Opinion

Texas Utilities

IN THE COURT OF APPEALS, THIRD DISTRICT OF TEXAS,

AT AUSTIN

NO. 3-92-548-CV

TEXAS UTILITIES ELECTRIC COMPANY, PUBLIC UTILITY COMMISSION,

OFFICE OF PUBLIC UTILITY COUNSEL, AND CITIES OF ARLINGTON, ET AL.,

APPELLANTS

vs.

PUBLIC UTILITY COMMISSION, TEXAS UTILITIES ELECTRIC COMPANY,

OFFICE OF PUBLIC UTILITY COUNSEL, AND CITIES OF ARLINGTON, ET AL.,

APPELLEES

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 250TH JUDICIAL DISTRICT

NO. 91-16609, HONORABLE JOHN DIETZ, JUDGE PRESIDING

Texas Utilities Electric Company, the Public Utility Commission, the Office of

Public Utility Counsel, and the Cities of Arlington, et al. appeal from a district-court judgment

rendered in a suit for judicial review of the Commission's final order in an electric utility rate case

conducted under the Public Utility Regulatory Act (PURA), Tex. Rev. Civ. Stat. Ann. art 1446c

(West Supp. 1994). (1) The district-court judgment reverses and remands certain aspects of the Commission's final order, and affirms the remainder. We will reverse the district-court

judgment and remand the cause to the district court with instructions that the cause be remanded

to the Commission for further proceedings consistent with our opinion. See Administrative

Procedure Act (APA), Tex. Gov't Code Ann. § 2001.174 (West 1994). (2)

THE CONTROVERSY

Texas Utilities filed its application for a rate increase in January 1990 seeking to

include in its rate base costs associated with Comanche Peak, a newly constructed nuclear power

plant. The utility sought an agency adjudication regarding what portion of its costs it could

include in its rate base as being a "prudent" investment, public interest findings on its

reacquisition of a 12.2 percent ownership interest in the plant, final reconciliation of its fuel costs

and revenues for the period April 1983 to June 1989, and a reduction of its fuel factor for the

period May 1990 to April 1991. After the Commission issued its order, motions for rehearing

were filed and the Commission issued a second order on rehearing. Subsequent motions for

rehearing were overruled by operation of law, and five parties to the rate-making proceeding filed

suit for judicial review in district court. See PURA § 69; APA § 2001.171. The district court

affirmed the Commission order in part and reversed it in part, after which Texas Utilities, Public

Utility Counsel, the Cities, and the Commission each appealed the district-court judgment. (3) For

clarity, we will provide additional facts germane to the various points of error throughout the

opinion.

CONFLICT OF INTEREST

In their first point of error, the Cities and Public Utility Counsel argue that the

chairman of the Commission, Paul Meek, was biased because he had a pecuniary interest in the outcome of the proceedings, and because he was prejudiced in favor of the gas industry. The

allegations of impermissible bias center around Meek's ties with American Petrofina ("Fina").

During the rate-making proceedings, Meek served as chairman of Fina's board, received

retirement benefits from Fina, and held shares of its publicly traded common stock. Fina's direct

sales of natural gas to Texas Utilities from 1989 to 1991 totalled $60,782; indirect revenue from

sales to other Texas Utilities suppliers approximated $104 million. Because of his connections

with Fina, the Cities and Public Utility Counsel claim that Meek's participation in the hearings

precluded the Commission from making impartial findings. The district court found the evidence

insufficient to show that Meek's service on the Commission led to unfair proceedings or

prejudiced substantial rights of the parties. We agree.

PURA provides that no commissioner may, during a period of service with the

Commission, "have any pecuniary interest . . . in any person or corporation or other business

entity a significant portion of whose business consists of furnishing goods or services to public

utilities or affiliated interests . . . ." PURA § 6(b)(1). It is grounds for removal from the

Commission if a member has interests in violation of section 6(b) at the time of his or her

appointment. PURA § 6A. However, "the validity of an action of the commission is not affected

by the fact that it was taken when a ground for removal of a member of the commission existed."

PURA § 6A(b). Meek resigned from the Commission effective April 20, 1992, after the Attorney

General requested that he either sever all ties with Fina or resign from the Commission. Although

Meek was not removed from the Commission because of a conflict of interest pursuant to PURA

section 6A, he did resign in the face of a perceived conflict. Meek's conflict, however, has no

effect on the Commission's order in Docket 9300. PURA § 6A(b). This Court is left, therefore,

with the power to reverse and remand the Commission's order only if Meek's participation

resulted in an order that prejudices substantial rights of the appellants. See APA § 2001.174. (4)

We understand appellants to contend that this Court should reverse the Commission's order

because Meek's interests in Fina resulted in an order that is arbitrary and capricious and a

violation of their constitutional right to a fair and impartial hearing.

In order to prevail, appellants must overcome the presumption that agency members

are persons of conscience and intellectual discipline, capable of judging a particular controversy

fairly on the basis of its own circumstances. United States v. Morgan , 313 U.S. 409, 421 (1941).

Following the United States Supreme Court, we recognize a presumption of honesty and integrity

in those serving as adjudicators. Withrow v. Larkin , 421 U.S. 35, 47 (1975). One may overcome

this presumption by demonstrating that the decisionmaker's mind is "irrevocably closed" on the

matters at issue. Federal Trade Comm'n v. Cement Inst. , 333 U.S. 683, 701 (1948). During

confirmation hearings conducted in May 1990, the Texas Senate fully explored the issue of

Meek's conflict. At that time, aware of Meek's connections with Fina, the Senate satisfied itself

that Meek could execute his duties as commissioner impartially and without prejudice in favor of

the gas industry. Additionally, Meek promised to recuse himself from voting on any contested

issue regarding contracts between public utilities and Fina, a promise he upheld by not reviewing

contracts between Texas Utilities and Fina. (5)

It is well established that absent a showing of incapability to decide a particular

controversy fairly, an administrative officer is not disqualified simply because he or she has

previously taken a position, even in public, on a policy issue related to a particular dispute.

Morgan , 313 U.S. at 421 . In Morgan , the Supreme Court held that the Secretary of Agriculture's

strong views on a particular issue did not make him unfit to exercise his duties in administrative

proceedings relating to those matters. Id. Similarly, in Cement Institute the Court held that

members of the Federal Trade Commission were not disqualified from participating in

adjudicatory proceedings simply because they had previously expressed their opinions that a

pricing system at issue in the proceeding was illegal. Cement Institute , 333 U.S. at 700-01 .

In this appeal, the Cities and Public Utility Counsel question Meek's impartiality

because of a newspaper interview in which he expressed his disappointment with the

Commission's decision to disallow $1.3 billion of Comanche Peak costs. The Supreme Court has

decided, however, that public criticism "is a practice familiar in the long history of . . .

litigation," and that while an administrator may have an underlying philosophy in approaching a

specific case, he or she may still be assumed to be a person of conscience and intellectual

discipline, capable of judging a particular controversy fairly. Morgan , 313 U.S. at 421 .

The Cities and Public Utility Counsel argue that this order should be invalidated,

relying on American Cyanamid Co. v. Federal Trade Commission , 363 F.2d 757 (6th Cir. 1966).

In American Cyanamid , the court invalidated a commission order because one of the

commissioners had previously served as counsel for a Senate subcommittee investigating many

of the same facts and issues that later came before the commission. The court found that the

commissioner's dual investigative and adjudicative experiences with the issues involved in the

hearing created a risk that commission decisions might be based on evidence outside the record.

It was the presentation of nonrecord evidence, not the commissioner's personal viewpoints, that

led the court to invalidate the order. American Cyanamid , 363 F.2d at 767 . In this case,

however, appellants base their request for invalidation of the order on assertions that Meek's

personal views about the gas industry made it impossible for him to decide the issues fairly.

Under the circumstances of this proceeding, we cannot agree.

We do not express any opinion regarding whether Meek should have been removed

from the Commission had he not resigned. This Court is limited to the judicial review enumerated

in APA section 2001.174. We conclude that Meek's involvement with Fina and his opinions

about the gas industry have not been shown by the complaining parties to have resulted in a

deprivation of the right to an impartial and fair hearing before the Commission, nor has it been

shown that he exhibited bias such that his votes were necessarily arbitrary and capricious. The

Cities and Public Utility Counsel's first point of error is overruled.

REACQUISITION OF MINORITY INTERESTS

All appellants bring points of error related to the district court's disposition of the

Commission order disallowing more than $908 million spent to repurchase 12.2 percent of

Comanche Peak from minority interest owners and to settle litigation arising from the joint

ownership of the project. Section 63 of PURA permits the Commission to disallow certain

expenses associated with transactions involving changes in public utility ownership. The

Commission's authority to make disallowances under section 63 is limited to three specific types

of transactions: (1) the acquisition, sale or lease of any plant as an operating unit in the state of

Texas for a total consideration in excess of $100,000; (2) a public utility's merger or consolidation

with another public utility operating in the state; and (3) the sale of fifty percent or more of a

public utility's stock. (6) When any one of these transactions takes place, the utility must file a

report with the Commission, which then investigates the transaction to determine whether it is in

the public interest. In making this determination, the Commission is to consider the reasonable

value of the property, facilities or securities involved. If the Commission finds that the

transaction was not in the public interest, it must "disallow the effect of such transaction if it will

unreasonably affect rates or service." PURA § 63.

In reviewing the costs associated with the construction of Comanche Peak, the

Commission exercised its authority under section 63 to make a disallowance of $908,688,938.

The Commission asserted that it had jurisdiction to make disallowances pursuant to section 63

because Texas Utilities' repurchase of certain minority interests in the Comanche Peak project

constituted the purchase of a plant or unit as an operating system for consideration in excess of

$100,000. Texas Utilities' second motion for rehearing filed with the Commission included an

assignment of error stating:

The Commission erred in concluding that PURA § 63 controls this Commission's

review of [Texas Utilities'] reacquisition of minority owner interests in Comanche

Peak, for the reason that, as a matter of law, PURA § 63 does not apply to the

transfer between joint owners of partial, undivided interests in a plant and does not

apply to a plant under construction that is not operating.

When this second motion for rehearing was overruled by operation of law, Texas Utilities sought

review in the district court, and continued to maintain that the Commission had improperly applied

section 63 to the repurchase of minority interests in the project. As part of its appeal to this

Court, Texas Utilities contends in its second point of error that the Commission's section 63

review was an error of law.

The Cities, Public Utility Counsel, and the Commission each argue that Texas

Utilities has waived its right to challenge the Commission's decision to proceed under section 63

because it was the utility that initially identified section 63 as one of the provisions giving the

Commission jurisdiction over the rate-making proceeding. (7) Administrative agencies, however,

have only those powers that are expressly conferred by statute, together with those necessarily

implied from the authority conferred or the duties imposed. State v. Jackson , 376 S.W.2d 341,

344 (Tex. 1964) (citing Stauffer v. City of San Antonio , 344 S.W.2d 158, 160 (Tex. 1961));

Sexton v. Mount Olivet Cemetery Ass'n , 720 S.W.2d 129, 142 (Tex. App.--Austin 1986, writ ref'd

n.r.e.). Jurisdiction cannot be conferred upon the agency by the parties before it, but rather must

emanate from the statute itself. See Nueces County Water Control & Improvement Dist. v. Texas

Water Rights Comm'n , 481 S.W.2d 924, 929 (Tex. Civ. App.--Austin 1972, writ ref'd n.r.e.) ("If

the statutes do not grant the board the power to do a thing, then it has no such power."). If the

utility's reacquisition of minority interests in Comanche Peak is not one of the specific

transactions identified in section 63 of PURA, the Commission has no jurisdiction to make

disallowances based on the standards set forth in that section; such jurisdiction cannot be

conferred on the Commission simply because the parties have requested or agreed to it.

This Court has the power, as well as the duty, to review the agency's interpretation

and application of a statute. See Railroad Comm'n v. Lone Star Gas Co. , 599 S.W.2d 659, 662

(Tex. Civ. App.--Austin 1980, writ ref'd n.r.e.) (stating that an agency's duty is to carry forward

the directives of statutes, and the courts review agency orders to ensure that statutes are enforced).

In reviewing the Commission's order, we are therefore obliged to determine whether the

repurchase of minority ownership interests is a transaction contemplated by section 63 of PURA.

If it is not, the Commission had no authority to conduct a section 63 review, and we may not

uphold that portion of the order. Accordingly, we first examine the repurchase at issue in this

case to determine if it falls within the scope of transactions the Commission is directed to review

under PURA section 63.

In August 1973, Texas Utilities' corporate predecessors, Dallas Power & Light

Company, Texas Power & Light Company, and Texas Electric Service Company, signed a

memorandum of agreement to design, construct, and operate the Comanche Peak nuclear power

plant. (8) Texas Utilities originally intended to own the entire plant, but was required to sell

ownership interests in the project in order to receive construction permits from the Nuclear

Regulatory Commission (NRC). In 1974, Texas Utilities agreed to allow participation in the

ownership of Comanche Peak, thereby eliminating antitrust concerns associated with the issuance

of the construction permits. By 1979, Texas Municipal Power Agency and Brazos Electrical

Power Cooperative had acquired ownership shares of 6.2 percent and 3.8 percent respectively. (9)

In 1982, Tex-La Electric Cooperative of Texas became another co-owner of the Comanche Peak

project. Because Tex-La had raised antitrust issues with the Department of Justice and had filed

a petition to intervene in the Comanche Peak antitrust review related to its application for an

operating license, Texas Utilities agreed to sell Tex-La a 4.3 percent interest in the project.

Before the closing, however, Tex-La reduced its purchase to 2.2 percent of the project. The joint

operating agreement was amended to reflect this sale. (10) The Commission granted certificates of

public convenience and necessity for all three sales of ownership interests in the project. (11)

The joint ownership agreement began to deteriorate over time. In May 1985,

Brazos Electrical Power Cooperative ceased making its contractual payments to Texas Utilities.

In early 1985, Tex-La Electric Cooperative made several late payments, and thereafter stopped

making payments altogether. Texas Municipal Power Agency continued to make payments, but

it made them under protest. Thereafter, the minority interest owners claimed that Texas Utilities

had failed to meet its responsibilities under the joint ownership agreement, resulting in rising

costs, schedule delays, and licensing problems. The three minority interest owners contended that

they were therefore relieved of any obligation to pay their percentage costs of the construction and

operation of the project.

Texas Utilities sued for breach of contract, seeking monetary damages and a

declaratory judgment affirming the minority interest owners' continuing obligation to pay their

share of the plant's remaining costs. The minority interest owners filed counterclaims alleging

mismanagement of the project, breach of contract, and deceptive trade practices. Faced with

mounting litigation costs, Texas Utilities settled with the minority interest owners by repurchasing

their undivided interests in the project. (12) The settlement agreements ended all litigation between

Texas Utilities and the minority interest owners. The repurchases were approved by the

Commission which, as previously noted, indicated its intention to review the repurchase of these

minority interests under PURA section 63 in the future rate-making proceedings.

As part of Docket 9300, the Commission did in fact conduct the section 63 review.

The Commission determined that the repurchase was in the public interest "to the extent that

[Texas Utilities] paid a reasonable value for the repurchased capacity." The Commission found

that the utility had reacquired the minority interests by paying $4,765 per kilowatt--the cost of

building Comanche Peak. By contrast, the Commission decided that a "reasonable value" would

be $1,865 per kilowatt, the cost of building a stand-alone "generic coal plant" with 12.2 percent

of Comanche Peak's capacity. As a result, the Commission determined that Texas Utilities had

paid $2,900 more per kilowatt than was "reasonable." (13) Accordingly, the Commission disallowed

the excess purchase price amounting to almost $812 million. The Commission also disallowed

the utility's reimbursement of the minority interest owners' litigation costs, amounting to $72,684

million, and $24,662 million of the total consideration paid for the nuclear fuel.

The district court concluded that although review under section 63 of PURA was

appropriate, the Commission made disallowances that were arbitrary and capricious and not

supported by substantial evidence. In two jointly raised points of error, the Cities and Public

Utility Counsel assert that the district court erred in remanding some of the Commission's findings

of fact and that the Commission properly carried out its section 63 review. They do not challenge

the propriety of the section 63 review. The Commission also brings two separate points of error

relating to its section 63 review, contending that it properly applied section 63 and that its findings

of fact were supported by substantial evidence. We do not address these points of error because

our conclusion that the repurchase of the undivided minority interests in the plant are not

transactions reviewable under section 63 renders moot any further controversy about what would

constitute a proper disallowance under that provision. (14)

As previously noted, section 63 applies to three types of transactions: (1) the

purchase, sale or lease of a plant or unit as an operating system for consideration in excess of

$100,000; (2) sales of more than fifty percent of the stock of a public utility; and (3) a merger or

consolidation of two public utilities. Texas Utilities' repurchase of the undivided ownership

interests sold to Texas Municipal Power Agency, Brazos Electrical Power Cooperative, and Tex-La Electric Cooperative falls into none of these categories. Rather than repurchasing a "plant or

unit," Texas Utilities acquired the undivided ownership interests of three tenants-in-common.

Under the joint ownership agreement, the co-tenants had waived any right to partition the

interests, thereby foreclosing the possibility of identifying any part of the plant as belonging

specifically to any co-tenant. The fallacy in the Commission's analysis is its assumption that the

minority interests translate into a complete and independently operable portion of Comanche Peak,

ownership of which changed hands when the repurchase took place.

The Cities and Public Utility Counsel argue that excluding the repurchase of the

undivided interests from the scope of a section 63 review renders the provision meaningless.

They contend that it is illogical to conclude that "a statute concerned with transactions of at least

$100,000 would not apply to a transaction 1,000 times greater than that amount." This argument

fails because the element that triggers section 63 review is not the amount of money involved in

the transaction, although the legislature has set a $100,000 minimum presumably to exclude

transactions so small that there is no real risk they will unreasonably affect rates or service.

Rather, section 63 is concerned with certain types of transactions that result in changes of

ownership of the utility or its operating units to ensure that the costs of transactions inconsistent

with the public interest are not assessed against the ratepayers. We conclude that the Commission

erred in reviewing the costs associated with the minority interests under PURA section 63.

In its final judgment, the district court reversed and remanded for reconsideration

on the existing record the following specific findings of fact related to the minority interest

repurchases:

149. For the reasons discussed in Section VII.C.2. of this Report, [Texas

Utilities] failed to prove that the consideration it paid for the repurchased

12.2 percent interest in the plant was reasonable.

150. For the reasons discussed in Section VII.C. of this Report, [Texas

Utilities'] repurchases of the minority owners' interests in Comanche Peak

are consistent with the public interest to the extent that [Texas Utilities]

paid a reasonable value for the repurchased capacity.

151. For the reasons discussed in Section VII.C. of this Report, all amounts in

excess of the reasonable value of the repurchased interests should be

disallowed from invested capital as unreasonably affecting rates.

152. For the reasons discussed in Section VII.B.2.d. and Section VII.D. of this

Report, a reasonable value of the repurchased interests in Comanche Peak

is $1,856 per kW.

153. For the reasons discussed in Section VII.D. of this Report, the reasonable

value of $1,856 per kW should apply to valuating the repurchased interests

in Unit 1 and Unit 2.

153A. Consistent with an estimated fuel cost for Comanche Peak of $11 billion,

the test-year-end cost of $5.938 billion should be used to value the

repurchased 12.2 percent interest in Unit 1 and an estimated cost of $5.0

billion should be used to value the repurchased 12.2 percent interest in Unit

2.

153B. The plant disallowances related to the repurchased 12.2 percent interest in

Unit 1 is $462,764,691; the plant disallowance related to the repurchased

12.2 percent interest in Unit 2 is $348,578,247. Taken together, the total

plant disallowance related to the repurchased 12.2 percent interest in the

entire plant is $811,342,938.

154. For the reasons discussed in Section VII.E. of this Report, the $72.684

million in minority owners' litigation expenses reimbursed by [Texas

Utilities] as part of the settlement agreements should be disallowed.

* * * *

156. As modified by Findings of Fact 153A and 153B, Section VII.F. of this

Report indicates the disallowances for Unit 1 and Unit 2, as calculated in

Section VI. (Prudence) and Section VII. (Reacquisition of Minority Owner

Interests). The total Unit 1 disallowance is $847,004,966; the total Unit 2

disallowance is $534,139,597. Taken together, the total disallowance is

$1,381,144,563.

The purpose of remanding these findings was to allow the Commission to

reconsider the "reasonable value" it assigned the repurchased interests, presumably to make an

upward adjustment in its $1,856 per kilowatt valuation to reflect the "intangible" benefits of

repurchasing the minority interests. The district court instructed the Commission to consider not

only the "economic value" of the property and facilities acquired, but also benefits gained from

terminating expensive and time-consuming litigation that jeopardized the entire project. We

affirm the district court's rejection of these findings of fact based on our conclusion that the

Commission erroneously reviewed the repurchases under PURA section 63 and failed to evaluate

the repurchase price in light of the relevant statutory considerations. We reverse that portion of

the district court's judgment affirming the Commission's disallowance of $24,662,000 of the cost

to Texas Utilities of repurchasing nuclear fuel from the minority interest owners. This payment

was part of the overall settlement cost and should be reviewed under the prudent investment

standard along with all other costs related to the repurchase. The Commission has already

approved the utility's decision to settle the dispute with the minority interest owners; (15) on remand,

we direct the Commission to consider, under the prudent investment standard, the price paid for

the repurchase, including the litigation costs and repurchase of nuclear fuel at its original cost. (16)

FEDERAL INCOME TAX EXPENSE

In points of error seven through ten, the Cities and Public Utility Counsel complain

that the district court erred in affirming the Commission's calculation of the utility's federal

income tax expense. They contend that the Commission's calculation (1) improperly employed

the hypothetical rather than the actual-tax method, (2) failed to account for tax savings resulting

from the utility's consolidated tax return, (3) did not reflect deductions for actual interest expense,

and (4) failed to reflect deductions taken for below-the-line expenses, including disallowed

Comanche Peak plant costs.

We sustain the seventh point of error complaining of the Commission's use of the

hypothetical tax method. The mandate from the supreme court is clear: "The utility's rates must

reflect the tax liability actually incurred." Public Util. Comm'n v. Houston Lighting & Power

Co. , 748 S.W.2d 439, 442 (Tex. 1987). This Court has repeatedly affirmed that statement by

consistently requiring the Commission to employ the actual-taxes-paid doctrine. See City of Alvin

v. Public Util. Comm'n , No. 3-92-459-CV, slip op. at 17 (Tex. App.--Austin June 1, 1994, no

writ h.); Cities of Abilene v. Public Util. Comm'n , 854 S.W.2d 932, 944 (Tex. App.--Austin 1993,

writ requested); Public Util. Comm'n v. GTE-SW , 833 S.W.2d 153, 159 (Tex. App.--Austin 1992,

writ granted). Furthermore, under the actual-taxes-paid test, " any utility tax savings must benefit

ratepayers ." Cities of Abilene , 854 S.W.2d at 945 (emphasis added). In this case, as well, we

reject the Commission's refusal to adhere to binding precedent.

The Cities and Public Utility Counsel's eighth point of error asserts that the

Commission erred when it failed to adjust its calculation of the utility's tax expense to reflect

savings that resulted from the utility's filing a consolidated tax return. The Commission rejoins

that its decision not to allocate any of the savings to the utility was consistent with PURA section

41(c)(2) and cases construing that statutory provision. Section 41(c)(2) states:

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.

Texas Utilities argues that this statute only applies when the utility has not filed a consolidated

return. We disagree. The statute provides that, regardless of whether the utility actually filed a

consolidated return, the Commission must calculate the utility's income tax expense as though it

had received any tax benefits a consolidated return would provide. Once the Commission

determines that a consolidated filing would have been, or was, advantageous to the utility, the

Commission must adjust the utility's tax expense to reflect those savings. If the Commission does

not reduce the utility's tax expense to reflect the utility's tax savings, it violates the actual-tax

doctrine's underlying principle that rates must be set based on the utility's actual tax liability.

GTE-SW , 833 S.W.2d at 166 .

The Commission argues that it was not required to allocate any of the tax savings

from the consolidated filing to the utility because it specifically found that the consolidated filing

was not advantageous to the utility. See Finding of Fact 331A. In Cities of Abilene we held that

no adjustment to income tax expense is necessary under PURA section 41(c)(2) if the Commission

finds either (1) that it was not advantageous to the utility to consolidate returns, or (2) that the

Commission has computed taxes as though a consolidated return were filed and the utility has

received its fair share of the savings from the consolidated return. Cities of Abilene , 854 S.W.2d

at 944 . In this case, the Commission relied on its own conclusion that the utility's fair share of

the savings was zero to support its finding that the consolidated return was not advantageous to the utility. We will uphold the Commission's decision only if it properly found

that the utility's fair share of the tax savings was zero.

Finding of fact 331D states:

The federal income tax savings resulting from the filing of a consolidated federal

income tax return should accrue to the entity that provided the tax attributes that

allowed for such savings, and [Texas Utilities] was not the entity that provided

such tax attributes.

This Court has previously decided that even when it is the utility's affiliates that have suffered

losses and provided "the tax attributes that allowed for savings," those savings must be passed on

to the ratepayers. GTE-SW , 833 S.W.2d at 167 . In finding of fact 331F, the Commission asserts

that it would be unfair to allocate to the utility tax savings resulting from the affiliates' losses

because the utility will never be responsible for paying the affiliates' taxes when "timing

differences reverse and those affiliates have taxable income." Again, this Court has rejected that

argument. GTE-SW , 833 S.W.2d at 167 n.16 (inequity resulting from ratepayers' benefitting from

tax savings not offset by obligation to pay higher rates in the event of affiliates' gains is a matter

for the legislature to remedy by amending PURA section 41(c)(2)). Similarly, finding of fact

331H, that Texas Utilities should not benefit from tax savings attributed to affiliates because it

bears none of the risks associated with those entities, conflicts with existing caselaw. The

Commission's finding that the consolidated tax return was not advantageous cannot rest upon its

own improper refusal to allocate any savings to the utility. Having rejected several of the findings

supporting the Commission's conclusion that the utility's fair share of the tax savings is zero, we

are unable to uphold that conclusion. There is no indication that each finding is independently

sufficient to support the conclusion. We therefore sustain the Cities and Public Utility Counsel's

eighth point of error.

The ninth point of error objects to the Commission's failure to adjust the tax

expense calculation to reflect actual-interest-expense deductions. The Commission is required to

allocate tax savings to ratepayers rather than to shareholders. The actual-tax doctrine requires that

the ratepayers be held accountable only for "those tax expenses that are actually incurred by a

utility." Houston Lighting & Power , 748 S.W.2d at 442 . If the utility enjoys a tax deduction

based on interest expense, the benefits of that deduction must be passed on to the ratepayers. In

City of Alvin , however, we rejected the argument that the Commission must pass on immediately

the entire savings related to a utility's tax deductions. City of Alvin , No. 3-92-459-CV, slip op.

at 18 ("Section 27(e) of PURA directs the Commission to distribute [tax savings benefits] to all

ratepayers, however, both present and future. We will not interpret Houston Lighting as

mandating that present ratepayers receive all the benefits of accelerated depreciation."). We

sustain the point of error to the extent that we continue to require the Commission to pass through

to ratepayers any tax benefits from interest expense deductions. However, the Commission must

allocate those savings between present and future ratepayers, and the proper allocation is within

the Commission's discretion.

The Cities and Public Utility Counsel's tenth point of error contends that the

Commission erroneously excluded tax benefits resulting from below-the-line expenses, including

tax deductions related to expenses disallowed as imprudently incurred. This Court has already

decided that PURA requires that the Commission reduce the utility's income tax expense by the

amount of tax deductions, even if they are associated with disallowed capital expenses. City of

Alvin , No. 3-92-459-CV, slip op. at 17 (citing GTE-SW , 833 S.W.2d at 169 ). We remain

unpersuaded by the Commission's argument that the actual-tax doctrine conflicts with the

normalization rules. See City of Alvin , No. 3-92-459-CV, slip op. at 18. We sustain the tenth

point of error.

BONDED RATES

In their twenty-first point of error, the Cities challenge the Commission's authority

to allow Texas Utilities to implement bonded rates in both the municipal and non-municipal

sections of its service area. (17) Disposition of this point of error requires an interpretation of PURA

section 43(e). This appeal presents the first opportunity for this Court to consider the bonded-rate

provision of the statute since its amendment in 1983.

When an electric utility wishes to change its rates it must follow the procedures

outlined in PURA section 43. (18) The utility initiates rate proceedings by filing a statement of intent to change rates with the regulatory authority having original jurisdiction. PURA § 43(a). (19)

In all proceedings involving major rate changes, (20) the regulatory authority having original

jurisdiction must hold a hearing on the proposed rate schedule. PURA § 43(c). Pending the

hearing, the regulatory authority may suspend implementation of the new rate schedule. If the

original proceeding involves a proposed increase in the rates charged in municipal areas, the

municipality holds the hearing and has ninety days in which to come to a final decision. If the

municipality has made no final disposition of the rate proceeding at the expiration of ninety days,

the proposed rate schedule is deemed to have been approved and the municipality loses jurisdiction

over the proceeding. PURA § 43(d). If an order is issued, any party to the proceeding may seek

de novo appellate review in the Commission. PURA § 26(a), (g).

Because most utilities provide services in both municipal and non-municipal areas,

there is usually a parallel proceeding originating in the Commission to consider the same proposed

rate increase as it affects non-municipal areas. The Commission, however, has a 150-day period

of original jurisdiction over its portion of the rate proceeding. In addition, the Commission is

allowed two days for each day of hearings in excess of fifteen days. The practical result of

allowing the Commission a longer period of original jurisdiction is that it can wait for the

municipality to issue a final appealable order and then consolidate de novo appellate review with

its own consideration of the same proposed rate increase in non-municipal areas. Therefore, the

Commission typically exercises its original and appellate jurisdiction concurrently.

In these consolidated rate proceedings, the Commission has 150 days plus two days

for each day of hearings in excess of fifteen days in which to make a final determination. When

the Commission is faced with a particularly complex rate proceeding, protracted hearings can

mean a utility's proposed rate schedule may not take effect for a long period of time. (21) The term

"regulatory lag" is used to describe the economic consequences of this delay. (22) In order to protect

utilities from the financial harm engendered by prolonged regulatory lag, PURA section 43(e)

provides that in cases in which the Commission has failed to render a final order within 150 days

of the proposed effective date of the rate increase, the utility

may put a changed rate, not to exceed the proposed rate, into effect upon the filing

with the regulatory authority of a bond . . . . The utility concerned shall refund

or credit against future bills all sums collected . . . in excess of the rate finally

ordered plus interest at the current rate as finally determined by the regulatory

authority. (23)

PURA § 43(e). This practice is known as "bonding in" rates and is used to relieve the potential

financial hardship imposed on a utility while it awaits a final Commission order on its requested

rate increase.

In Docket 9300, Texas Utilities requested the same rate increase throughout its

entire service area, encompassing both municipal and non-municipal areas. As permitted by the

1983 amendments to PURA, the Commission reviewed the proposed rate increase in municipal

areas under its appellate jurisdiction at the same time it considered the increase in non-municipal

areas under its original jurisdiction. When 150 days had passed without the Commission's having

reached a final determination, the utility decided to implement bonded rates throughout its entire

service area, and pursuant to PURA 43(e) requested that the Commission approve its bond. The

Cities objected to Texas Utilities' request for bonded rates in municipal areas, maintaining that

PURA prohibits bonded rates in municipal areas once the municipality has lost its original

jurisdiction over the rate proceeding. (24) The Commission rejected this argument and determined

that PURA's bonding provision does not prohibit a utility from implementing bonded rates in

municipal areas when the underlying rate increase is subject to the Commission's appellate

jurisdiction. We conclude that the Commission's interpretation of PURA section 43(e) is correct.

Section 43(e) contains no language that limits the bonding provisions to rates being

considered under the Commission's original jurisdiction:

If the 150-day period has been extended, . . . and the commission fails to make its

final determination of rates within 150 days from the date that the proposed change

would have gone into effect, the utility concerned may put a changed rate, not to

exceed the proposed rate, into effect upon the filing with the regulatory authority

of a bond . . . .

PURA § 43(e). In support of its contention that the utility may implement bonded rates only for

those rates subject to the Commission's original jurisdiction, the Cities rely on two pre-1983 cases

holding that the former version of section 43(e) did not permit bonded rates in areas under the

Commission's appellate jurisdiction. See Lone Star Gas , 656 S.W.2d at 425; Arkansas Louisiana

Gas Co. (Arkla) v. Railroad Comm'n , 586 S.W.2d 643 (Tex. Civ. App.--Austin 1979, writ ref'd

n.r.e.). We conclude that the reasoning of those cases is so closely tied to the wording of PURA

before the 1983 amendments that they do not support the Cities' interpretation of amended section

43(e). (25)

In Lone Star Gas the supreme court recognized the hardship created by PURA's

failure to provide for bonded rates during an extended period of appellate review, but commented

that "any changes in the protection afforded the utility should be made by the legislature." 656

S.W.2d at 425. Perhaps responding to the court's invitation to act, in 1983 the legislature

significantly amended PURA and apparently cured this particular hardship. See GTE-SW , 833

S.W.2d at 173 (noting that an almost identical bonded rate provision in the new Gas Utility

Regulatory Act cured the problems caused by the utility's inability to implement bonded rates in

municipal areas pending review de novo by the Commission).

Without the ability to bond in rates, a utility's only avenue for relief from

regulatory lag in city rates, traditionally the lion's share of its service area, would be to request

interim rates. See PURA § 26(g) (allowing the Commission to authorize interim rates if

"necessary to effect uniform system-wide rates"). This would necessitate a bifurcated process of

considering the request for interim city rates while contemporaneously implementing bonded rates

outside city limits. Such an inefficient and unwieldy process undermines the amended statutory

scheme designed to consolidate consideration of system-wide rates in one proceeding.

Furthermore, interim rates that require a hearing do not provide relief from regulatory lag

equivalent to the bonding provision which permits implementation of new rates without

Commission approval, subject only to a bond adequate to ensure possible refunds. We see no

suggestion in the amended version of section 43(e) that utilities should be limited to seeking

interim rates to cure regulatory lag in areas servicing cities. (26)

The Commission's interpretation of section 43(e) is entitled to great weight,

provided it is reasonable and does not contradict the plain language of the statute. Tarrant

Appraisal Dist. v. Moore , 845 S.W.2d 820, 823 (Tex. 1993). The Commission's construction

of the bonding provision is consistent with the statutory scheme embodied in the 1983 amendments

designed to facilitate contemporaneous disposition of system-wide rates in a single proceeding.

It also affords the utility protection from regulatory lag through bonded rates, whether inside or

outside city limits. Nothing in the statute itself or the relevant case law supports the Cities'

restricted reading of section 43(e). We overrule the Cities' twenty-first point of error.

RATE BASE ALLOWANCES

In points of error two through four, the Cities and Public Utility Counsel complain

that the district court improperly upheld various aspects of the Commission's order on rehearing

relating to the prudence phase of the rate-making proceeding. Specifically, they contend that the

Commission's disallowance of Comanche Peak costs is contrary to substantial evidence and

inconsistent with the Commission's factual determinations regarding the insufficiency of Texas

Utilities' proof and with Texas law regarding the burden of proof. The Cities and Public Utility

Counsel assert that reasonable minds could not reach the decision arrived at by the Commission

regarding the reasonable cost of Comanche Peak, and that the Commission failed to disallow

imprudent project costs as required by statute. See PURA §§ 39, 41.

In August 1972, Texas Utilities announced its plan to build Comanche Peak, its

first nuclear power plant. In 1977, the utility estimated that Comanche Peak Unit 1 would be

commercially operable in 1981, and Unit 2 would achieve commercial operation in 1983. The

total estimated cost of the project was $1.7 billion, including an allowance for funds used during

construction (AFUDC). However, Unit 1 did not become commercially operable until August

1990. At the rate-making proceeding, the examiners attributed this substantial delay to Texas

Utilities' inability to obtain an operating license from the NRC. See Examiners' Report at 5. (27)

Docket 9300 addressed the prudence of costs incurred by the utility in responding

to the NRC's concerns; the utility engaged in an unprecedented revalidation and reinspection

program which caused Comanche Peak costs to nearly double. The Commission, which heard

three explanations for these costs, was charged with determining which costs were prudent. Texas

Utilities contended that the NRC unforeseeably and unreasonably applied stricter licensing

standards to Comanche Peak, forcing the utility to implement an expensive and time-consuming

revalidation and reinspection program in order to obtain an operating license. The utility took the

position that all of these were regulatory costs that should be included in rate base. At the other

end of the spectrum, the Cities and Public Utility Counsel argued that imprudent project

management caused the NRC to lose confidence in Comanche Peak's safety, and that all post-1984

costs incurred in responding to these concerns should be disallowed as imprudent. The

Commission's general counsel, supported by an evaluation conducted by the Nielsen-Wurster

Group, an independent auditor, concluded that Texas Utilities' inability to obtain an operating

license resulted from the NRC's significant, but unfounded, quality concerns. The general

counsel maintained that certain costs should, however, be disallowed based on Nielsen-Wurster's

findings that the utility acted imprudently in discrete instances during the life of the project. The

Commission reviewed the evidence presented by the parties and general counsel and determined

that $537.90 million of Comanche Peak costs were imprudently incurred and should be

disallowed.

To support the assertion that the Commission erred in the prudence phase of Docket

9300, the Cities and Public Utility Counsel make three basic points: (1) Texas Utilities did not

sustain its burden of proof on the prudence of its Comanche Peak expenditures, (2) Texas Utilities

did not properly quantify its imprudent Comanche Peak costs, and (3) the Nielsen-Wurster report

does not constitute substantial evidence to support the Commission's determination of which

Comanche Peak costs were imprudently incurred. Taken together, these points assert that the

evidence presented during 203 days of hearings cannot support the Commission's final order with

respect to disallowances. See APA § 2001.174(E); Texas Health Facilities Comm'n v. Charter

Medical-Dallas, Inc. , 665 S.W.2d 446, 452-53 (Tex. 1984).

In conducting a substantial evidence review, we must determine whether the

evidence as a whole is such that reasonable minds could have reached the conclusion the agency

must have reached in order to take the disputed action. Charter Medical , 665 S.W.2d at 453 .

We may not substitute our judgment for that of the agency and may consider only the record on

which the agency based its decision. Texas State Bd. of Dental Examiners v. Sizemore , 759

S.W.2d 114, 116 (Tex. 1988), cert. denied , 490 U.S. 1080 (1989). The party bringing the appeal

bears the burden of showing a lack of substantial evidence. Charter Medical , 665 S.W.2d at 453 .

If substantial evidence would support either affirmative or negative findings, we must uphold the

agency's order, resolving any conflict in favor of the agency's decision. Auto Convoy Co. v.

Railroad Comm'n , 507 S.W.2d 718, 722 (Tex. 1974).

The Cities and Public Utility Counsel essentially argue that because the

Commission was not persuaded by the utility's argument that all Comanche Peak costs were

prudent, and because the utility then failed to quantify the impact of its imprudence by identifying

costs related to imprudent management, the Commission was required to disallow all of these

expenditures. (28) We do not agree. The Commission determined the evidence presented by the

parties did not provide an accurate foundation on which to base its disallowance decisions. It

therefore turned to the report prepared by the Nielsen-Wurster Group. Nielsen-Wurster had

previously performed twelve comprehensive prudence reviews of other nuclear plants, eight for

commissions and four on behalf of utilities, before it was retained by the Commission to evaluate

the planning and management of Comanche Peak. After an extensive investigation, Nielsen-Wurster offered its findings in ten days of testimony presented by five expert witnesses.

The Cities and Public Utility Counsel argue that the evidence presented by Nielsen-Wurster cannot serve as a proper foundation for Commission decision-making because it does not

provide a sufficiently detailed breakdown of all Texas Utilities' expenditures identifying those

related to utility imprudence and those that would have been necessary absent any imprudence.

They assert that in order to provide evidence sufficient to support the Commission's order, either

the utility or Nielsen-Wurster was required to "produce a breakdown of the Company's post-March 1985 expenditures, disaggregated between those that were `remedial' and those that would

have been incurred even absent the prolonged licensing delay." The argument urged on appeal

is that once the Commission has determined the utility's evidence is insufficient to demonstrate

that all expenditures were prudently incurred, the utility must then "isolate out the costs associated

with its imprudent conduct" in order to avoid having the Commission disallow all the costs

incurred. (29) In support of their argument, the Cities and Public Utility Counsel direct this Court

to Coalition of Cities v. Public Utility Commission , 798 S.W.2d 560, 563-64 (Tex. 1990), cert.

denied , 499 U.S. 983 (1991), in which the supreme court stated that "[a] party who fails to meet

its burden of proof loses." In Coalition of Cities , the utility "lost" because neither the utility nor

any other party satisfied the Commission that $1.453 billion in expenditures were prudently

incurred. Nowhere does the supreme court state that a utility must segregate imprudent costs.

When a utility fails to persuade the Commission of the wisdom of all its expenditures, that does

not preclude the Commission from considering the other evidence presented in the rate-making

proceeding. Indeed, it is the Commission that is charged with sifting through the evidence and

deciding whether imprudent conduct caused certain expenditures. Having reviewed the utility's

evidence and the Nielsen-Wurster report, the Commission determined that $90.5 million of the

Comanche Peak Response Team expenses and $79.9 million of the Corrective Action Program

expenses were imprudent. The Commission made further disallowances for other imprudent

conduct associated with the delay in licensing; it disallowed $54.1 million in time-driven indirect

costs and $167.3 million in AFUDC.

The Commission rejected Texas Utilities' claim that the costs associated with the

reinspection and revalidation program were entirely due to higher regulatory standards; it

similarly rejected the Cities and Public Utility Counsel's contentions that all such costs should be

disallowed as imprudent. The Commission accepted the Nielsen-Wurster study as evidence that

some, but not all, of the expenditures were imprudently incurred. The Commission found that

the NRC's Technical Review Team findings on the plant's condition were partly unfounded,

although they did identify weaknesses in the pre-1985 quality assurance program. The

Commission also concluded that the growth of regulatory requirements increased the cost and

extended the construction schedule beyond Texas Utilities' control. These findings are supported

by testimony adduced during the rate-making proceeding and provide substantial evidence upon

which the Commission could base its decision to examine all the costs in detail and make discrete

disallowances associated with imprudent conduct.

The Cities and Public Utility Counsel vigorously assert that the Commission erred

in not making any disallowance for the costs of executing the Corrective Action Program.

However, the Commission determined that although the imprudence of the utility was partially

responsible for the need to carry out the Corrective Action Program, the changed regulatory

climate would have made such a program necessary even in the absence of utility imprudence.

The Commission's findings are presumed to be supported by substantial evidence, and the Cities

and Public Utility Counsel have failed to demonstrate that reasonable minds could not have come

to that decision based on this record. Charter Medical , 665 S.W.2d at 453 .

The Cities and Public Utility Counsel also complain that the Commission

improperly applied a "sliding" standard of prudence, assigning degrees of imprudence to utility

decisions and making disallowances only when the imprudence reached a certain level or degree.

After reviewing the record we believe this criticism is unfounded. (30) The Commission determined

that the costs associated with responding to NRC concerns were necessary in part because of

utility imprudence and in part because of the NRC's application of higher safety and inspection

standards in the face of mounting concerns about the safety of nuclear power plants in general.

The Commission's finding of fact 138 expresses this conclusion. (31) The Examiners' Report notes

that Texas Utilities' conduct was not the sole reason for the expenditures necessary to regain the

NRC's confidence. The Commission then made partial disallowances for the costs of the remedial

action program, not the wholesale disallowances recommended by the intervenors. After a careful

and thorough review of all the evidence presented in 203 days of hearings, the Commission made

findings of fact and conclusions of law based on that review. For each finding of imprudence in

the construction and management of Comanche Peak, the Commission made a disallowance for

the associated costs. (32) The Commission also made significant disallowances for the cost of the

delay in licensing, reflecting its opinion that the utility's imprudence was partially responsible for

that delay.

The Cities and Public Utility Counsel next contend that the Commission's order

is improper because it is not supported by underlying findings of fact. We understand their

complaint to be that the findings of fact do not meet the requirements of the APA. See APA §

2001.141(d) ("Findings of fact, if set forth in statutory language, must be accompanied by a

concise and explicit statement of the underlying facts supporting the findings.") The supreme

court has concluded that an agency's findings of fact need the additional support of findings of

underlying facts only when the findings are stated in terms taken directly from the enabling

legislation or when they "represent the criteria that the legislature has directed the agency to

consider in performing its function." Charter Medical , 665 S.W.2d at 451 . The Cities and Public

Utility Counsel contend that findings of fact 138 through 152 are "ultimate" findings by which the

Commission fulfills its statutory obligation to exclude from rate base all imprudently incurred

post-1985 remedial costs, and as such they require underlying findings of fact. (33)

We first consider whether the findings of fact at issue are indeed "ultimate

findings." In City of El Paso , this Court stated that although PURA does not expressly require

the Commission to make a finding of prudence before including costs in rate base, once the

Commission finds a major project to have been imprudently planned or managed, it should

generally disallow project costs to the extent of the imprudence. City of El Paso , 839 S.W.2d at

908. (34) A determination that an expenditure is imprudent carries the legal consequence of its

exclusion from rate base. Such a finding must be supported by underlying findings because it

embodies one of the criteria the Commission must consider in deciding whether to include the

particular expenditure in rate base.

The following findings of fact are here at issue:

138. As discussed in Section VI.Q.2. of this Report, the evidence does not

support imprudence disallowances of the magnitude proposed by the

intervenors.

139. As discussed in Section VI.Q.2. of this Report, the costs of

executing the Comanche Peak Response Team and Corrective

Action Program were prudent.

140. As calculated in Section VI.Q.2. of this Report, the total imprudent

costs incurred by [Texas Utilities] through the end of the test year

is $537.9 million, which allocates $382.05 million to Unit 1 and

$155.85 million to Unit 2.

To meet the criteria set forth in Charter Medical and City of El Paso , these findings must be

accompanied by underlying findings connecting evidence to the conclusions expressed in the

Commission's ultimate findings. In support of finding of fact 138, the Examiners' Report

explains that the utility should not be prohibited from including any of the costs of the remedial

action program in rate base because other factors contributed to the NRC's application of stricter

regulatory standards. See Examiners' Report at 169. Those other factors are also identified in

the Report: "On balance, although the inspection standards and procedures applied by the

Technical Review Team were the same as those previously used by the project's quality control

inspectors, the Technical Review Team conducted its inspections and scrutinized its inspection

results at Comanche Peak in a manner as never before." See id. at 124. These findings support

the Commission's decision not to make the wholesale disallowances proposed by the intervenors.

Nielsen-Wurster did not recommend disallowing any costs related to the post-effective date

execution of the response team or the corrective action program. See Examiners' Report at 139. (35)

Finding of fact 140 expresses the Commission's final calculation of total imprudent costs incurred

by the utility through the end of the test year. These calculations are supported by extensive

explanations in the Examiners' Report as well as specific findings of fact in the order on rehearing

for each element of the total disallowance. We reject the Cities and Public Utility Counsel's

contention that findings of fact 138, 139, and 140 are not adequately supported by underlying

findings of fact.

Finally the Cities and Public Utility Counsel challenge the Commission's failure

to impose specific disallowances flowing from its finding that the utility imprudently failed to

infuse its senior management with personnel having the appropriate nuclear experience. During

the rate-making proceedings the examiners determined that it was impossible to state generally the

effect of this lack of nuclear experience; rather, as in the entire prudence review, the examiners

proposed an examination of the utility's discrete actions and decisions throughout the project. The

Commission adopted the examiners' reasoning and made disallowances for costs associated with

imprudent management. (36) These disallowances represent the Commission's exercise of its

discretion in determining rate base; the findings are not arbitrary or capricious or unsupported by

substantial evidence.

After careful review and consideration of all the arguments raised by the Cities and

the Office of Public Utility Counsel, we overrule points of error two through four.

COMANCHE PEAK RESPONSE TEAM DELAY

In its first point of error, Texas Utilities complains of the Commission's

disallowance of $194.4 million representing costs associated with an imprudent seven-month delay

in Comanche Peak construction. Each of the utility's arguments advanced under this point of

error, however, was presented to the Commission during the rate-making proceeding and rejected

with adequate accompanying findings supported by substantial evidence. We decline to substitute

our judgment for that of the Commission, and will overrule the point of error.

The utility first argues that there is not substantial evidence to support the

Commission's finding that Revision 2 to the Comanche Peak Response Team Program Plan was

not a reasonable licensing response. To the contrary, the Commission relied on evidence that the

NRC Technical Review Team letter, issued on January 8, 1985, marked a distinct departure from

the NRC staff's previous position on Comanche Peak's licensability, and that the Comanche Peak

Response Team did not adequately address the outstanding licensing issues raised by the Technical

Review Team until the issuance of Revision 3 in January 1986. Findings of Fact 105, 109. The

Commission further found that Revision 2 should have included a sampling methodology

equivalent to that ultimately included in Revision 3. Finding of Fact 111. The Commission relies

on the Examiners' Report to further explain its finding:

[Texas Utilities'] contention that it could not anticipate the unacceptability of the

Revision 2 sampling methodology until after it filed Revision 2 is a red herring.

The strongly worded third Technical Review Team letter suggested a possible

programmatic quality assurance/quality control breakdown, a position never before

expressed by the NRC staff.

Examiners' Report at 133. The utility simply failed to convince the Commission that, as it

reasserts in its brief, "it had every reason to believe that the entire program under Revision 2 .

. . would be acceptable to the NRC." The Examiners' Report outlines many of the same

arguments the utility now makes on appeal and explains its rejection of those arguments in light

of conflicting evidence and proposals and recommendations made by the Commission's staff.

The utility next argues that even if there was a delay in preparing an adequate

response plan to NRC concerns, the delay had no impact on project duration because the project

schedule was controlled by a design validation of piping and pipe supports that began in mid-1985. Again, the Commission specifically rejected this argument when it was presented at the

rate-making proceeding.

[T]he examiners reject [Texas Utilities'] argument that the delay in formulating an

adequate Comanche Peak Review Team Program Plan did not delay the completion

of Units 1 and 2. First, the Comanche Peak Review Team--the initial vehicle by

which the Company sought to assure licensability--constituted the critical path

activity for both units during this period. Therefore, any imprudent delay in

formulating an acceptable Comanche Peak Review Team Program Plan delayed

fuel load. . . . [Texas Utilities] argues that the 100 percent design revalidation of

large bore pipe and pipe supports, which commenced sometime in mid-1985,

constituted the critical path activity with respect to Unit 1 at this time. This

argument, however, is contradicted by the direct testimony of [Texas Utilities]

witness Mr. Manzi, who stated the Comanche Peak Review Team's activities paced

the project's schedule through early 1987.

Examiners' Report at 134 (emphasis added). Again, the Commission's decision is supported by

record evidence. In its brief, the utility asserts: "The Commission improperly rejected the

[utility's] evidence that the critical path activity during this period was not the sampling-based

CPRT activities but instead was the 100 percent design validation of piping and pipe supports .

. . ." This Court is bound by the Commission's determination as to the weight and credibility of

the evidence. As long as there is substantial evidence in the record supporting the Commission's

decision, we will not disturb its findings. Suburban Util. Corp. v. Public Util. Comm'n , 652

S.W.2d 358, 364 (Tex. 1983) (holding that the agency's action will be sustained if the evidence

is such that reasonable minds could have reached the conclusion that the agency must have reached

in order to justify its action).

The utility next argues that the work performed pursuant to Revision 2 would have

been necessary under Revision 3, and thus failure to adopt Revision 3 until January 1986 had no

effect on the project schedule. To support this argument, the utility asserts: "There is no

evidence in the record that [work performed pursuant to Revision 2] was not necessary under

Revision 3." They point to record evidence that work performed in accordance with Revision 2

during the seven-month period was productive, useful, and necessary under the subsequent

Revision 3. The fact that work performed was productive, useful, and necessary does not,

however, foreclose the possibility that activities dictated by Revision 3 could have, and should

have, been carried out contemporaneously with the necessary Revision 2 activities. In other

words, nothing in the record states that the Revision 3 work could not have begun until all the

work done under Revision 2 was completed. The Commission specifically found that Revision

3 greatly expanded the scope of the Comanche Peak Review Team effort. This supports a finding

that the failure to expand the scope sooner caused delay in completing the project.

Finally, the utility argues that even if the failure to implement Revision 3 until

January 1986 caused delay in completing Comanche Peak Unit 1, it had no effect on the completion of Unit 2. Again, we need look no further than the Examiners' Report for references

to evidence supporting the Commission's decision: "Unit 2 delay costs occurred in the same

manner as those for Unit 1; both were equally affected by the licensing quagmire in which the

entire project found itself. [Texas Utilities] witness Mr. Nace agreed that the licensing issues

facing Unit 1 also faced Unit 2." Examiners' Report at 134. The substantial evidence standard

is well established. Charter Medical , 665 S.W.2d at 452 . We may not reweigh the evidence in

order to come to a conclusion different from the Commission's. Texas Utilities' arguments on

appeal are nothing more than a restatement of arguments and evidence considered by the

Commission and rejected in favor of other evidence and recommendations. We will not presume

to substitute our judgment for that of the agency, but rather uphold its findings that are reasonably

supported by substantial evidence. Texas Utilities' first point of error is overruled.

INCLUSION OF CWIP IN RATE BASE

As part of Docket 9300, the Commission determined that the utility should be

allowed to include some "construction-work-in progress" (CWIP) costs in rate base. The term

"CWIP" refers to money dedicated to facilities that are currently under construction. Because it

is a state-regulated monopoly, a utility has the responsibility to provide utility service that meets

public demand. In a growing market, therefore, a utility must continually expand to create greater

capacity and must replace existing facilities as they wear out or become obsolete. Although these

projects require huge capital outlays, PURA does not allow a utility to include these costs in rate

base until the completed facility becomes "used and useful in rendering service to the public."

PURA § 39(a). Before completion of a project, the utility includes these construction costs in a

separate CWIP account. A utility may be permitted to include some CWIP costs in rate base as

an exceptional form of rate relief upon a showing that their inclusion is necessary to the utility's

financial integrity. PURA § 41(a). In its order on rehearing, the Commission allowed the utility to include $695,177,625 of CWIP in rate base. In three points

of error, the Cities and Office of Public Utility Counsel challenge this decision.

In its eleventh point of error, the Cities contend that the Commission violated Rule

21.69(a) when it allowed the utility to present evidence in the rate-making proceeding to justify

the inclusion of CWIP in rate base. (37) Rule 21.69(a) provided:

Any utility filing an application, petition, or statement of intent to change its rates

in a major rate proceeding must file all of its evidence, including the prepared

testimony of all of its witnesses and exhibits, on the same date that such

application, petition, or statement of intent to change its rates is filed with the

commission. . . . A utility filing for a change in rates shall be prepared to go

forward at a hearing on the data which have been previously submitted and sustain

the burden of proof of establishing that its proposed changes are just and

reasonable, and the material submitted as the filing and supporting work papers

shall be of such composition, scope, and format so as to serve as the utility's

completed case.

16 Tex. Admin. Code § 21.69 (a) (1993) (since amended). (38) The Cities argue that Texas Utilities

did not include CWIP as a basis for rate relief in its request for a rate increase filed on January

16, 1990. They assert that, in fact, the utility affirmatively disavowed an intention to request

CWIP in the upcoming rate-making proceeding. The Cities allege that the utility's testimony

regarding the amount of CWIP necessary to maintain its financial integrity in the face of proposed

disallowances came as a complete surprise to the Cities and other parties to the proceeding and

was tantamount to the utility changing the basis of its request for a rate increase in contravention

of Rule 21.69(a).

We disagree with the Cities' characterization of the utility's position on CWIP

presented in its rate filing package. Schedule C-4.1, included in the rate filing package, stated,

"The Company is not requesting any construction work in progress in rate base, as discussed in

the testimony of Mr. H. Dan Farell." Through Mr. Farell's testimony, the utility explains:

In this particular case . . . a relatively large level of CWIP attributable to

Comanche Peak Unit 1 as of June 30, 1989, is being transferred to rate base as

electric plant in service. Provided the Company's requested rate base and cost of

service levels are approved, the Company will have a reasonable opportunity to

reverse the negative trends and begin to restore the previously discussed financial

integrity measures to acceptable levels without the inclusion of CWIP in rate base.

However, as discussed subsequently in conjunction with the overall cost of capital,

any material reductions in the Company's requested rate base or cost of service

will require reconsideration of the issue, and may well make inclusion of some

level of CWIP in rate base necessary.

(emphasis added). We are satisfied that the utility provided adequate notice of its intent to seek

inclusion of CWIP in rate base in the rate-making proceeding. The utility did not represent that

it would not request CWIP at all, but rather that it would seek to include CWIP in the event the

Commission materially disallowed its proposed rate increase, a very likely occurrence in any rate-making proceeding. Even though the utility's conditional request for inclusion of CWIP in rate

base appears to improperly treat CWIP as a means to offset the Commission's disallowance of

imprudent expenditures, it nevertheless satisfies the notice requirement of Rule 21.69(a) by

announcing that the utility intended to request inclusion of CWIP in rate base if disallowances

were recommended. Though the utility did not indicate what level of CWIP it would seek, it was

hardly in a position to do so before the rate-making proceeding began. We reject the Cities'

contention that they did not know the utility would seek inclusion of CWIP in rate base until the

final stages of the proceeding. The Cities' eleventh point of error is overruled.

In their twelfth point of error, the Cities and Public Utility Counsel assert that the

Commission rewarded the utility's imprudence by making CWIP allowances to offset the

disallowances of imprudent expenditures. Although the utility announced its decision to seek

CWIP only if its rate request was substantially disallowed, we believe the Commission applied

the proper standard for including CWIP in rate base. The Commission determined that over $2

billion of Comanche Peak Unit 2 CWIP was prudent and could be included in rate base to the extent necessary to preserve the utility's financial integrity. Finding of Fact 169. The examiners

recommended that sufficient CWIP be included in rate base to allow the utility to recover up to

80 percent of its requested rate increase. In their report the examiners explained:

Including CWIP in rate base may appear to offset any prudence disallowance and

require the ratepayers to indemnify the shareholders. However, in reality, the

inclusion of CWIP in rate base does not offset a prudence disallowance. Instead,

it reflects a policy determination that in order to save the Company's financial

integrity so that the utility may continue to provide reliable service, the ratepayers

should pay now what they would soon pay anyway but in greater amounts.

Examiners' Report at 218. The Commission based its decision to allow CWIP in rate base on this

reasoning along with the utility's testimony regarding the need for CWIP in rate base to preserve

the company's financial integrity. Conclusion of Law 59. We conclude that the Commission

included CWIP in rate base to accomplish its proper purpose, consistent with the statutory

requirements. See PURA § 41(a). (39) Consequently, we overrule the Cities and Public Utility

Counsel's twelfth point of error.

The thirteenth point of error asserts that the Commission failed to make proper

underlying findings of fact to support its decision to include $695,177,625 of CWIP in rate base.

The Commission set this figure based on its conclusion that the utility required a rate increase of

10.1 percent, or $442,353,160, to maintain financial stability. We have already determined that

this order must be remanded to the Commission to reconsider disallowances associated with the

12.2 percent of the project repurchased from the minority interest owners. The Commission will

be required to reevaluate the utility's CWIP requirements in light of the level of disallowance on

remand. In making this determination, the Commission may only consider the financial condition

of the utility at the time of the hearing; it may not consider subsequent positive or negative

changes in the utility's financial integrity. Therefore, though we agree that the Commission could

properly consider including CWIP in rate base, we recognize that its decision as to the appropriate

amount of CWIP will change, and is dependent upon the disallowances it makes on remand. We

do not, therefore, review the findings related to CWIP allowances, as they will be superseded by

the Commission's findings when it reexamines the utility's need for CWIP under the

circumstances present at the time of the remand. The Commission will be required to reconsider

whether the 10.1 percent rate increase it found necessary to maintain financial integrity remains

the benchmark in light of changed circumstances. A consequence of our remand is to moot the

Commission's CWIP findings because they were calculated pursuant to erroneous disallowances.

We do not, therefore, address the thirteenth point of error challenging the adequacy of the

Commission's findings to support a CWIP allowance that is now immaterial. Similarly, we do

not address the Cities and Public Utility Counsel's fourteenth and fifteenth points of error which

attack a specific finding of fact regarding the CWIP allowance.

GAS RECONCILIATION

In their sixteenth and seventeenth points of error, the Cities and Public Utility

Counsel complain of error in the Commission's determination of the proper measure of imprudent

costs associated with Texas Utilities' purchases of gas from Texas Utilities Fuel Company (the

"Fuel Company").

Part of Docket 9300 involved the reconciliation of fuel costs incurred by Texas

Utilities during the period from April 1, 1983, to June 30, 1989. Fuel reconciliation is a term

used to describe periodic adjustments to a utility's fuel costs made to account for the difference

between previously anticipated costs and actual, reasonable costs incurred. The Commission

makes these adjustments on a periodic basis because of the practical difficulty of deciding a new

rate case with each variation in fuel prices. In a hearing on fuel reconciliation, the utility has the

burden of proving that its fuel expenses during the reconciliation period were reasonable and

necessary expenses incurred to provide reliable service. See 16 Tex. Admin. Code 23.23(3)(B)

(1994). If the fuel is purchased from or provided by an affiliate, the utility must also show 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).

As part of the fuel reconciliation proceedings in Docket No. 9300, Texas Utilities

sought to establish the reasonableness and necessity of $7,167,233,745 in natural gas costs

incurred during the six year reconciliation period. Upon reviewing the evidence, the Commission disallowed $29,173,090 of those costs and determined that the remainder were

reasonable and necessary expenditures. There is no dispute that the gas purchase transactions

reviewed by the Commission were affiliate transactions; the Fuel Company, an affiliate of Texas

Utilities, supplies all the utility's gas requirements. In addition, because Texas Utilities is the

Fuel Company's only customer, whether the Fuel Company charged Texas Utilities prices

commensurate with those charged to other affiliates or to unaffiliated entities is not an issue. The

Commission's only task was to determine the extent to which the affiliate fuel expenses were

reasonable and necessary costs that could be included in Texas Utilities' rate base. At issue in

the Cities and Public Utility Counsel's sixteenth and seventeenth points of error is the

Commission's decision to disallow only $29,173,090 in gas costs as unreasonable expenditures.

The Commission arrived at this figure in the following way. First, it heard

evidence from Texas Utilities regarding the reasonableness of the approximately 900 gas contracts

subject to the reconciliation proceedings. Then it heard evidence presented by the Reed

Consulting Group, which reviewed 100 of the 900 contracts representing eighty percent of the gas

purchases made during the reconciliation period. In their report, the examiners reviewed sixty-four contracts, and after considering disallowances suggested by both Texas Utilities and the Reed

Consulting Group, made their own recommendations for disallowances for each contract. A chart

included in the Examiners' Report sets forth the disallowances recommended by Texas Utilities,

the Reed Consulting Group, and the examiners with respect to thirty-seven production contracts,

six long-term commercial contracts, thirteen short-term commercial contracts, and eight spot

contracts. See Examiners' Report at 448-51. (40) The Examiners' Report then includes a summary

section which states:

The examiners recommend a total disallowance for unreasonable expenditures for

gas purchases by [Texas Utilities] from its affiliate, [the Fuel Company], of

$78,504,776. The remainder of the Company's requested reconcilable gas costs,

$7,088,728,967, are reasonable and should be approved. (41)

Examiners' Report at 479. The chart and summary imply that the examiners accepted Texas

Utilities' evidence regarding the reasonableness of all the gas contracts not represented in the

chart, and allowed all costs related to those contracts in rate base.

In its final order, the Commission made specific findings of fact for each gas

contract that appeared in the examiners' chart, rejecting the examiners' recommended

disallowance in only five instances. (42) Like the examiners, the Commission only disallowed costs

associated with the contracts that appear in the examiners' chart. The Commission allowed all

costs associated with all other gas contracts.

In points of error sixteen and seventeen, the Cities and Public Utility Counsel

challenge the Commission's gas contract disallowances on two grounds: (1) the Commission did

not review all the affiliate gas costs associated with approximately 800 contracts making up twenty

percent of Texas Utilities' gas costs and as a result included unreasonable costs in rate base, and

(2) the Commission did not make the specific findings required by PURA section 41(c)(1) to

support the costs it did allow. Because we find both arguments to be without merit, we overrule

the sixteenth and seventeenth points of error.

The Cities and Public Utility Counsel essentially argue that because the Reed

Consulting Group did not review the smaller and more numerous gas contracts making up

approximately twenty percent of Texas Utilities' gas costs, the Commission did not review the

contracts. Simply because the Reed Consulting Group did not include these contracts in its sample

does not mean that the Commission did not review those expenses or that there was no evidence

that the contracts met the requirements of PURA section 41(c)(1).

Texas Utilities presented evidence as to the reasonableness of all of the

approximately 900 gas contracts subject to the reconciliation proceeding. As part of its evidence

of reasonableness, the utility presented testimony justifying its decisions to enter into the various

gas contracts. (43) Opposing the reasonableness of Texas Utilities' gas contracts, the Cities' witness,

Richard S. Morey, recommended a disallowance of $452 million in gas-related expenditures. This

amount represented fuel costs for the years 1985 through 1988. The examiners determined that

Mr. Morey's quantification technique was seriously flawed because it relied on comparisons with

utilities not comparable to Texas Utilities. The examiners recommended that the Commission

reject Mr. Morey's analysis and his recommended disallowance, which the Commission did. If

that had been the whole of the evidence presented to the Commission, it would have been within

the Commission's discretion to allow all the costs requested by Texas Utilities if it found they

were supported by substantial evidence. However, the Commission also considered the evidence

presented by its own auditor and, as a result, disallowed some of the expenses associated with the

larger gas contracts. While the Commission may consider evidence such as that presented by the

Reed Consulting Group, it is not required to do so. In the absence of such evidence, it may accept

or reject the evidence presented by the utility, the party bearing the burden of proof of

reasonableness. With respect to the smaller gas contracts, the Commission apparently accepted

the evidence of reasonableness presented by Texas Utilities. If substantial evidence supports the

Commission's findings, which we conclude it does, we must uphold the order. See Auto Convoy ,

507 S.W.2d at 722 .

The Cities and Public Utility Counsel also maintain that the Commission did not

make the findings of fact required by PURA section 41(c)(1) to support an allowance of all gas

costs related to those contracts not included in the chart. The following are the portions of the

Commission order relating to its determination of gas disallowances:

Finding of Fact 379: The Company's fuel expenditures during the reconciliation

period of April 1983 through June 1989 should be approved to the extent of

$10,488,044,993.

Conclusion of Law 82: Except to the extent of the disallowed reconciliation period

gas costs (reflected in the Findings of Fact attached to the order), Texas Utilities

met its burden of proof under PURA § 41(c)(1), regarding affiliate transactions.

Conclusion of Law 83: Except to the extent of the disallowed reconciliation period

gas costs (reflected in the findings of fact attached to the order), the Company's

fuel expenditures during the reconciliation period comply with the requirements of

P.U.C. SUBST. R. 23.23(b)(2)(H).

The question for this Court is whether these findings satisfy the requirements of PURA section

41(c)(1) that "[a]ny such finding shall include specific findings of the reasonableness and necessity

of each item or class of items allowed." The Cities and Public Utility Counsel assert that this

statute demands specific findings of reasonableness for each contract. We disagree. The statute

allows the Commission to address its specific findings either to "each item" or "each class of

items." The Commission may either make a contract-by-contract determination of reasonableness,

or it may group the contracts together and declare them all to be reasonable.

The Commission made a specific finding that, with the exceptions set forth in

findings of fact 383A-383AAA, Texas Utilities had established the reasonableness and necessity

of its gas costs. We conclude that these findings meet the requirements of PURA section 41(c)(1).

AMOCO CONTRACT NUMBER 1627

In its sixth point of error, Texas Utilities claims that the trial court incorrectly

affirmed the Commission's decision to disallow $447,972 as imprudent gas expenditures pursuant

to Amoco contract number 1627. At the Commission hearing, Texas Utilities initially offered

evidence indicating that it had purchased fuel in March 1989 from Amoco pursuant to contract

number 1627, a spot contract. The Commission determined that the price paid for this gas was

unreasonably high given the spot price of gas at the time, and disallowed the excess purchase price

from rate base. During "surrebuttal testimony," the utility's fourth opportunity to file testimony

on fuel issues, it asserted that the gas purchase was not actually made pursuant to a spot contract,

but rather pursuant to a separate short-term commercial contract under which the price paid would

be reasonable. The utility explained that it had made an accounting error, forgetting to reform

its ledger to credit the purchases to the short-term contract. (44) The Commission treated the gas as

purchased pursuant to the spot contract and disallowed the $447,972 it believed to be in excess

of a reasonable spot price for gas.

We do not agree with Texas Utilities that its testimony of an accounting error is

uncontroverted or that it necessarily established that the gas was purchased under a short-term

commercial contract as a matter of law. The Commission, rather, was presented with conflicting

evidence: the utility's own records showing the gas purchased pursuant to a spot contract and its

contradictory testimony that in fact the gas was purchased under a short-term commercial contract.

The utility characterizes the Commission's decision to rely on the utility's records rather than the

testimony provided by the utility as arbitrary and capricious. We come to the opposite conclusion.

The Commission is the judge of the weight to be accorded witnesses' testimony and is free to

accept part of the testimony of one witness and disregard the remainder. Southern Union Gas Co.

v. Railroad Comm'n , 692 S.W.2d 137, 141-42 (Tex. App.--Austin 1985, writ ref'd n.r.e.). The

Commission was not required to accept the utility's eleventh-hour accounting error explanation,

but was free to rely on the utility's own records. It is the utility that carries the burden of proof

at a rate-making proceeding; the utility that submits records to the Commission that do not

accurately reflect its expenditures does so at its own peril. The point of error is overruled.

DELHI CONTRACT NUMBER 1659

In the rate proceeding, Texas Utilities asserted that Delhi gas contract number 1659

contained a take-or-pay clause which obligated the utility to purchase a certain amount of gas

under the contract. The Commission considered the contract and determined that it imposed no

take-or-pay obligation and that Texas Utilities had purchased gas at a price higher than necessary.

The Commission concluded that Texas Utilities' gas purchases pursuant to this contract violated

its obligation to purchase fuel at the lowest reasonable cost to ratepayers and disallowed

$2,509,810 in fuel costs incurred under the contract. See PURA § 41(c)(1); 16 Tex. Admin.

Code § 23.23 (b)(2)(H) (1993) (since amended). In its third point of error, the Commission

contends that the district court incorrectly reversed this conclusion. Because we agree with the

Commission that the contract contained no take-or-pay provision, we will sustain this point of

error.

The pertinent contract provision provides:

Delhi hereby grants [the Fuel Company] the option to purchase up to fifty percent

(50%) (calculated in terms of heating value) of the Schlensker-Texas Crude Gas,

purchased by Delhi, at Delhi's cost of such gas plus 5 cents/MMBtu. Such option

to purchase may be exercised by [the Fuel Company] at any time and from time to

time during the term of Delhi's respective gas purchase agreements for such gas

in blocks of ten percent (10%) of Delhi's purchases, and until [the Fuel Company]

has exercised completely its option to purchase such fifty percent (50%). Each

such exercise of its option to purchase by [the Fuel Company] shall be evidenced

by not less than thirty (30) days prior written notice to Delhi and shall be effective

on the first day of the month following that month in which the said thirty (30) day

period expires.

Contrary to Texas Utilities' assertions, this contract embodies no take-or-pay obligations. It is

apparent from its unambiguous terms that the contract gives Texas Utilities the option to buy, in

ten percent blocks and at a fixed price, up to fifty percent of any Schlenker-Texas crude gas

purchased by Delhi. We are not persuaded by Texas Utilities' argument that the phrase "and until

TUFCO has exercised completely its option to purchase such fifty percent" means that once the

utility has purchased at that level it must continue to do so. The contract contemplates that

whenever Delhi purchases Schlenker-Texas crude gas the Fuel Company may purchase up to fifty

percent of that gas at Delhi's cost plus five cents per MMBtu. The phrase "and until [the Fuel

Company] has exercised completely its option to purchase such fifty percent" sets an upper, rather

than a lower, limit on the utility's right to purchase this gas at the contract price; it does not

operate to convert the option to purchase gas into an obligation. We sustain the Commission's

third point of error.

FUEL OIL INVENTORY

In its fourth point of error, Texas Utilities challenges the Commission's decision

to set fuel oil inventory at 1.7 million barrels. The utility contends that this finding is arbitrary

and capricious, and not supported by substantial evidence. See APA § 2001.174 (E), (F). We

disagree.

Texas Utilities requested a fuel inventory level of 2,031,540 barrels, an increase

of 331,540 barrels from the previously authorized level of 1.7 million barrels. See Application

of Texas Utilities Electric Company for a Rate Increase , 10 P.U.C. Bull. at 954. The higher

figure was based on the utility's test-year end thirteen-month average inventory of fuel oil. The

Cities argued that the utility needed a fuel oil inventory of only 1,279,363 barrels, suggesting that

access to nuclear-generated power from Comanche Peak Unit 1 reduced the utility's need for fuel

oil. Additionally, the Cites contended that increased levels of non-oil/gas fired generation caused

a decrease, rather than an increase, in the necessary fuel oil inventory level. Texas Utilities

countered that it burned 1,201,008 barrels of oil in December 1983 and 1,249,952 barrels during

two cold weather periods in February and March 1989. The utility hoped to demonstrate that the

Cities had miscalculated its needs in the event of cold weather.

The Commission rejected both the Cities' and the utility's requests, adopting

instead the examiners' recommendation that the "level of fuel oil inventory established in Docket

No. 5640 of 1.7 million barrels should be left in place." This decision was not arbitrary and

capricious or unsupported by substantial evidence. The examiners based their recommendation

on an evaluation of the utility's actual needs since the 1.7 million barrel inventory level was

established in 1984. The examiners stated, "[I]n light of the Company's experience, the

examiners find that the level of fuel oil inventory established in Docket No. 5640 of 1.7 million

barrels should be left in place by the Commission." The utility's actual experience over the past

several years provides probative evidence from which the agency could conclude what the utility's

future needs will be. If the utility could convince the Commission of the need to increase that

level, then such an increase would be in order. The burden, however, was on the utility. Texas

Utilities' fourth point of error is overruled.

RETURN ON COMMON EQUITY (45)

In points of error eighteen through twenty, the Cities and Public Utility Counsel

challenge the trial court's affirmance of the Commission's decision to set the utility's return on

common equity at 13.2 percent. (46) Specifically, they contend that the Commission (1) did not

identify the methodology it used to arrive at this figure; (2) failed to consider the statutory factors

set out in PURA section 39(a); and (3) did not make adequate findings of fact.

During the rate-making proceeding, all the presentations regarding the appropriate

return on common equity used some form of a discounted cash-flow methodology. Because this

methodology was the only one presented, the Commission's adoption of any of the range of

figures presented as the appropriate return on common equity in itself entails adoption of the

discounted cash-flow methodology. The Commission's order is presumed to be based on

substantial evidence and we will not require the Commission to make a separate finding simply

to confirm that it has based its decision on the only method of calculating return on common

equity presented during the rate-making proceeding. See Charter Medical , 665 S.W.2d at 451 ;

see also GTE-SW , 833 S.W.2d at 159 (holding that a return on equity falling within the range

presented by expert testimony meets the substantial evidence test). We reject the Cities and Public

Utility Counsel's attempts to look to the transcript of the Commission's final order meeting to

show that the Commission based its decision regarding return on common equity on something

other than record evidence. We judge the agency order on the basis on which it purports to rest,

and the mental processes of individual commissioners are immaterial to judicial review.

Pedernales Elec. Coop., Inc. v. Public Util. Comm'n , 809 S.W.2d 332, 341 (Tex. App.--Austin

1991, no writ); see also City of Frisco v. Texas Water Rights Comm'n , 579 S.W.2d 66, 72 (Tex.

Civ. App.--Austin 1979, writ ref'd n.r.e.) ("The thought processes or motivations of an

administrator are irrelevant in the judicial determination whether the agency order is reasonably

sustained by appropriate findings and conclusions that have support in the evidence.").

The Cities and Public Utility Counsel next argue that the Commission failed to

consider the necessary statutory criteria in choosing the appropriate return on common equity.

The statute directs the Commission to consider, among other things, the utility's efforts to comply

with the statewide energy plan, its efforts and achievements in the conservation of resources, the

quality of its services, the efficiency of its operations, and the quality of its management. PURA

§ 39(b). Our examination of the order reveals findings of fact and conclusions of law addressing

each of these criteria. The Commission addressed the utility's operational efficiency, finding that

the utility generated electricity efficiently and reliably during the reconciliation period and that

the energy efficiency plan satisfied the Commission's substantive rules. Findings of Fact 396,

398. Conclusion of law 58 states that Texas Utilities' generation, transmission, and distribution

facilities are safe, adequate, efficient, and reasonable. Regarding the quality of management, the

Commission found that, with limited exceptions, the quality of management was adequate.

Finding of Fact 12. The Commission also considered the utility's efforts and achievements in

conservation and compliance with the statewide energy plan. See Finding of Fact 215 ("Staff's

recommended 15-basis-point upward adjustment to recognize the Company's exceptional

achievement in conservation and load management is reasonable."); Finding of Fact 401 ("[Texas

Utilities'] demand side management achievements have been remarkable, commendable, and

clearly far above those of other utilities.").

The chief complaint appears to be the Cities and Public Utility Counsel's perception

that the Commission made no downward adjustment to the return on common equity to penalize

the utility for instances of imprudent management. While the statute instructs the Commission

to consider the quality of the utility's management, it does not require that the Commission lower

the return on common equity if it finds any imprudence. We understand the statute to leave to

the Commission's discretion the decision whether the utility's management warrants a reduction

in the overall rate of return. We also reject the assertion that the Commission's chosen rate of

return is not supported by adequate findings. The utility testified to a recommended range of

return from 13 to 14.25 percent. The staff's recommendation ranged from 12.36 to 13.4 percent.

The Examiners' Report summarizes extensive testimony supporting the various ranges sponsored

by the parties and the staff. The Commission made a specific finding that a 13.2 percent return

on common equity is reasonable and appropriate for the utility. Finding of Fact 213. This Court

has already decided that a finding regarding the appropriate cost of equity is not a finding set forth

in statutory language, and therefore needs no underlying findings. City of Alvin , No. 3-92-459-CV, slip op. at 28; see also GTE-SW , 833 S.W.2d at 158 (approving a finding on return on equity

that was "the Commission's own estimate converted into a finding" so long as the estimate was

"within the range made by the testimony of the various expert witnesses"). Choosing a rate of

return is a proper exercise of the Commission's discretion in setting the rate of return, and we will

not require any more specific findings than its selection from a range of rates all supported by

credible expert testimony. The Cities and Public Utility Counsel's points of error eighteen

through twenty are overruled.

CASH WORKING CAPITAL

Texas Utilities' fifth point of error complains of the district court's decision to

remand the Commission's cash working capital allowance. The district court found, and the

Commission agreed, that the Commission made a mathematical error in its calculation of the cash

working capital. On appeal, Texas Utilities argues that there is no evidence that the Commission

made a mathematical error and that in any case the district court could not address the issue

because it was not raised in the motions for rehearing filed with the Commission. See APA §

2001.145. We do not address this point of error. On remand the Commission will have an

opportunity to recalculate the cash working capital and correct its mathematical error or make

other changes to cash working capital in light of its decisions on remand.

CONCLUSION

For the reasons stated in this opinion, we reverse the district-court judgment and

remand the cause to the district court with instructions that it be remanded to the Commission for

further proceedings consistent with this opinion.

Bea Ann Smith, Justice

Before Chief Justice Carroll, Justices Aboussie and B. A. Smith

Reversed and Remanded

Filed: June 15, 1994

Publish

1. Cities of Arlington, et al. includes the municipalities of Addison, Allen, Azle,

Belton, Breckenridge, Bridgeport, Burkburnett, Burleson, Carrollton, Celina,

Centerville, Cleburne, Colleyville, Copperas Cove, Corinth, Crowley, Dalworthington

Gardens, De Leon, Denison, Euless, Farmers Branch, Forest Hill, Fort Worth, Glen

Heights, Grand Prairie, Granger, Hewitt, Howe, Hurst, Irving, Keller, Lindale, Luella,

McKinney, Milford, Murchison, New Chapel Hill, Ovilla, Pantego, Plano, Ranger,

Richardson, Roanoke, Rockwall, Rosser, Rowlett, Sherman, Sunnyvale, The Colony,

Tyler, University Park, Venus, Waco, White Settlement, and Wichita Falls. In addition

to bringing individual appeals, each of the appellants is also an appellee with respect to

certain parts of the district-court judgment.

2. All citations in this opinion are to the current Administrative Procedure Act rather

than the former Administrative Procedure and Texas Register Act because the recent

recodification did not substantively change the law. Act of May 4, 1993, 73d Leg., R.S.,

ch. 268, § 47, 1993 Tex. Gen. Laws 583 , 986.

3. With one exception, the Cities and Public Utility Counsel jointly raised their points

of error.

4. APA section 2001.174 directs this Court to reverse and remand a cause for further

proceedings only if substantial rights of the appellant have been prejudiced because the

administrative findings, inferences, conclusions, or decisions are: (1) in violation of a

constitutional or statutory provision, (2) in excess of the agency's statutory authority, (3)

made through unlawful procedure, (4) affected by error of law, (5) not reasonably

supported by substantial evidence, or (6) arbitrary or capricious or characterized by

abuse of discretion or clearly unwarranted exercise of discretion.

5. Meek recused himself from voting on three issues: (1) finding of fact 172 relating to

the reasonableness of Texas Utilities' fuel oil inventory, (2) finding of fact 379 relating to

the reasonableness of Texas Utilities' fuel expenditures during the reconciliation period

insofar as such expenditures relate to gas contracts between the utility and Fina, and (3)

finding of fact 389 relating to the reasonableness of Texas Utilities' fuel oil expenditures

during the reconciliation period.

6. Section 63 expressly provides that it shall not be construed as applying to the

purchase of units of property for replacement or to additions to the public utility's

facilities by construction.

7. 7 The Examiners' Report notes:

In the petition and statement of intent initiating this docket, [Texas Utilities]

requested that "the public interest and other findings be made favorably"

with respect to its repurchases of the minority owner interests. [Texas

Utilities'] pleading also cited § 63 as one of the statutory provisions granting

the Commission jurisdiction over [Texas Utilities'] application. [Texas

Utilities] now contends that § 63 does not apply to its reacquisition of the

minority owners' interests in Comanche Peak. It instead argues that the

Commission should determine the prudent cost of 100 percent of Comanche

Peak, rather than just 87.8 percent of the plant, in determining the extent to

which the costs of the 12.2 percent repurchased plant are included in rate

base.

The Report goes on to state:

The relevant precedent [for applying § 63] . . . is found in the three dockets

in which the Commission approved the CCN amendments reflecting the

Company's reacquisition of the minority owners' interests: Docket Nos.

8015, 8236, and 8736.

In each of those dockets' final orders, the Commission envisioned a future

§ 63 review of [Texas Utilities'] buyback of a minority owner's interest. . . .

[Texas Utilities] did not file a motion for rehearing in any of the final orders

in the CCN dockets related to the repurchases of the minority owners'

interests, even though each of the final orders envisioned a future § 63

review.

8. Texas Utilities Electric Company ("Texas Utilities" ) is the principal subsidiary of

Texas Utilities Company (the "Holding Company"), an investor-owned holding company.

Texas Utilities was created in 1984 after the merger of Dallas Power & Light Company,

Texas Electric Service Company, and Texas Power & Light Company--all Holding

Company subsidiaries.

9. 9 Joint ownership agreements executed with Texas Municipal Power Agency and Brazos

Electrical Power Cooperative described the ownership of Comanche Peak as follows:

3.01 Ownership: The Parties shall have title to the Project and Fuel as tenants

in common and shall, as co-tenants with an undivided interest therein, subject to

the terms of this Agreement, own the Project and Fuel and have the related

rights and obligations . . . . (emphasis added).

The agreement also contains a provision whereby the parties to the agreement waive the right

to partition their interest in the project.

10. In exchange for the ownership interest, each minority interest owner agreed to

advance sufficient funds to pay its ownership interest share of the project's construction

and operation costs. Additionally, each minority interest owner agreed to pay its

percentage share plus interest of the accumulated costs of fuel and construction paid by

Texas Utilities before the applicable date of closing. The minority interest owners

essentially agreed to assume financial responsibility for a percentage of the cost of

building the plant in exchange for a corresponding percentage undivided interest in the

completed plant. Once the plant was operating, the minority interest owner was entitled

to capacity equal to its percentage share of Comanche Peak's net effective generation.

11. For example, in Docket No. 3589, the Commission reviewed the transfer of a four

and one-third percent ownership interest in Comanche Peak from Texas Utilities'

corporate predecessors to Tex-La Electric Cooperative. Though PURA section 63 was

cited as one of the statutory provisions giving the Commission jurisdiction to review the

sale, the Examiners' Report states, "Because only a portion of [a] joint interest is being

conveyed, it may not be necessary to comply with § 63 of the Act because it speaks to the

transfer of `. . . any plant as an operating unit or system . . . .'"

12. The repurchase prices were based on the cost of building the percentage of the

plant owned by each seller. Therefore, it appears that Texas Utilities reacquired the

interests by reimbursing each minority interest owner the money each had contributed to

the construction and operation of the plant. Additionally, Texas Utilities agreed to

repurchase nuclear fuel and transmission facilities, and to reimburse the minority interest

owners' litigation expenses. These payments together constitute the settlement costs paid

by Texas Utilities to the minority interest owners. The Commission reviewed these

settlement costs under PURA section 63 and made the following disallowances:

Repurchase of 12.2% Ownership Interest $811,342,938

Reimbursement of Litigation Expenses $ 72,684,000

Repurchase of Nuclear Fuel $ 24,662,000

Total $908,688,938

13. It does not appear, however, that purchasing a stand-alone coal plant was an option

available to the utility in its attempts to resolve the litigation quagmire that threatened the

entire project. The utility was required to obtain a license for the Comanche Peak power

plant; it could not choose to license 87.8 percent of the capacity and turn to alternative

power sources for more capacity. The 12.2 percent was part of the whole project, and

until the dispute with the minority interest owners was resolved, the entire plant would

remain inoperative.

14. The Cities and Public Utility Counsel argue that the standard applied by the

Commission in its section 63 review is identical to the standard employed in the typical

"prudence review" of a rate-making proceeding, and for that reason the Commission's

findings should be affirmed even if this Court determines that section 63 is inapplicable to

this transaction. Assuming, without deciding, that the standards are the same, we would

still reverse the Commission's disallowances because they are arbitrary and capricious.

In Docket 9300, the Commission adopted the following prudence standard:

The exercise of that judgment and the choosing of one of that select range of

options which a reasonable utility manager would exercise or choose in the

same or similar circumstances given the information or alternatives

available at the point in time such judgment is exercised or option is chosen.

If the Commission indeed applied a prudence standard when evaluating the repurchase,

the resulting findings of fact are arbitrary and capricious because they reflect

consideration of a factor legally irrelevant to a review of expenditures under the prudent

investment standard. See Public Util. Comm'n v. South Plains Elec. Coop., Inc. , 635

S.W.2d 954, 957 (Tex. App.--Austin 1982, writ ref'd n.r.e.) (citing Starr County v. Starr

Indus. Servs., Inc. , 584 S.W.2d 352 (Tex. Civ. App.--Austin 1979, writ ref'd n.r.e.), for the

proposition that an agency's consideration of a non-statutory factor amounts to arbitrary and

capricious action requiring reversal); John E. Powers, Agency Adjudications 165 (1990). The

Commission disallowed the purchase price to the extent that it exceeded the cost of building a

stand-alone coal plant with capacity equivalent to 12.2 percent of Comanche Peak's. Building

a stand-alone coal plant was not, however, one of the options available to the utility at the time

it made the repurchase. The purpose of repurchasing the minority interests was not to obtain

capacity, but to eliminate expensive and time-consuming litigation that jeopardized licensing of

the entire project; building or buying a coal plant would not achieve that objective.

15. Finding of fact 148 states:

For the reasons discussed in Section VII.C.1. of this Report, settling the

minority owner litigation was reasonable from [Texas Utilities'] perspective.

The Report noted that "it is clear that the minority owner litigation potentially threatened

the Company's licensing efforts, which in turn threatened further schedule delays and

cost overruns on the project. At the time of the settlements with the minority owners, the

project was incurring approximately $60 to $70 million a month in case requirements and

carrying costs. Consequently, a settlement of the minority owner litigation was

reasonable in order to avoid the possibility of any further project delay and unnecessary

expenditures of these amounts."

16. We realize the Commission has already conducted an overall prudence review of

the costs associated with the original construction of Comanche Peak resulting in a

disallowance of approximately $537 million. Rather than hold that this figure is the

appropriate disallowance, we note that the question on remand is not whether the original

construction costs of the 12.2% at issue here were prudently incurred, but rather whether

it was prudent for the utility to repurchase that portion of the plant at its original cost.

17. Public Utility Counsel does not join the Cities in bringing this point of error.

18. This discussion focuses on the more typical situation in which a utility requests a

rate increase rather than a decrease.

19. Original jurisdiction over rate proceedings is divided between the governing body

of each municipality ("the municipality") and the Commission. Each municipality

exercises exclusive original jurisdiction over electric rates and services within its corporate

limits ("municipal areas"), whereas the Commission exercises exclusive original

jurisdiction over rates and services in all other areas ("non-municipal areas"). PURA §

17(a), (e). In addition, the Commission has exclusive appellate jurisdiction to review each

municipality's order in any rate proceeding. PURA § 17(d).

20. The statute defines a "major change" as an increase in rates that will augment the

aggregate revenues of the utility making the rate application by more than $100,000 or

two and one-half percent, whichever is greater. PURA § 43(b).

21. In this case, for example, there were 203 days of hearings. This means the utility

might not be allowed to increase its rates for as many as 526 days.

22. "Regulatory lag arises from the loss in revenue experienced by a utility whose rates

are in need of upward adjustment during the period between filing an application for a

rate increase and the date when relief is granted." Railroad Comm'n v. Lone Star Gas Co. ,

656 S.W.2d 421, 423 (Tex. 1983).

23. PURA section 3(g) provides that the term "regulatory authority" means either the

governing body of any municipality or the Commission, depending upon the context in

which the word is used.

24. When considered in conjunction with other provisions of PURA, the Cities'

interpretation of section 43(e) leads to the result that a utility will never be able to

implement bonded rates in municipal areas. Section 43(e) specifically states that a utility may

not put bonded rates into effect until 150 days have passed. Because the municipality loses its

jurisdiction after only ninety days, a utility's right to bonded rates will always arise after the

municipality has lost its original jurisdiction over the rate proceeding.

25. Moreover, the supreme court expressly limited the effect of its decision in Lone Star

Gas to cases arising before September 1, 1983, the effective date of significant amendments to

PURA. Lone Star Gas , 656 S.W.2d at 427 .

26. It is more sensible to view interim rates and bonded rates as separate and

independent methods by which a utility may obtain rate relief in its entire service area,

rather than alternative procedures for setting rates inside and outside city limits. A utility

might first request interim rates in order to avoid posting a large bond. If the Commission did

not approve the interim rates, the utility could then post a bond, which it would risk losing

entirely or in part if final rates set by the Commission were lower than the bonded rates.

27. In March 1984, the NRC formed a Technical Review Team to identify and resolve

all regulatory issues raised by Texas Utilities' attempt to obtain an operating license. The

utility, in turn, created the Comanche Peak Response Team to assess and resolve any

issues raised by the Technical Review Team. In January 1985, the Technical Review

Team issued a letter suggesting that Comanche Peak was deficient in the areas of quality

assurance and quality control. In response, the utility formed the Design Adequacy

Program and the Corrective Action Program to address the NRC's concerns and ensure

that Comanche Peak received an operating license. The NRC issued a license for

Comanche Peak Unit 1 in February 1990.

28. The Commission rejected several of Texas Utilities' attempts to justify costs

associated with Comanche Peak. For example, the Commission found: (1) the plant cost

comparisons tendered by the parties were not credible for purposes of establishing a

reasonable cost, (2) the cost variance analysis tendered by the utility had limited, if any,

value in a prudence review of Comanche Peak, (3) the schedule variance analysis tendered

by the utility did not credibly evaluate the post-March 1985 schedule extensions, and (4)

the present value revenue requirements analysis and capital cost correction analysis

tendered by Texas Utilities were improper methodologies for quantifying the impact of a

seven-month delay. However, the Commission's final order shows that it did accept

much of Texas Utilities' and the Nielsen-Wurster Group's evidence supporting the

prudence of a variety of decisions related to the overall construction and management of

Comanche Peak.

29. This Court has previously rejected similar arguments. In City of El Paso v. Public

Utility Commission we held:

Requiring the Commission to adopt or reject witnesses' testimony in toto,

especially when the testimony concerns a multi-faceted issue such as [prudence],

would hobble the Commission's ability to assess each witness and render its

decision based solely on the testimony it found credible.

City of El Paso v. Public Util. Comm'n , 839 S.W.2d 895, 906-07 (Tex. App.--Austin 1992,

writ granted).

30. The Cities and Public Utility Counsel base their argument on the following

statement contained in the Examiners' Report: "Although the examiners conclude that

certain [Texas Utilities] management decisions were imprudent and undoubtedly

contributed to the Company's licensing problems, they do not find that those practices

rise to the level of imprudence which would justify a substantial disallowance of

Comanche Peak costs." That the Report expresses only the view that not all costs should

be disallowed because they were not all occasioned by utility imprudence is clarified by

the examiners' careful explanation of their position:

True, certain unreasonable conduct unquestionably contributed to the NRC

staff's shift in position with respect to its expectation of proof, as reflected

in the Third Technical Team letter, but other circumstances also

contributed to this change in position. In other words, the imprudent

conduct of [Texas Utilities] did not result in the necessity to incur all of the

post-1984 costs.

31. Finding of fact 138 states: "As discussed in Section VI.Q.2. of this Report, the

evidence does not support imprudence disallowances of the magnitude proposed by the

intervenors."

32. The Commission made the following disallowances:

Item Amount (Millions of Dollars)

Electrical Labor 51.3

Electrical Penetration Assemblies 16.2

Electrical Switchgear 4.1

Heating, Ventilation & Air Conditioning 60.1

Reactor Pressure Vessel Supports .4

Diesel Generators 10.6

DAP Root Cause Analysis 3.2

CPRT Start-Up Costs 90.5

CAP Start-Up Costs 79.9

Construction Permit Lapse .2

TOTAL $ 316.5

33. We limit our discussion to findings of fact 138, 139, and 140. The Cities and Public

Utility Counsel waive any separate attack on findings of fact 141 and 142 in their brief,

stating that they consist primarily of calculations that "fall out" of the three previous

findings. We understand this to mean that if the three preceding findings are sufficient,

there is no independent reason that findings of fact 141 and 142 are improper. Findings

of fact 143 through 152 are addressed separately in this opinion.

34. This Court held:

The "statutory language" to which [APA § 2001.141(d)] refers is the

language in the statute that confers authority on the agency to take the

complained-of action. In PURA, the legislature authorized the Commission

to make orders setting rates. A number of PURA's sections also detail the

criteria the Commission is to consider in setting rates. Therefore, only

when the Commission's findings are stated in PURA's express terms, or

when they represent criteria the legislature has directed the Commission to

consider , must the Commission also make findings of underlying fact.

City of El Paso , 839 S.W.2d at 908 (citations omitted) (emphasis added).

35. The Report also provides several references to the administrative record including

pages 28200-28204 of the statement of facts.

36. For example, the Commission found that Texas Utilities management's lack of

nuclear experience caused the imprudent decision to discontinue the integrated cube

schedule and implement a start-up driven schedule in May 1980. This led to reduced

productivity in electrical craft labor from June 1980 to September 1981. See Findings of

Fact 40, 41, 42. Accordingly, the Commission disallowed $51.3 million in electrical craft

labor costs. The Commission also disallowed $90.5 in costs expended in developing an

effective Comanche Peak Response Team program plan and $79.9 million in start-up costs

associated with the Corrective Action Program, having concluded that these costs arose from

management's imprudent decision to discontinue its comprehensive policy of updating original

design drawings. See Findings of Fact 78, 79.

37. Public Utility Counsel attempts to join the Cities in bringing this point of error.

However, because its motion for rehearing filed with the Commission does not raise this

claim, it has waived the right to raise it on appeal. APA § 2001.171 (requiring a party to

a contested case to exhaust administrative remedies before seeking judicial review).

38. The Commission established this rule pursuant to PURA section 43(a) which

provides:

The statement of intent [to change rates] shall include proposed revisions of

tariffs and schedules and a statement specifying in detail each proposed

change, the effect the proposed change is expected to have on the revenues

of the company, the classes and numbers of utility customers affected, and

such other information as may be required by the regulatory authority's rules

and regulations.

PURA § 43(a) (emphasis added).

39. That CWIP allowances were not made as a direct dollar-for-dollar offset of

imprudence disallowances is clear when comparing the total disallowance for Comanche

Peak Units 1 and 2, $1,381,144,563, with the amount of CWIP included in rate base,

$695,177,625. This is consistent with the Commission's obligation to include CWIP in

rate base only to the extent necessary to ensure the utility's financial integrity.

40. There is no explanation in the Examiners' Report as to why the Examiners did not

include all 100 contracts reviewed by the Reed Consulting Group in their chart.

41. We note that a chart entitled Summary of Recommended Disallowances-Gas Contracts

appearing on page 434 of the Examiners' Report shows an additional recommended

disallowance for open access transportation. The total recommended disallowance on this

chart is therefore $81,504,776. Without explanation, in the summary section on page 479, the

examiners dropped this $3 million disallowance leaving a recommended total disallowance of

$78,504,776.

42. The Commission disallowed less than the examiners recommended in four

instances:

Contract No. Examiners' Recommendation Commission's

Disallowance

1690 (Empire) $ 19,222,738 $ 0

3205 (PG&E) $ 13,453,686 $ 0

3697 (Coronado) $ 1,916,756 $ 1,455,193

3011, 3701, 3707

(Houston Pipeline,

Panhandle) $ 16,721,007 $ 0

The Commission disallowed more than the examiners recommended in one instance:

Contract No. Examiners' Recommendation Commission's

Disallowance

3076 (Amalgamated) $ 0 $ 527,308

43. Texas Utilities asserted that its three major gas contracts expired between late 1980

and 1983, at a time when its forecasts showed a continuing increase in the cost of natural

gas and when prices were still escalating. The utility entered into new contracts during a

sellers' market with the result that the new contracts were less favorable to the utility

than they would have been if they had entered into them at another time. Texas Utilities

attributes its failure to obtain gas in an interstate market to a desire to remain free from

burdensome and expensive federal regulation.

44. The utility's testimony was that it had for a short time credited purchases made

pursuant to a short-term commercial contract with Amoco to contract number 1627

because of delay in setting up the short-term contract for payment. Presumably, the

utility only realized its failure to change its records after the rate-making proceeding had

been under way for some time.

45. We understand "common equity" to mean the utility's common stock. We refer to

the utility's common stock as "common equity" so as not to deviate from the terminology

used by the Commission in the proceeding below. See GTE-SW , 833 S.W.2d at 157 n.3.

46. Return on equity is one element of the rate of return on a utility's invested capital.

Other elements include long-term and short-term debt and preferred stock.