complaint discussed

above. We believe the Company directs its separate point of error

at the absence of evidence explicitly supporting the Commission's

choice to reduce the 12.49% figure to exactly 11.99%, that is to

say, a want of evidence to support fixing the difference at

precisely .50%. The .50% difference is an inference from the body

of evidence on the point in question; none of the evidence

suggested that figure explicitly. It is, however, within the range

of the evidence received, as discussed above.

The "substantial evidence" test or rule refers simply to

"such relevant evidence as a reasonable mind might accept as

adequate to support a conclusion." Pierce v. Underwood , 487 U.S.

552, 563 (1988); Consolidated Edison Co. v. National L. R. Bd. , 305

U.S. 197, 229 (1938); see generally K. Davis, Administrative Law

Text § 29.02, at 527-30 (3d ed. 1972); B. Schwartz, Administrative

Law , § 10.7, at 596-600 (2d ed. 1984). The Company suggests no

reason why the .50% difference is an unreasonable conclusion even

though it falls squarely within the range of conclusory inferences

that a reasoning mind might have drawn from the relevant evidence,

which included testimony that a reasonable rate of return to

"common equity" might range from 10.54% to 15%. No such reason

appears to us.

For the reasons given, we overrule the Company's two

points of error complaining of the rate of return.

PAYMENTS TO AFFILIATES

As mentioned previously, PURA § 39(a) requires a rate of

return that will allow the Company to recoup "its reasonable and

necessary operating expenses" while simultaneously affording the

Company "a reasonable opportunity to earn a reasonable return on

its invested capital." The Commission included within the

Company's operating expenses the estimated amounts the Company will

pay two affiliate companies, GTE Directories and GTE Service

Corporation. The Cities complain on appeal that the Commission

erroneously included these sums in calculating the Company's

operating expenses and, by extension, its rate of return.

Because operating expenses are limited to those that are

"reasonable and necessary," and because the sums paid between

affiliates might be fixed at something less than an arms-length

transaction, rational administration required the Commission to

scrutinize closely any sums the Company expected to pay its two

affiliates. See Hawes, Utility Holding Companies , at 10-1 (1984).

The same principle is found in the terms of PURA § 41(c)(1). That

statute explicitly requires the Commission to exclude such expenses

" except to the extent that the [Commission] shall find such payment

to be reasonable and necessary for each item or class of items as

determined by the commission." Moreover, the statute spells out

the character of finding that the Commission must make before such

expenses may be included :

Any such finding shall include specific findings of the

reasonableness and necessity of each item or class of

items allowed and a finding that the price to the utility

is no higher than prices charged by the supplying

affiliate to its other affiliates or divisions for the

same item or class of items, or to unaffiliated persons

or corporations.

PURA § 41(c)(1). In other words, each finding that a payment to an

affiliate is "reasonable and necessary" must include subsidiary

findings: (1) that each item or class of items is "reasonable and

necessary"; and (2) that the price paid by the utility is no higher

than the prices charged to other specified purchasers.

GTE Directories

The evidence showed that the Company made payments to GTE

Directories for the printing and publishing of the Company's

telephone directories. GTE Directories is an "affiliate" within

the meaning of PURA § 3(i)(4). (5)

The Cities complain on appeal, in several respects, of

the Commission's inclusion of the Company's payments to GTE

Directories as "reasonable and necessary operating expenses."

Specifically, they argue that the Commission's final order did not

contain the specific findings required by PURA § 41(c)(1).

The sole relevant finding contained in the Commission's

final order is that numbered 16; no other finding pertains to the

Company's payments to GTE Directories. Finding of Fact 16 states

as follows:

The testimony of GTE witness Keys refutes the conclusion

that GTE Directories' agreement with GTE Southwest is

unfavorable in comparison with its other customers. It

would not be appropriate to adjust GTE Directories'

prices for return and tax components. Because the

matching principle would require ignoring the revenues

from the arrangement with GTE Directories if the expenses

are not allowed, the customers benefit from recognizing

the arrangement for rate-making purposes. Accordingly,

expenses of $19,400,000 and revenues of $47,416,000

should be included in the cost of service.

While the foregoing purports to be a "finding," it hardly

determines anything at all except perhaps in the last sentence,

which concludes starkly, opaquely, and with surpassing generality

that the stated sums "should" be included in the Company's cost of

service. The balance of the finding declares merely that: (1) a

witness's testimony refutes any conclusion that the directory

agreement "is unfavorable in comparison with the [Company's] other

customers"; (2) any adjustment of the prices "would not be

appropriate"; and (3) the Company's "customers benefit from

recognizing the arrangement for rate-making purposes."

We are instructed not to be "hypertechnical" in our

evaluation of whether an agency's findings comply with a statutory

mandate that the agency make findings of fact; and we are even told

that the "evidence and testimony" in a contested case amounts in

some manner to a sufficient finding of fact. State Banking Bd. v.

Allied Bank , 748 S.W.2d 447, 449 (Tex. 1988). We need not explore

these mysteries, however, for we cannot imagine a more flagrant

failure by an administrative agency to comply with the terms of its

governing statute. Absolutely nothing in the Commission's order

suggests the Commission attempted to include in its order what PURA

§ 41(c)(1) explicitly demands in the clearest and most imperative

language: (1) " specific findings of the reasonableness and

necessity " of the sums to be paid for directories; and (2) "a

finding that the price to the [Company] is no higher than prices

charged by [GTE Directories] to its other affiliates or divisions

for the same item or class of items, or to unaffiliated persons or

corporations." If a statute means anything at all, PURA § 41(c)(1)

required those specific findings before the affiliate payments

might be included , and the Commission did not make them in its

final order in this case.

We therefore sustain the Cities' point of error. (6) See

APTRA § 19(e)(1).

GTE Service Corporation

GTE Service Corporation is another subsidiary of GTE

Corporation, the parent company. Three divisions of GTE Service

Corporation charge its sister subsidiaries for various services it

provides them; they are: (1) "Telephone Operations Headquarters,"

or "Telops," which files interstate-access tariffs and supplies

certain planning and development services to those subsidiaries

that are telephone-operating companies, such as the Company here;

(2) "GTE Corporate Departments," which supplies to all affiliates

certain services such as consolidated accounting, treasury

services, and the preparation and filing of the parent's

consolidated tax return; and (3) "Diversified Products

Headquarters," which supplies services only to subsidiaries that

are not telephone-operating companies, such as GTE Communications

Systems and GTE Government Systems.

The parties dispute exactly how GTE Service Corporation

charges its sister affiliates for its services. In general,

however, the charges are assessed only for services supplied: for

example, the Company receives services only from "Telops" and "GTE

Corporate Departments," but not from "Diversified Products

Headquarters," and pays accordingly. With this qualification, we

may refer hereafter to the amounts the Company pays its affiliate,

GTE Service Corporation.

The Cities assail the Commission's decision to include as

"reasonable and necessary operating expenses" the estimated sums

the Company will pay GTE Service Corporation, contending the

payments were unreasonable as a matter of law because the

allocation system employed by GTE Service Corporation results in a

disproportionate share of those expenses being borne by the

Company, and thus by its customers through the rates charged them.

The Company disputes any contention that it pays more than a "fair

share" under the allocation system. We are unable to decide that

issue; it is a question for the Commission and not this court. But

the Cities raise an additional contention under PURA § 41(c)(1),

directed again at the Commission's failure to comply with the

statutory requirements of PURA § 41(c)(1).

The Commission's Finding of Fact 13 is the sole finding,

in the final order, that refers to the Company's payments to GTE

Service Corporation. It states as follows:

GTE Service Corp provides to GTE Southwest the classes of

services described in section III.D.3.a of the Report.

The testimony of the GTE witnesses summarized in section

III.D.3 of the Report establishes by a preponderance of

the evidence that (1) the allocation formula properly

reflects differences between the purchasing affiliates;

(2) the prices charged for each class of service are

reasonable relative to the cost of obtaining them from

alternative sources; and (3) the services are reasonable

and necessary for the provision of utility service. The

testimony of Mr. Gillespie establishes that $258,000

should be deducted as a disallowance of legislative

advocacy expenses and $268,000 should be deducted for

Signaling System 7, which is related to services that are

not being provided.

Finding of Fact 13 incorporates by reference the following

paragraph in the examiner's report:

Introduction--Four GTE witnesses discussed the operation

of GTE Service Corp and the allocation and direct billing

of its expenses to GTE Southwest. About $9,406,000 of

GTE Service Corp expenses were allocated to GTE

Southwest.

[The report describes here the division of GTE

Service Corp. into three groups and summarizes the

functions of each group.] In general, the expenses of

corporate departments are allocable to all GTE

subsidiaries, the expenses of telops are allocable only

to telephone operating companies, and the expenses of

products and systems are allocable only to nontelephone

subsidiaries.

As mentioned previously, PURA § 41(c)(1) requires the

exclusion of payments to an affiliate, from a utility's "reasonable

and necessary operating expenses," unless the Commission makes

these findings in its final order: a general finding that the

payments are "reasonable and necessary for each item or class of

items"; and specific findings that (1) each item or class of items

supplied by the affiliate is reasonable and necessary and (2) "the

price to the utility is no higher than prices charged by [the]

affiliate to its other affiliates or divisions for the same item or

class of items, or to unaffiliated persons or corporations."

The Cities complain that the Commission did not make the

second specific finding -- a finding that the prices charged by GTE

Service Corporation to the Company were "no higher than prices

charged" other affiliates or unaffiliated persons or corporations

for the same item or class of items. As a result, the Cities

contend, the premise of PURA § 41(c)(1) required that the

Commission exclude from the rate calculation the Company's

estimated payments to its affiliate GTE Service Corporation. We

agree.

If we assume that Finding of Fact 13 amounts to "specific

findings" that each item or class of items supplied by GTE Service

Corporation is reasonable and necessary (a matter we do not

decide), the fact remains that nothing therein purports to

determine that the prices charged the Company by GTE Service

Corporation are "no higher than" those charged by it to its other

affiliates or divisions, or unaffiliated persons or corporations.

Instead, Finding of Fact 13 determines only that the prices charged

the Company by GTE Service Corporation are "reasonable relative to

the cost of obtaining them from alternative sources." This is not

the same thing. See APTRA § 19(e)(1).

In its motion for rehearing, the Commission invites our

attention to section III.D.3.e. of the report, where the examiner

writes: "Accordingly, Mr. Bredeweg's testimony establishes that the

prices charged to GTE-Southwest were no higher than prices charged

to other subsidiaries." The Commission apparently argues that, by

mentioning a section of the examiner's report in a finding of fact,

it thereby adopts everything in that section of the report. We

disagree. PURA § 41(c)(1) requires specific findings that the

price charged to the utility is no higher than prices charged by

the supplying affiliate to its other affiliates or unrelated

entities. The Commission made no such finding here. A sentence in

the examiner's report, summarizing the opinion of a witness, will

not substitute for a Commission decision in the form of a finding,

particularly when there is no specific incorporation of the

examiner's report, when there is an actual finding dealing with the

subject, and when the actual finding does not satisfy the statutory

requirement.

Nothing in the order explains the departure from what the

statute required; and, of course, the Commission was not free to

disobey the terms of its governing statute. We therefore sustain

the Cities' point of error. See APTRA § 19(e)(1).

HYPOTHETICAL FEDERAL INCOME TAX ALLOWANCE

Federal income taxes incurred by a public utility are

recoverable as part of the company's operating expenses for

ratemaking purposes. Public Utility Com'n v. Houston Lighting , 748

S.W.2d 439, 441 (Tex. 1987), appeal dism'd , 488 U.S. 805 (1988);

Suburban Util. Corp. v. Public Util. Com'n , 652 S.W.2d 358, 363

(Tex. 1983). Public Counsel and the Cities contend the Commission

erroneously calculated the Company's federal-income-tax liability

in estimating its operating expenses. They contend the calculation

was erroneous in two respects: first, it did not include the

income-tax deductions actually taken by the Company for expenses

disallowed by PURA § 41(c)(3); second, it failed to account for a

pro-rata share of the tax savings realized by the Company by reason

of its parent's filing a consolidated tax return. Both tax-accounting practices, the Cities and Public Counsel assert, violate

the "actual taxes paid" formulation of Houston Lighting , 748 S.W.2d

at 442 . We will sustain the point of error.

The Consolidated Income-Tax Return

The Company's parent files a consolidated federal-income-

tax return on behalf of itself and its subsidiary companies. Not

all the subsidiaries are regulated utilities. Each subsidiary

furnishes the parent a return reflecting its particular federal-income-tax liability or absence thereof, which the parent uses to

compute the combined tax liability of all the participating

subsidiaries.

A. The Statutory Requirements

PURA § 41(c)(2) requires for rate-calculation purposes

that a utility which is a subsidiary of a holding company compute

its federal-income-tax expense as follows:

If the public utility is a member of an affiliated group

that is eligible to file a consolidated income tax

return, and if it is advantageous to the public utility

to do so, income taxes shall be computed as though a

consolidated return had been so filed and the utility had

realized its fair share of the savings resulting from the

consolidated return , unless it is shown to the

satisfaction of the regulatory authority that it was

reasonable to choose not to consolidate returns. The

amounts of income taxes saved by a consolidated group of

which a public utility is a member by reason of the

elimination in the consolidated return of the

intercompany profit on purchases by the public utility

from an affiliate shall be applied to reduce the cost of

the property or services so purchased. The investment

tax credit allowed against federal income taxes, to the

extent retained by the utility, shall be applied as a

reduction in the rate based contribution of the assets to

which such credit applies, to the extent and at such rate

as allowed by the Internal Revenue Code.

We have not found, nor has any party pointed out to us,

a Texas decision construing PURA § 41(c)(2). We believe, however,

that § 41(c)(2) contains three separate requirements. Firstly,

upon showings that the utility is a member of an affiliated group

eligible to file a consolidated income-tax return and that it would

be advantageous to do so, the Commission must (1) compute the

utility's income taxes as though it had filed a consolidated

return, and (2) impute to the utility its fair share of tax

savings. Secondly, any taxes saved by the consolidated group

because of the elimination of the intercompany profit on purchases

by the utility from an affiliate must be applied to reduce the

costs of the services or property purchased. Thirdly, any

investment-tax credit retained by the utility must be applied as a

reduction in the rate-based contribution of the asset to which the

credit applies. Each part of the statute must be given effect. See

Perkins v. State , 367 S.W.2d 140, 147 (Tex. 1963). Therefore, the

statute imposes three distinct duties on the Commission.

B. The Commission's Findings

The Company argues that the Commission satisfied the

requirements of PURA § 41(c)(2). The Cities and Public Counsel

contend, however, that the Commission calculated the Company's

income-tax expense on the basis of a hypothetical individual tax

return when a consolidated return would have yielded the Company

certain tax savings associated with the parent's investment in non-regulated businesses. Thus, the Company's customers were denied

the benefit of such savings in violation of PURA § 41(c)(2) and

Houston Lighting . The relevant finding by the Commission declared:

FF 12. The evidence establishes that GTE Southwest

properly accounts for the benefits from filing a

consolidated tax return with the GTE affiliates: (1) its

purchases from GTE Communications Systems are subject to

intercompany profit elimination, (2) it amortizes

investment tax credits over the life of the related

plant, and (3) GTE Corp's consolidation method properly

assigns tax losses and tax benefits to the sources of

income or losses that gave rise to the tax or benefit.

The Commission's order also contains the following "Conclusion of

Law," as well as several other "Conclusions of Law" that we have

set out in a footnote: (7)

CL 11. Because the benefits of the consolidated tax

return are properly accounted for in GTE Southwest's

invested-capital and cost-of-service accounts, the

staff's model calculates the proper allowance for the

company's federal income tax expense in accordance with

section 41(c)(2) of PURA without a separate adjustment

for consolidated tax savings.

Appended to the final order is "Schedule V." It appears

to represent federal-income-tax expenses used in calculating the

Company's rates. (8)

The table indicates that the Commission made no

adjustment to reflect the difference between the tax liability

shown on the Company's individual return and that of the

consolidated return.

The various conclusions of law and the one conclusion

labeled a finding of fact, augmented by "Schedule V," amount to

only one essential determination by the Commission: an opaque

generality that the Company " properly accounts for the benefits

from filing a consolidated tax return with the GTE affiliates."

This does not conform to PURA § 41(c)(2), which explicitly requires

a determination of whether any tax savings would result from a

consolidated return; and if so, an inclusion of a fair share of

that savings in computing the Company's operating expenses, in

order that the savings might be passed on to customers in the form

of a lower rate.

The Company calls our attention to Finding of Fact 72,

which says, "For the reasons stated in section III.B. (9) of the

Examiner's Report, GTE-Southwest's federal income tax should not be

adjusted for consolidated tax savings." We do not believe that the

examiner's report satisfies the requirements of PURA § 41(c)(2).

Although the report states that "the GTE consolidated return

provides GTE-Southwest its `fair share of savings,'" the

administrative law judge limited his understanding of consolidation

to the elimination of intercompany profit and amortization of

investment tax credits. He refused to reduce the Company's tax

expense by the losses of unregulated affiliates because he

perceived a violation of the normalization rules. We do not agree

that the normalization rules preclude consideration of the losses

of unregulated affiliates, as we will discuss below. Because the

administrative law judge ignored the first sentence of PURA

§ 41(c)(2), the examiner's report will not satisfy the statutory

requirements. (10)

C. Normalization Issues

Once the Commission computes a utility's income taxes as

though a consolidated return had been filed, the statute directs

the Commission to impute to the utility its "fair share of the

savings resulting from the consolidated return." PURA § 41(c)(2).

The statute does not define the expression "fair share," but the

supreme court has held that any tax savings actually enjoyed by a

utility "should inure to the benefit of its ratepayers." Houston

Lighting , 748 S.W.2d at 442 . To effectuate that principle, in a

case in which the utility had actually obtained a tax savings,

Houston Lighting required application of the corollary that "(t)he

utility's rates must reflect the tax liability actually incurred"

in lieu of any greater, hypothetical tax liability that might

plausibly be constructed in the circumstances. (11)

Id. ; see also

Federal Power Com'n v. United Gas Pipeline Co. , 386 U.S. 237, 244

(1967); Suburban Utility , 652 S.W.2d at 362-64 .

The Company argues on appeal that the "actual taxes paid"

corollary of Houston Lighting violates the "normalization"

requirement of the Internal Revenue Code and the Commission's

substantive rules regarding that subject. See 26 U.S.C.A.

§§ 167 (1)(3)(G), 168(i)(9) (Supp. 1990); 16 T.A.C. 23.21(b)(1)(D)

(Supp. 1991). The Company would avoid the effect of the corollary,

in the present case, on that basis. We should first determine

whether the "actual taxes paid" corollary of Houston Lighting

conflicts with the "normalization" requirement of the statute and

rule.

The "normalization" requirement is one element of rate

calculation. The Commission's rule 23.21(b) requires that a

utility's "cost of service" include, for rate-calculation purposes,

"[f]ederal income taxes on a normalized basis" and that such taxes

"be computed according to the provisions of" PURA. Nothing in PURA

or the Commission's rules elaborates on "normalization." It

appears, however, that "normalization" refers to the technique by

which utilities are positively encouraged to seek income-tax

savings that may ultimately inure to the benefit of ratepayers,

even though the benefit does not inure immediately. Simply stated,

a utility is authorized to depreciate its capital assets at an

accelerated rate and calculate its actual income-tax liability

accordingly; for rate-calculation purposes, however, the utility is

authorized to depreciate the same assets on a straight-line basis.

The resulting difference is accumulated in a deferred-tax account

that the Commission may ultimately divide, on an equitable basis,

between the utility and its customers. See PURA 27(e); Warren, Tax

Accounting in Regulated Industries: Limitations on Rate Base

Exclusions , 31 Rutgers L. Rev. 187 , 187-194 (1978).

"Normalization" under the Internal Revenue Code and the

Commission's rules purports to authorize the use of a fictitious

depreciation expense for rate-calculation purposes: the expense is

determined on a straight-line basis for rate-calculation purposes

even though the utility determines the expense on an accelerated

basis in calculating its actual income-tax liability. But this

does not mean that the holding in Houston Lighting contradicts the

"normalization" requirement; rather, it means that the corollary of

that decision does so. In Houston Lighting , the "actual taxes

paid" corollary was necessary to effectuate the principle laid down

in the holding in that decision: the tax savings actually enjoyed

by a utility "should inure to the benefit of the ratepayers." See

Houston Lighting , 748 S.W.2d at 442 . The "normalization"

requirement effectuates that principle in a different way: by

encouraging utilities to seek tax savings for the ultimate benefit

of its ratepayers when the Commission eventually divides the

savings equitably between the utility and its ratepayers in

calculating rates. We hold, for this reason, that there exists no

contradiction between the "normalization" requirement and Houston

Lighting . (12)

The Company contends that using the tax losses of

unregulated affiliates to reduce the income tax expense of a

regulated affiliate violates normalization rules. We reject this

argument for two reasons. First, although no Texas case has

addressed this question directly, the parties in Houston Lighting

apparently raised the issue of normalization violations in their

motion for rehearing. (13) In his dissent to the court's overruling

of the motion for rehearing, Justice Wallace asserted that taxable

revenues and deductible expenses must be segregated on the basis of

whether they are generated by a utility or non-utility. Id. He

also warned that permitting a deduction to go to the entity that

did not bear the loss could cause the I.R.S. to deny the utility

the right to depreciate its assets on an accelerated basis, an

argument the Company vigorously presses in this case. No other

member of the supreme court joined Justice Wallace's dissent; we

therefore conclude that the supreme court rejected the dissent's

contentions.

Secondly, we believe that the very text of PURA

§ 41(c)(2) refutes the Company's contention that reducing a

utility's tax expense because of losses by non-regulated affiliates

violates normalization rules. If the first sentence of PURA

§ 41(c)(2) requires a separate computation, as we think it does,

consolidation must mean something more than elimination of

intercompany profit and amortization of investment tax credits. We

believe that it requires the Commission to include in the Company's

tax expense any losses that may reduce the utility's tax liability,

even if unregulated affiliates suffered the losses. As discussed

above, "normalization" is an accounting method for depreciation

deductions; it does not speak to the issue of reducing a utility's

tax expense because of its affiliates' losses.

The Company argues that it receives no benefit from a

consolidation of tax returns. It explains that it determines its

separate income-tax liability and pays that amount to its parent

corporation. The parent, GTE Corporation, then pays the

consolidated-tax liability and distributes the amount left over to

those subsidiaries whose investments, expenses or losses gave rise

to the tax benefit. We do not pass on the question whether it was

advantageous for the Company to consolidate returns; this is a

question for the Commission. We do believe, however, that the

Commission was required by statute to find either (1) that it was

not advantageous for the Company to consolidate returns or (2) that

the Commission had computed taxes as though a consolidated return

were filed and the utility had received its fair share of savings

from the consolidated return. The Commission cannot satisfy the

explicit requirements of the statute merely by a finding that the

Company's income-tax expense should not be adjusted for

consolidated tax savings. (14)

D. Basis for Reversal

In their motions for rehearing, both the Company and the

Commission argue that extensive underlying findings of fact support

the Commission's ultimate findings. They mistake the basis for the

Court's holding, however. The issue is not whether the Commission

made the underlying facts required by APTRA § 16(b), but whether it

followed its governing statute, PURA § 41(c)(2). Disobeying the

statutory guidelines is a ground for reversal by a reviewing court.

APTRA § 19(e)(1).

Disallowed-Expense Deductions

The Company incurs certain operating expenses which PURA

§ 41(c)(1) and (3) prohibit the Company to include in its operating

expenses for rate-making purposes. These include lobbying

expenses, certain advertising expenses, and payments to various

affiliates. The Cities and Public Counsel contend the Commission

erred by not requiring the Company to pass on to its customers,

through the rate calculation, the tax deductions taken for these

"disallowed expenses." We agree.

The Texas Supreme Court held, in Houston Lighting , that

any tax savings actually enjoyed by a utility should inure to the

benefit of ratepayers. See also Suburban Utility , 652 S.W.2d at

362-64 . In Houston Lighting , the utility actually took a tax

deduction for expenses incurred in the management of its Allen's

Creek Nuclear Plant, which expenses the Commission had disallowed

in computing the utility's costs of service for ratemaking

purposes. Even though the utility could not pass on to ratepayers

the expenses it had incurred in connection with the nuclear plant,

the court held the utility must include, in its rate calculation,

the tax savings obtained when deductions were taken for these

expenses in calculating the utility's income-tax liability.

In regard to the tax deductions taken for "disallowed

expenses," the Commission's order includes two "Conclusions of

Law":

CL 14. Section 43(c)(3) [sic] prohibits the Commission

from considering for rate-making purposes any expenditure

found to be unreasonable. To include disallowed expenses

in the computation of income taxes is to consider them

for rate-making purposes in violation of section 43(c)(3)

[sic].

CL 16. Including disallowed expenses in the computation

of federal income tax expense violates the consistency

requirement in the normalization rules. Accordingly,

such a treatment would violate the requirement in PURA

and the Commission's substantive rules requiring

utilities to compute federal income taxes on a normalized

basis.

The first conclusion conflicts with the supreme court's holding in

Houston Lighting that any tax savings taken by a utility must inure

to the benefit of the ratepayers, regardless of whether the expense

bringing about the deduction is includable in the utility's cost of

service under PURA § 41(c)(3).

The Company argues (as the Commission stated in its

Conclusion of Law 14) that including deductions taken for

disallowed expenses in a utility's rate is equivalent to taking

into account a "disallowed expense" in ratemaking, in violation of

PURA § 41(c)(3). (15)

We believe the matter settled, however, by the

holding in Houston Lighting . Furthermore, the issue does not

concern a violation of § 41(c)(3), but rather compliance with § 39

and Houston Lighting . Passing a deduction on to ratepayers is not

the same thing as considering a "disallowed" expense for ratemaking

purposes under § 41(c)(3). The purpose of § 41(c)(3) is to ensure

that utilities do not pass on to ratepayers their expenses for

unreasonable costs or costs incurred which are not necessary for

the supplying of utility services, and to ensure that utilities

recover only that amount of revenue permitted by PURA § 39(a) -- "a

reasonable return on its invested capital . . . over and above its

reasonable and necessary operating expenses." The terms of PURA

§ 41(c)(3) forbid passing along to ratepayers certain expenses , but

say nothing of savings .

For the reasons stated, we sustain the point of error

raised by Public Counsel and the Cities regarding disallowed-expense deductions. APTRA § 19(e)(1).

EFFECTIVE DATE OF THE COMMISSION'S FINAL ORDER

The provisions of PURA § 43 govern when a utility wishes

to change its existing rates. The utility must file in the

Commission a statement of intent to change its rates, including

therein a schedule of the proposed new rates and the date they are

to become effective. PURA § 43(a). If the schedule portends a

"major change" in rates, as defined in PURA § 43(b), the Commission

must "enter on a hearing to determine the propriety of such

change." "Pending the hearing and decision," however, the

Commission may suspend the effective date of the utility's proposed

new rates for as many as "150 days beyond the date on which the

schedule would otherwise go into effect." PURA § 43(d). If the

Commission suspends the proposed rate schedule, the utility's

existing rates continue in force unless the Commission, in its

discretion, establishes temporary rates in lieu of the existing

rates. Id. If the Commission suspends the utility's existing

rates but fails to determine within 150 days the utility's

rate-change application, the utility may unilaterally implement a

system of unofficial rates of its own choosing, not to exceed the

proposed rates, provided the utility files and the Commission

approves a bond to secure the utility's obligation to refund or

credit any excess produced by the unofficial rates over and above

the rates finally determined by the Commission. PURA § 43(e).

After hearing, the Commission must determine and fix the utility's

level of rates if the agency finds the proposed rates "unreasonable

or in any way in violation of any provision of law." PURA § 43(f).

The Commission must include the rates fixed by it in an order

"served upon the utility," and "these rates are thereafter to be

observed until changed, as provided by" PURA. Id.

Not all rate changes are initiated by a utility. It is

the Commission's duty "to insure that every rate made, demanded, or

received by any public utility . . . shall be just and reasonable,"

and not "unreasonably preferential, prejudicial, or discriminatory,

but . . . sufficient, equitable, and consistent in application to

each class of consumers." PURA § 38. Accordingly, the Commission

itself is authorized to initiate a rate-change proceeding "on its

own motion or on complaint by any affected person." PURA § 42;

see, e.g. , P.U.C. of Texas v. Pedernales Elec. Co-op. , 678 S.W.2d

214 (Tex. App. 1984, writ ref'd n.r.e.). If the Commission, after

reasonable notice and hearing, finds in such a case "that the

existing rates of any public utility for any service are

unreasonable or in any way in violation of any provision of law,"

the Commission "shall determine the just and reasonable rates . .

. to be thereafter observed and in force, and shall fix the same by

order to be served on the public utility." Id. These "rates shall

constitute the legal rates of the public utility until changed as

provided in" PURA. Id.

The record of agency proceedings and the briefs indicate

that the Company first initiated, in February 1984, a rate-change

proceeding under PURA § 43. Its proposed rates were suspended for

150 days, and continued to be suspended by agreement for an

extended period thereafter. The Commission did not establish

temporary rates, and the Company did not implement a system of

unofficial "bonded" rates. The Company thus continued to charge,

pendente lite, its existing rates.

By an amendment of the tax code, effective October 1,

1985, the Legislature excluded from the gross-receipts tax any sums

received by a utility from its sale of telecommunication services.

Simultaneously, however, the amendment included the sale of such

services within the scope of the sales tax. See 1985 Tex. Gen.

Laws, ch. 206, § 10, at 793 [since repealed]; 1959 Tex. Gen. Laws,

3d C.S., ch. 1, art. 11.06, at 304 [since repealed]; 1985 Tex. Gen.

Laws, ch. 206, § 3, at 792 [since amended, now codified as Tex. Tax

Code Ann. § 151.0101 (a)(6) (Supp. 1991)]; Tex. Tax Code Ann.

§ 151.010 (Supp. 1991).

The Company, after October 1, 1985, began including in

its customer invoices a "surcharge" to collect the sales tax while

continuing to charge for its telecommunication services according

to its existing rates. The Company's collection of the sales tax

was, of course, neutral in its effect on the Company, which simply

remitted those collections to the State. But the calculation of

charges according to the Company's existing rates resulted in a

"windfall" in a certain sense: because the Company was no longer

subject to the gross-receipts tax, the existing rates yielded the

Company an equivalent increase in net income.

In 1986, the Cities complained to the Commission

regarding "the double collection of state taxes," and the

Commission apparently initiated a temporary-rate proceeding under

PURA § 43(d). Before this was completed, however, the Company sued

in district court to enjoin the Commission proceeding. The court

did not enjoin the proceeding, but the temporary-rate issue was

apparently abandoned by all parties and the Company continued to

charge its existing rates. (16)

On March 27, 1987, the Company withdrew its original

application for a rate increase according to the "package" which

accompanied its statement of intent. On June 1, 1988, however, the

Company filed a new "package," proposing rates that would increase

its annual intrastate revenues by about $81.4 million.

Although the record indicates that the Company's proposed

rates were suspended, it does not indicate that the Commission

established temporary rates or that the Company implemented a

system of unofficial "bonded" rates subject to refund.

After final hearing, the Commission required the Company

to reduce its rates as necessary to diminish its annual revenue by

about $59 million, and to refund to its customers, by credits on

future invoices, some $140 million. The Commission's final order

also determined: (1) the Commission possessed authority under PURA

§ 42 and § 43 to make new rates retroactive to the date the General

Counsel filed an answer to the Company's first application or the

date the Company filed its second application; (2) PURA § 43(i)

(dealing with rates proposed by a "local exchange company") "does

not make the Commission's retroactive rate-making authority

contingent on the date of its final determination in this case";

and (3) the rates required by the Commission's final order would be

effective January 1, 1987 "in order to do equity in light of [the

Company's] dilatory tactics . . . in this case" and because "[t]he

gross receipts taxes and federal income taxes embedded in the

company's rates were at higher levels than the company actually

paid since that date." The district court reversed the

Commission's order because it purported to fix the effective date

of the Company's rate retroactively. We agree with this holding

and the resulting reversal of the Commission order.

On appeal to this Court, the Cities, State Purchasing,

Public Counsel, and the Commission complain that the district court

erred in reversing the retroactive effective date of the order.

The Cities complain that the Commission did not go far enough back

in time when it gave retroactive effect to its new rates--that the

effective date of January 1, 1987, still permitted the Company a

"windfall" by reason of its collecting the sales tax while being

exempt from the gross-receipts tax during the calendar year 1986.

Because we hold PURA § 42 and § 43(f) preclude the Commission from

making its official rates effective at a date earlier than that of

its final order under either statute, we will overrule the parties'

points of error regarding retroactivity. We need not, in

consequence, discuss the Cities' contention that the Commission

should have set an effective date for the rate decrease which would

have allowed ratepayers to recover the "over-collection" received

by the Company in 1986.

We have held previously that PURA does not authorize the

Commission to make its new official rates effective at a date

earlier than the date of the order fixing those rates. See Texas

Ass'n (TEXALTEL) v. Public Utility , 798 S.W.2d 875, 882 (Tex. App.

1990, writ denied); Southwestern Bell, etc. v. Public Util., etc. ,

615 S.W.2d 947, 955 (Tex. Civ. App. 1981, writ ref'd n.r.e., 622

S.W.2d 82 ). See also Public Utilities Com. v. United Fuel Gas Co. ,

317 U.S. 456, 464 (1943). We shall, however, expand on the

reasoning by which we reached that view.

The purpose of making rates effective at a date earlier

than the order fixing them is to compensate for the effects of

"regulatory lag," or unusual delay in the proceeding in which the

Commission fixes the rates. Railroad Com'n of Texas v. Lone Star

Gas Co. , 656 S.W.2d 421, 427 (Tex. 1983). Whether any regulatory

body possesses the power to make its new rates effective earlier

than the date it fixes the rates is a question of statutory

construction -- did the legislature delegate that power to the

Commission?

The issue thus comes within the general rules: a

commission has only those specific powers conferred upon the agency

by law, in clear and express language , as well as any power

necessary to make effective any specific power that is granted in

clear and express language. One may not, however, on a theory of

necessary implication, impute to the commission a power, function,

or duty that really amounts to a new and additional power or one

that contradicts a relevant statute , no matter how expedient the

new power might be for purposes of administration. See Sexton v.

Mount Olivet Cemetery Ass'n , 720 S.W.2d 129, 137-38 (Tex. App.

1986, writ ref'd n.r.e.) and authorities cited. Moreover, the

possible implication of a power does not extend so far as to vest

in the agency an implied power to supplant a method or procedure

that the legislature itself has designated for the circumstances.

The legislature's method or procedure prevails over that of the

agency; "the prescribed method excludes all others, and must be

followed." Cobra Oil & Gas Corp. v. Sadler , 447 S.W.2d 887, 892

(Tex. 1968); Foster v. City of Waco , 255 S.W. 1104, 1105 (Tex.

1923); Balios v. Texas Dept. of Public Safety , 733 S.W.2d 308, 311

(Tex. App. 1987, writ ref'd).

The only relevant statutory provisions, requiring

construction, are those contained in PURA. Nothing in PURA

purports to delegate to the Commission, in clear and express

language, a power to assign new rates an effective date earlier

than the order in which they are fixed . Indeed, PURA adopts a

uniform principle that such rates shall be effective no earlier

than the date fixing them. This is declared most explicitly in

PURA § 26(g), a statute not applicable here, but it is also

declared explicitly in those that are applicable -- PURA §§ 42 and

43(e). Both direct the Commission to determine and fix just and

reasonable rates in an order served on the utility, and conclude

with the mandate that such rates shall "thereafter" be "observed"

until changed in a manner authorized by PURA. The word thereafter

"in terms thus gives the Commission power to prescribe such rates

prospectively only . . . . There is no basis in the statute for

concluding the Commission's orders can be retroactive to the date

when the Commission's inquiry into the rates was begun; on the

contrary, the explicit language of the statute precludes such a

construction ." Public Utilities Com. v. United Fuel Gas Co. , 317

U.S. 456, 464 (1942) (emphasis added). Far from conferring "in

clear and express language" the power to make rates effective at a

date earlier than the order fixing them, that language provides

precisely to the contrary. We shall, nevertheless, continue in our

analysis of the Commission's claim to have the power by

implication.

The Commission determined that the early effective date

of the new rates was required "in order to do equity in light of

[the Company's] dilatory tactics . . . ." This falls squarely

within the purpose of a legislative grant of the power to make

rates effective at a date earlier than the date they are fixed --

the purpose of providing a remedy for the effects of "regulatory

lag." But the legislature provided its own statutory remedy to

serve that purpose. We refer, of course, to the system of rate

suspension, temporary rates fixed by the Commission, and "bonded-in" rates fixed by the utility when unusual delay occurs, as this

system is established in PURA § 43(d) and (e) to provide for rates

effective pendente lite. There is no similar provision for

temporary and "bonded-in" rates in Commission-initiated rate

proceedings under PURA § 42, the legislature being content

evidently to rely upon the Commission's diligence in ferreting out

when and to what extent a utility's rates have become unjust,

unreasonable, or in violation of law, using its investigative

powers for the purpose, as it did in P.U.C. of Texas v. Pedernales

Elec. Co-op., Inc. , 678 S.W.2d 214 (Tex. App. 1984, writ ref'd

n.r.e.).

As indicated in Cobra Oil & Gas Corp. and the other

decisions listed above, we are not free to impute to the

Commission, by necessary implication, a power to provide its own

remedy for "regulatory lag" to be utilized in lieu of the

legislatively prescribed remedy, especially when the Commission's

remedy contradicts the clear and express language that utility

rates shall be effective after the Commission's order fixing them.

In the present case, the terms of PURA §§ 43(d) empowered the

Commission to fix temporary rates to serve the purpose of

compensating for the Company's "dilatory tactics." No additional

power was required by way of necessary implication.

In its motion for rehearing, Public Counsel argues that

if the Commission lacks the power to make rates effective at a date

earlier than the order that fixes them, then the Commission should

have the power under PURA § 42 to suspend a utility's existing

rates and to set temporary rates fixed by the Commission. (The

Commission initiated a proceeding under PURA § 42 after the Company

initiated its own rate-change application under PURA § 43.) As

proof of the Commission's need, Public Counsel cites the length of

the proceeding in the present cause, which began in 1984. We

reject the argument. The power to suspend the Company's rates and

to establish temporary rates existed in the present case by virtue

of PURA § 43(d), for the Company itself initiated a proceeding to

change its rates under PURA § 43. This is, therefore, not an apt

case to raise the contention. Moreover, it is not our place to

supply omissions in legislation concerning the problem of

"regulatory lag"; the change should come from the legislature.

Lone Star Gas Co. , 656 S.W.2d at 427 . More importantly, perhaps,

it appears to us that such power might be inconsistent with the

general tenor and purpose of PURA § 42. In those proceedings, the

legislature elected apparently to rely upon a diligent Commission

in initiating rate inquiries on its own initiative. In any case,

we are not free in the present case to consider whether such a

power exists by necessary implication; and, of course, we do not

purport to make a decision in the matter.

In its motion for rehearing, the Commission contends we

err in finding that PURA does not authorize the Commission to make

its new rates effective earlier than the date of its order and

service of the order on the utility. The Commission argues first

from PURA § 2, which requires the Commission to balance the

interests of utilities and consumers in setting rates. (17) We reject

the argument. PURA §§ 42 and 43 provide expressly and clearly that

rates shall be effective after they are found to be just and

reasonable by the Commission, in an order served upon the utility,

as discussed above at length. If the Commission possessed the

power to make its new rates effective at an earlier time, by

necessary implication from PURA § 2, then the more specific

language of PURA §§ 42 and 43 would be unnecessary and indeed

meaningless. It is a familiar rule of statutory construction, of

course, that a specific provision governs and qualifies a general

provision. Ayre v. Brown & Root , 678 S.W.2d 564, 566 (Tex. App.

1984, writ ref'd n.r.e.).

The Commission argues next that our reasoning and

interpretation of PURA §§ 42 and 43 are contrary to the precedents

mentioned below.

We do not believe the supreme court rejected our views by

its decision in Railroad Com'n v. Moran Utilities Co. , 728 S.W.2d

764 (Tex. 1987). There, the court expressly based its decision

solely on an explicit provision for the refund of illegally

collected sums, as authorized by the terms of Tex. Rev. Civ. Stat.

Ann. art. 6055 (1962). Moran Utilities , 728 S.W.2d at 767 n.2.

The court noted, moreover, that reasonable statutory procedures

affecting a utility's rates (such as those setting the effective

date of rate orders) do not amount to an unconstitutional

confiscation of the utility's property. Id. at 768 .

Nor do we believe the supreme court rejected our views by

its decision in Lone Star Gas Co. The court in Lone Star expressly

limited the effect of its decision to cases arising before

September 1, 1983, the effective date of "the new Gas [Utility]

Regulatory Act." Lone Star Gas Co. , 656 S.W.2d at 427 . It is not

within our power to override this express limitation concerning the

effect of the supreme court's decision. The significance of

September 1, 1983 was that it was the effective date of the new Gas

Utility Regulatory Act, an enactment that made express provision to

compensate for regulatory lag -- provisions allowing for "bonded-in" temporary rates in terms almost identical to those found in

PURA § 43(e). 1983 Tex. Gen. Laws, ch. 263, § 20, at 1209. This

provision of the new enactment cured the problem raised in Lone

Star Gas Co. -- there was no provision for a utility to "bond-in"

rates in rate cases initiated before the governing body of a

municipality (the City of Kaufman in that case) and reviewed do

novo by the Commission: "The rates within the city of Kaufman over

which the Commission exercised appellate jurisdiction and which

represent most of Lone Star's revenues in controversy are not

subject to being `bonded in.'" Lone Star Gas Co. , 656 S.W.2d at

425 ; see also Arkansas Louisiana Gas Co. v. Railroad Commission of

Texas , 586 S.W.2d 643 (Tex. Civ. App.--Austin 1979, writ ref'd

n.r.e.). Moreover, the new enactment provided expressly that

"[a]ny rates, whether temporary or permanent, set by the railroad

commission shall be prospective and observed from and after the

applicable order of the commission, except interim rate orders

necessary to effect uniform systemwide rates." 1983 Tex. Gen Laws,

supra , at 1196. In summary, we believe the supreme court held as

it did in Lone Star Gas Co. because there was in the relevant

regulatory system no provision prescribed by the legislature to

compensate for the effects of unusual regulatory lag; hence it was

permissible to rely upon an implied power. Such is not the present

case, of course, where the legislature has provided for "bonded-in"

rates for that purpose and those statutory provisions in PURA

§ 43(d) were available for the purpose. In Lone Star Gas Co. the

implied power did not supplant a legislative remedy; in the present

cause, it would.

Finally, State Purchasing argues in its motion for

rehearing that the decision on the effective-date issue conflicts

with a recent case decided by this Court, City of El Paso v. Public

Utility Com'n , No. 3-90-007-CV (Tex. App. May 8, 1991) (motions for

rehearing pending). In City of El Paso , this Court allowed a

utility which incurred increased operating costs to increase its

rates to compensate for the "regulatory lag" between the time when

it incurred the costs and the time when new rates went into effect.

State Purchasing argues that the utility was permitted to charge

future customers for past underrecoveries by increasing prospective

rates, amounting to a retroactive rate increase.

We disagree with State Purchasing's contention that the

cases are inconsistent. The retroactive ratemaking issue in City

of El Paso involved PURA § 41(a), which states that utility rates

must be based upon the original cost of property used by and useful

to the public utility in providing service. The Legislature, then,

has explicitly authorized the Commission to consider the costs of

invested capital in setting rates. Although this may have the

effect of imposing costs incurred during the period of regulatory

lag on utility customers, including these costs in the utility's

rate base is consistent with the legislative intent. In contrast,

PURA §§ 42 and 43 forbid the Commission from making its rates

effective before the date the rate is fixed and the rate order is

served upon the utility to compensate for regulatory lag.

We therefore hold that the district court did not err in

reversing the Commission's order insofar as it purported to

implement a retroactive effective date. (18)

The points of error

regarding that issue are overruled. (19)

THE DISTRICT-COURT JUDGMENT

The district-court judgment reverses the Commission's

final order on the Company's single complaint that the Commission

erred as a matter of law when the agency assigned the new rates an

effective date of January 1, 1987. Concerning the Company's other

complaints and those of the other parties in the cause, the

district-court judgment declares them moot or decided adversely to

the party making them, without identifying any particular complaint

or party.

We affirm that portion of the district-court judgment

that reverses the Commission's final order on the ground that that

order purports to set an effective date for the rate change earlier

than the date of the order fixing the rate.

After reversing the Commission's final order, however,

the district-court judgment goes further. It directs the

Commission to implement a surcharge that would allow the Company to

recover any sums previously refunded by the Company, together with

"interest and other costs associated with such refund." The

judgment expressly leaves to the Commission the issue of whether

the surcharge should include an amount allowing the Company to

recover "attorneys fees." We disagree with this aspect of the

district court judgment, and remand the cause to that court with

instruction that the remand to the agency be general.

The Revised Model State Administrative Procedure Act of

1961 (from which APTRA was taken) allowed reviewing courts to

modify agency orders in appropriate circumstances. This

authorization to modify orders was deleted in APTRA "in order to

retain the Texas rule that courts may not write certain orders for

the agency or direct it to do so in specific terms." D. McCalla,

The Administrative Procedure and Texas Register Act , 28 Baylor L.

Rev. 445 , 492 (1976).

The Texas Supreme Court had stated earlier that a court

"has the right to review the action of the Railroad Commission, and

to strike its orders down if they are illegal; but it has no

authority to write a proration order for the Commission, nor to

prescribe the terms of the subsequent order to be entered by the

Commission." Marrs v. Railroad Commission , 177 S.W.2d 941, 950

(Tex. 1944). The court added that the discretion to devise a

proration scheme had been committed to the Railroad Commission, and

it would be a usurpation of the Commission's authority for the

court to prescribe the terms of the order. Id. That same

reasoning applies in this case; a reviewing court may not make

substantive decisions committed by statute to the Public Utility

Commission.

In its motion for rehearing, the Company cites opinions

by this Court for the correct proposition that a reviewing court

may control the scope of a remand to the agency. See First Savings

& Loan Ass'n of Del Rio, Tex. v. Lewis , 512 S.W.2d 62, 64 (Tex.

Civ. App. 1974, writ ref'd n.r.e.). This Court has also stated in

a utility rate case that if a reviewing court sustains a utility's

allegations of error, "the proper judgment will be one of remand to

the agency with instructions to re-determine the utility's annual

revenue increase in light of the final decisions made upon the

utility's various contentions of error." Southwestern Bell, etc. v.

Public Util., etc. , 615 S.W.2d 947, 955 (Tex. Civ. App. 1981, writ

ref'd n.r.e., 622 S.W.2d 82 ). It does not follow, however, that

the power to control the scope of a remand necessarily authorizes

a district court to modify the agency's final order. As the

supreme court declared in Marrs , the terms of the final order are

matters committed to agency discretion as long as the agency

corrects the errors sustained on appeal.

The terms of APTRA § 19(e) authorize expressly only a

general remand when a party's substantial rights are prejudiced by

an agency error of the kind described in subsections (1) through

(6). It is sufficient that the cause must be remanded generally to

the Commission in order to effectuate our decision and judgment,

which rests on the several grounds given above. (20)

We therefore affirm that part of trial-court judgment

reversing the Commission's order. We reverse that judgment insofar

as it affirms the Commission's order. We remand the cause to the

district court with instructions that the cause be remanded to the

Commission for proceedings not inconsistent with our opinion.

John Powers, Justice

[Before Justices Powers, Aboussie and Kidd]

Affirmed in Part; Reversed and Remanded in Part with Instructions

Filed: November 13, 1991

[Publish]

1. The Cities' briefs on appeal list 88 cities, but only 86 are shown on the Cities' notice of

appeal.

2. Throughout our opinion we have added the emphasis where it appears in quotations.

3. 3 Throughout our discussion, we refer to the Company's common stock as its "common

equity" merely because we do not wish to deviate from the terminology used by the Commission

in the proceeding below. We note, however, that the term "equity" is broadly defined as "the

spirit and the habit of fairness, justness, and right dealing which would regulate the intercourse

of men with men, -- the rule of doing to all others as we desire them to do to us." Black's Law

Dictionary, at 634 (rev. 4th ed. 1968). The term has also come to mean "the remaining interest

belonging to one who has pledged or mortgaged his property, or the surplus of value which may

remain after the property has been disposed of for the satisfaction of liens." Id.

Although some use the term "common equity" to mean "common stock," see

Utilities Com'n v. Public Staff , 323 N.C. 481 , 374 S.E.2d 361, 364 (1988); Hawes, Utility

Holding Companies , § 5.07 (1984), we do not approve such misuse of the term "equity." We

employ that usage only for the reason stated above.

4. 4 The 10.85% figure is the cost of equity that Public Counsel's witness Carol Szerszen

recommended during her cross examination. We note that the Examiner's Report attributes to

Szerszen a recommended cost of equity of 10.73%.

5. 5 GTE-Southwest argues that because it and GTE Directories are involved in a joint venture,

it does not pay an expense to GTE Directories, and the arrangement therefore does not come

within the scope of § 41 (c)(1). The administrative law judge explicitly rejected this argument,

and the Commission made no findings that would support such a position. We may not find facts

which the Commission declined to find. See Gulf Land Co. v. Atlantic Refining Co. , 131 S.W.2d

73, 84 (Tex. 1939) ("[T]he Commission determines primarily and finally all fact issues,--that is,

all issues that are not established as a matter of law.").

6. 6 We need not address the Cities' other grounds of attack on Finding of Fact 16, as we sustain

the Cities' point of error for the reasons stated in the text of our opinion.

Furthermore, the Company contends and the Commission concluded in its "Finding

of Fact 16," the Commission could not equitably disallow expenses incurred by the Company in

its transactions with GTE Directories and, simultaneously, include in the rate calculation revenues

received from the directory sales. We disagree. As Commissioner Campbell pointed out in her

dissent, the payments to GTE Directories comprise only part of the expense the Company incurs

in connection with the publication of the directories. The Commission did not "disallow" other

expenses incurred in the publication of the directories which are not payments to affiliates.

7. 7 Other "Conclusions of Law" relevant to the consolidated-tax-return issue include

the following:

CL 13. Section 27(e) [sic] requires utilities to keep separate accounts to show

profits and losses from the sale of equipment not integral to the provision of utility

service, and it prohibits the Commission from considering such profits in

determining a utility's rates.

CL 15. Because GTE Corp's consolidated return assigns to each subsidiary its

proper income tax liability, reducing GTE Southwest's income-tax expense would

reduce its deferred federal income-tax liability in violation of the normalization

provisions of the Internal Revenue Code and related regulations. Such a treatment

would also violate the consistency requirement in the normalization rules. As a

result, it would violate the requirement in PURA and the Commission's substantive

rules requiring utilities to compute federal income taxes on a normalized basis.

8. "SCHEDULE V"

(Appended to Commission's Order)

Public Utility Commission of Texas

General Telephone Company of the Southwest - Docket No. 5610

(Revised)

Federal Income Taxes

(000's)

Examiner Change Final Order

Return $136,547 (2,306) $134,241

Less:

Interest Expense 65,965 1 65,966

Amort. of Excess DFIT 5,049 1,888 6,937

Amortization of ITC 10,736 0 10,736

Preferred Stock Dividend 15 0 15

Consolidated Tax Savings 0 0 0

Disallowed Expenses 0 0 0

Plus:

Additional Depreciation 7,487 0 7,487

80% Limitation on Meals 213 0 213

Taxable Income After

Income Taxes 62,482 58,287

Tax Factor 0.51515152 0.51515152

Tax @ 34% 32,188 30,027

Less:

Amort. of Excess DFIT 5,049 1,888 6,937

Amortization of ITC 10,736 0 10,736

Total Federal Income Taxes $16,403 $12,354

9.

9 We assume the reference to the examiner's report contained a typographical error. The

discussion of the consolidated-tax-return issue is in section III.C. Section III.B. discusses a

completely different issue.

10.

10 The utility can avoid the computation required by PURA § 41(c)(2) by convincing the

regulatory authority that it is reasonable to choose not to consolidate returns. Perhaps the

Commission's conclusory determinations can be said to amount to a determination that the

exception in PURA § 41(c)(2) applies: that the Company had "shown to the satisfaction of the

[Commission] that it was reasonable to choose not to consolidate returns." In either case,

however, the Commission's conclusory determinations refer necessarily to the statutory factors

that PURA § 41(c)(2) required the Commission to consider in calculating the Company's income-tax liability for inclusion in its operating expenses for rate-making purposes. Thus, if the

Commission believed that the exception applied in this case, it was bound to include in its final

order an ultimate finding to that effect, as well as findings of basic or underlying fact that

supported its conclusory determinations. APTRA § 16(b); Texas Health Fac. v. Charter Medical-Dallas , 665 S.W.2d 446, 451 (Tex. 1984). The absence of an ultimate finding and supporting

findings implies that the Commission did not act upon the exception carved from the general rule.

See APTRA § 19(e)(1).

11.

11 It has been said that "the imprecision of the 'actual taxes paid' formulation is exceeded only

by the name of the Holy Roman Empire: two out of the three words are wrong. Taxes, yes. But

not necessarily actual taxes, since inexact estimations are often allowed." City of Charlottesville,

VA. v. F.E.R.C. , 774 F.2d 1205, 1215 (D.C. Cir. 1985), cert. denied , 475 U.S. 1108 (1986)

(emphasis original). Furthermore, as Justice Scalia points out in the majority opinion in

Charlottesville , taxes included in the rate calculation are often not "paid," but instead "incurred,"

as "normalization" rules permit utilities to pass along to ratepayers, on a straight-line schedule,

taxes deferred by the use of accelerated depreciation. Charlottesville , 774 F.2d at 1215 .

12.

12 We note that the Internal Revenue Service has withdrawn the notice of a proposed rule

entitled Normalization: Inconsistent Procedures and Adjustments , 55 Fed. Reg. 49294 (1990),

which addressed the extent to which "certain utility ratemaking procedures and adjustments that

are based on tax savings attributable to the filing of a consolidated tax return" violate

normalization requirements. See 56 Fed. Reg. 19825 (1991).

13.

13 In Houston Lighting the Commission disallowed $166 million as imprudent expenses for

ratemaking purposes, but required the utility to pass on to its ratepayers the tax write-off for these

expenses. The supreme court required the shareholders of Houston Lighting & Power's parent

corporation, Houston Industries, Inc., to bear the losses. Houston Lighting , 748 S.W.2d at 443

(Wallace, J., dissenting). In Houston Lighting the unregulated entity had to bear the losses of the

regulated affiliate; here, the regulated affiliate had to bear the losses of unregulated affiliates. We

do not believe this distinction warrants a different result.

14.

14 While GTE-Southwest may receive no tax savings from this method, the parent

corporation surely does. It benefits to the extent of the time value of money that it saves from

deferred taxes. Moreover, GTE-Southwest finds itself in the position of arguing that it should be

allowed to subsidize its affiliates with the revenue it receives from ratepayers. We do not believe

this argument is consistent with the holding in Houston Lighting .

15. The following are relevant portions of PURA § 41(c)(3):

Expenses Disallowed. The regulatory authority shall not consider for

ratemaking purposes the following expenses:

(A) legislative advocacy expenses, whether made directly or indirectly,

including but not limited to legislative advocacy expenses included in

trade association dues;

* * * * *

(D) any expenditure found by the regulatory authority to be

unreasonable, unnecessary, or not in the public interest, including but

not limited to executive salaries, advertising expenses, legal expenses,

and civil penalties or fines.

16.

16 State Purchasing and the Commission both assert that the Commission did not abandon the

temporary-rate issue, but instead was "judicially prevented" from setting such rates. We disagree

with their contention. The record reflects that the district judge never signed an order enjoining

the Commission from setting temporary rates. The Commission apparently pursued the matter

no further after receiving a letter from the district judge stating he was prepared to issue a

temporary injunction. The Commission cannot now complain of the district judge's action when

it failed to secure a ruling on the temporary-rate issue.

17.

17 PURA § 2 reads in part, "The purpose of this Act is to establish a comprehensive

regulatory system which is adequate to the task of regulating public utilities as defined by this Act,

to assure rates, operations, and services which are just and reasonable to the consumers and to the

utilities." Public Utility Regulatory Act, Tex. Rev. Civ. Stat. Ann. art. 1446c, § 2 (Supp. 1991).

18.

18 Because we base our holding on the PURA prohibition against retroactive ratemaking, we

need not address Public Counsel's fourth point of error which contends the district court erred in

its conclusion that setting a retroactive effective date for a rate change is unconstitutional.

19.

19 Because we hold that PURA prohibits the Commission from setting an effective date for a

rate change which precedes the final order, we need not address an argument posed by the Cities

and State Purchasing that the Commission's use of a retroactive effective date constituted proper

punishment for the Company's use of unspecified "dilatory tactics."

20.

20 Because we reverse the district-court judgment on the grounds stated above, we need not

address the Commission's point of error alleging that the district court erred in not sustaining its

pleas to the jurisdiction and motions to strike the intervention of several parties.

In its motion for rehearing, the Commission contends that this Court should have

decided whether Public Counsel was entitled to intervene. The Commission asserts that Public

Counsel failed to invoke the jurisdiction of the district court. According to the Commission, a

party's right to appear before the court is a fundamental issue; therefore, this Court's reversal of

other legal rulings by the district court does not settle the question whether the district court had

jurisdiction over Public Counsel and its claims.

We reject this argument. This Court is to address every issue "necessary to final

disposition of the appeal." Tex. R. App. P. Ann. 90(a) (Pamph. 1991). Deciding the issue of

Public Counsel's right to intervene was not necessary to the Court's disposition because the Cities

raised the same points of error that Public Counsel raised.