Public Utility Commission of Texas and South Texas Electric Cooperative, Inc. v. City Public Service Board of San Antonio

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

ON MOTION FOR REHEARING

NO. 03-02-00547-CV

Public Utility Commission of Texas and South Texas Electric Cooperative, Inc., Appellants

v.

City Public Service Board of San Antonio, Appellee

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

NO. 97-11665, HONORABLE PAUL DAVIS, JUDGE PRESIDING

O P I N I O N

To address concerns raised in appellee's motion for rehearing, we withdraw our

original opinion and judgment issued April 24, 2003, and substitute this opinion in its place.

In this appeal, we must decide whether the Public Utility Commission exceeded its

statutory authority by conducting a proceeding to determine the transmission cost of service (TCOS)

for the City Public Service Board of San Antonio (San Antonio) as a part of its regulatory oversight

of the wholesale energy market under the Public Utility Regulatory Act of 1995 (PURA 95). A

utility's TCOS includes all reasonable and necessary expenses, plus a reasonable return on

investments, associated with owning and operating its transmission network. The Commission held

individual TCOS proceedings for every utility in the statewide power-transmission grid. Then, the

Commission proceeded to use the utilities' TCOS numbers to set statewide rates for use of

transmission lines in wholesale energy transactions. While the Commission was conducting these

proceedings, San Antonio brought a declaratory-judgment action challenging the Commission's

authority to enact a wholesale rate-setting scheme under PURA 95. San Antonio eventually

prevailed when the supreme court declared the rate-setting rules to be invalid. See Public Util.

Comm'n v. City Pub. Serv. Bd. of San Antonio , 53 S.W.3d 310, 325 (Tex. 2001). Relying on the

supreme-court decision, the district court "reversed and vacated" the Commission's order in San

Antonio's TCOS case. The Commission appeals, (1) contending that although it cannot use the TCOS

numbers to set rates, it can use them to carry out its other responsibilities under PURA 95. Because

we think that determining a utility's TCOS number is tantamount to setting its transmission-service

rates, we affirm the district court's judgment reversing the Commission's order.

BACKGROUND Texas utilities have voluntarily interconnected their regional transmission networks

to form a single grid called the Electric Reliability Council of Texas (ERCOT). When power is sold

in a wholesale transaction, it is transported over this ERCOT grid. Prior to PURA 95, utilities whose

transmission networks were directly connected within the grid could sell power to one another in

"bundled" transactions which used a single rate to cover generation, transmission, and distribution

services. However, not all wholesale transactions were between utilities with directly connected

networks; many such transactions required power to be transmitted or "wheeled" over the networks

of other utilities. In these cases, payments to the wheeling utilities were negotiated on a case-by-case

basis. PURA 95 eliminates these distinctions and requires utilities to offer nondiscriminatory access

to their transmission facilities and to charge uniform rates for such access.

PURA 95

In 1995, the legislature amended PURA to promote competition in the wholesale

electricity market. See Act of May 28, 1995, 74th Leg., R.S., ch. 765, § 2.01(a), 1995 Tex. Gen.

Laws 3972 , 3988-89 (codified at Tex. Util. Code Ann. § 31.001 (c)). The centerpiece of PURA 95's

wholesale-deregulation scheme is a requirement that electric utilities provide open access to their

transmission facilities. See id. § 2.08, 1995 Tex. Gen. Laws at 4000 ( Tex. Util. Code Ann. § 35.004 ,

since amended). In this open-access regime, each utility must provide transmission service at rates

and terms comparable to what it costs the utility to operate its own system. Id. This requires the

utilities to separate or "unbundle" the costs associated with their transmission facilities from the

costs associated with their generation and distribution facilities.

PURA 95 gives the Commission several responsibilities related to oversight of the

transmission-service market. The Commission is directed to ensure that each utility provide

transmission service in a nondiscriminatory manner, and recover its reasonable costs in providing

such transmission service so that the utility's other customers are not required to bear those costs.

See id. PURA 95 also provides that "[t]he [C]ommission may require a utility . . . to provide

transmission service at wholesale to another utility . . . and may determine whether the terms and

conditions for the transmission service are reasonable." See id. § 2.07, 1995 Tex. Gen. Laws at 3999

( Tex. Util. Code Ann. § 35.005 , since amended). Moreover, the Commission is authorized to require

parties with wholesale-transmission disputes to submit to nonbinding alternative dispute resolution.

See Tex. Util. Code Ann. § 35.008 (West 1998). In order to fulfill these responsibilities, the

Commission must "adopt rules relating to wholesale transmission service, rates, and terms." See

id. § 35.006(a) (emphasis added). Utilities that own transmission facilities are, in turn, required to

"file a tariff in compliance with [C]ommission rules." See id. § 35.007(a).

The Rules

The Commission adopted rules governing wholesale transmission in 1996. See 21

Tex. Reg. 1397 (1996), adopting 16 Tex. Admin. Code § 23.67 [hereinafter Rule 23.67], and 21

Tex. Reg. 3343 (1996), adopting 16 Tex. Admin. Code 23.70 [hereinafter Rule 23.70]. These rules

required each ERCOT utility to pay every other ERCOT utility a "facilities charge" for transmission

service. See Rule 23.67(g). Each ERCOT utility was to pay this facilities charge in its capacity as

a transmission customer, and to receive a portion of the facilities charges paid by other utilities in

its capacity as a transmission provider. This facilities charge had two components, an "impact fee"

and an "access fee." See Rule 23.67(g)(1). The impact fee made up thirty percent of the facilities

charge and was calculated based upon the distance traveled by the electricity in the transmission

customer's wholesale transactions. See id. ; Rule 23.70(o); City Pub. Serv. Bd. v. Public Util.

Comm'n , 9 S.W.3d 868, 872-73 (Tex. App.--Austin 2000), aff'd , 53 S.W.3d 310 (Tex. 2001). The

access fee, which made up the remaining seventy percent of the facilities charge, was not distance

sensitive. The yearly access fee paid by each utility in its capacity as a transmission customer was

to be based on its percentage of use of the ERCOT grid. More precisely, the access fee was to reflect

the transmission customer's percentage of the peak-load quantity of electricity channeled through

the ERCOT grid, applied to the TCOS for the entire grid. See City Pub. Serv. Bd. , 53 S.W.3d at 314 ;

City Pub. Serv. Bd. , 9 S.W.3d at 872 ; Rule 23.67(g). To calculate access fees, the Commission was

first to determine each ERCOT utility's TCOS, which consists of its reasonable and necessary

expenses, plus a reasonable return on its investments, related to owning and operating transmission

lines. The Commission was to aggregate those costs to arrive at the TCOS for the entire grid. The

Commission was then to determine the maximum amount of electricity carried on the grid at any one

time during the relevant period, or its "total peak load" and each utility's percentage of that total.

City Pub. Serv. Bd. , 53 S.W.3d at 314 ; see City Pub. Serv. Bd. , 9 S.W.3d at 872 ; Rule 23.67(g)(1),

(5). Each transmission customer's access fee was then calculated by multiplying its percentage of

the aggregate peak load for the ERCOT grid by the TCOS for the entire grid. City Pub. Serv. Bd. ,

53 S.W.3d at 314 ; see Rule 23.67(g)(1). Relatedly, the amount that each ERCOT utility received

in its capacity as a transmission provider was to be determined by its individual TCOS as a

percentage of the aggregate TCOS for the entire grid.

To set transmission rates pursuant to its rules, the Commission initiated a series of

individual proceedings to determine the TCOS for each ERCOT utility. It also initiated a companion

generic proceeding to resolve common issues and set the transmission rates using the costs

determined in the individual cases. The generic proceeding and the individual proceedings worked

together. The Commission issued a preliminary order separating the general issues to be determined

in the generic proceeding from the utility-specific issues to be determined in the individual

proceedings. Once the TCOS numbers were determined in the individual proceedings, the

Commission used those numbers in the generic proceeding to set transmission-service rates-- i.e. ,

to determine the exact amount that each ERCOT utility was to pay every other ERCOT utility

according to the formula described above.

San Antonio's Challenge to the Rules

While these proceedings were taking place, San Antonio and Houston Lighting and

Power Company each filed declaratory-judgment actions claiming that the Commission had

exceeded its statutory authority in promulgating its wholesale-transmission rules. The causes were

consolidated and the trial court ruled in favor of the Commission. This court then reversed the trial

court, agreeing with the utilities that the Commission had exceeded its authority in promulgating its

rules. See City Pub. Serv. Bd. , 9 S.W.3d at 877-78 . We reasoned that PURA 95 did not grant the

Commission authority to establish any transmission-access rate, regardless of the methodology.

See id. at 873 . In reaching this conclusion, we explained that PURA 95 gave the Commission

oversight of wholesale transmission service, but not the authority to set rates initially:

We believe that the subchapter [dealing with wholesale transmission service], read

in context, contemplates that negotiations between parties regarding transmission-access pricing be voluntary and contractual. Should a party be dissatisfied with the

outcome of the negotiations, that party may then seek the aid of the [Commission],

which can either order the parties to submit to alternative dispute resolution, or may

settle the dispute by establishing a reasonable rate after notice and a contested-case

hearing.

See id. at 875 . The supreme court affirmed, agreeing that PURA 95 does not grant the Commission

authority to set wholesale transmission rates for municipally owned utilities such as San Antonio,

which are not otherwise subject to the Commission's traditional ratemaking authority. (2) It further

elaborated on the Commission's oversight role in resolving disputes between the requesting and

providing utilities in a way that ensures that the transmission provider is offering nondiscriminatory

access to its network at a reasonable rate and that the transmission provider's customers are not

unfairly bearing the transmission costs inflicted by the requesting utility. See City Pub. Serv. Bd. ,

53 S.W.3d at 320 . The Commission does not have the power to set wholesale transmission rates as

an initial matter, but once a dispute arises, it can either refer the parties to alternative dispute

resolution, or it can set a reasonable rate to resolve that dispute. (3) Id. The supreme court added that

the Commission has the independent ability to order utilities to appear before it even without a

dispute to ensure that they are providing non-discriminatory access and to protect their customers

from bearing others' transmission costs.

San Antonio's TCOS Case

While the declaratory-judgment action was on appeal, San Antonio sought judicial

review of its TCOS as determined by the Commission after the contested-case proceeding. See Tex.

Gov't Code Ann. § 2001.171 (West 2000). San Antonio alleged that the Commission had ignored

or underestimated certain portions of its transmission costs and had therefore set a TCOS number

that was too low. The district court initially affirmed the Commission's order. But shortly after we

declared the transmission rules invalid in the declaratory-judgment appeal, the district court granted

San Antonio's motion for new trial, vacated its earlier judgment, and abated the cause pending the

final resolution of the declaratory-judgment action. Once the supreme court ruled that the

transmission rules were invalid, the district court conducted a new hearing and received additional

briefing to review San Antonio's TCOS. San Antonio argued that the Commission's order setting

its TCOS should be vacated and declared void and invalid for lack of agency authority. The

Commission argued that the court should affirm the agency order. (4) The district court vacated the

Commission's order, declaring it to be "void and invalid as exceeding the authority and jurisdiction

of the [Commission]." On appeal, the Commission asserts that although the TCOS proceedings were

initially conducted as part of a rate-setting scheme, it has other responsibilities that empower it to

determine the TCOS of individual utilities.

DISCUSSION

This is a suit for judicial review of a Commission decision made after a contested

case. See Tex. Util. Code Ann. § 15.001 (West 1998); Tex. Gov't Code Ann. § 2001.171 (West

2000). The trial court was therefore authorized to reverse the case if the agency's findings,

inferences, conclusions, or decisions were in excess of the agency's statutory authority. See Tex.

Gov't Code Ann. § 2001.174 (2)(B). This ground for reversal presents a question of law that we

review de novo . See Texas Dep't of Transp. v. Jones Bros. Dirt & Paving Contractors , 24 S.W.3d

893, 898 (Tex. App.--Austin 2000), rev'd on other grounds , 92 S.W.3d 477 (Tex. 2002). The

Commission has only those powers conferred upon it by the legislature in clear and unmistakable

language. City Pub. Serv. Bd. , 53 S.W.3d at 315-16 ; Public Util. Comm'n v. GTE-Southwest, Inc. ,

901 S.W.2d 401, 407 (Tex. 1995). When the legislature expressly confers a power on an agency,

it also impliedly intends that the agency have whatever powers are reasonably necessary to fulfill its

express functions or duties. See GTE-Southwest, Inc. , 901 S.W.2d at 407 . An agency may not,

however, exercise what is effectively a new power on the theory that such exercise is expedient for

the agency's purposes. See id.

The Commission concedes that at the time it conducted San Antonio's contested-case

proceeding, it intended to use the TCOS number to set rates in the generic rate proceeding--a use

beyond its statutory authority. However, the Commission asserts that the reviewing court is not

bound by the reasons given in an agency order and may affirm if there is any valid legal basis for the

agency action. See Central Power & Light Co. v. Public Util. Comm'n , 36 S.W.3d 547, 559 (Tex.

App.--Austin 2000, pet. denied). The Commission argues that the oversight responsibilities

contemplated by PURA 95 invest it with the authority to initiate a proceeding to determine San

Antonio's TCOS, even though it may not impose rates. San Antonio rejoins that determining a

utility's TCOS is tantamount to setting its transmission rates. We agree that the TCOS case was an

integral part of the invalid rate-setting scheme. (5)

Under traditional electric-utility regulation, large, vertically integrated utilities

operated as monopolies in the areas they served. These utilities would generate, transmit, and retail

electricity to end-use customers. The Commission was authorized to set rates for each investor-owned utility at a level that would allow it to recoup its prudently incurred costs and to earn a

reasonable return on its investments. See id. at 553 ; 16 Tex. Admin. Code §§ 25.231 , .235(a) (2002).

The TCOS determination applies these same rate-setting principles to the wholesale transmission

market. That is, the final TCOS number represents the utility's reasonable and necessary expenses,

together with a reasonable return on its prudently invested capital, involved in operating its

transmission facilities. As San Antonio points out, this number is the first and most essential part

of establishing a final rate--it sets the amount to be recovered. The only thing left to do is apply

some methodology that determines how the amount is to be recovered. Before its rules were

invalidated, the Commission used the formula described above as its rate-setting methodology.

Because the Commission admits that it initiated the TCOS proceeding for a purpose

that was undoubtedly beyond the scope of its authority--to set rates as an initial matter--its final

order must be reversed unless it had some independent basis of authority to initiate such a case. The

Commission asks us to find such authority in its oversight responsibilities. It claims that it cannot

determine whether San Antonio is providing reasonable rates or being forced to subsidize other

utilities without first knowing the costs associated with its provision of transmission service. The

Commission also argues that its authority to oversee San Antonio's separation of functions

encompasses the authority to determine its TCOS. (6) We reject the Commission's arguments.

The supreme court clearly held that the Commission was not authorized to set rates

for municipally-owned utilities outside of a dispute-resolution context. See City Pub. Serv. Bd. , 53

S.W.3d at 320 . In so holding, it explicitly referenced the Commission's oversight responsibilities

in a context that contrasted them with rate-setting. See id 320-21 . It would elevate form over

substance for us to hold that although the Commission cannot set San Antonio's rates, it can

nonetheless determine, to the penny, the precise amount of San Antonio's reasonable and necessary

expenses together with a reasonable return on its prudently invested capital -- i.e. , the precise amount

it would be allowed to recover if the Commission were to set rates. To allow the Commission to

develop this number apart from its role of resolving a dispute, and to "use" it to check

reasonableness or conduct its other oversight functions bears too close a nexus to actual rate-setting

to withstand scrutiny.

The Commission asks us to draw a hypertechnical distinction between determining

San Antonio's TCOS and determining how San Antonio's TCOS is to be recovered. We recognize

that, in carrying out its oversight responsibilities, the Commission must take some measure of the

costs associated with San Antonio's transmission facilities; however, such authority simply cannot

encompass an initial determination of a municipal utility's TCOS, which is tantamount to an initial

determination of its wholesale transmission rates. (7) We hold that the Commission was without

authority to conduct TCOS proceedings for municipally owned utilities such as San Antonio, and

overrule the Commission's single issue. (8)

Upon finding that the Commission had exceeded its statutory authority in conducting

its TCOS proceeding, the district court "reversed and vacated" the Commission's order, which it

found to be "void and invalid" as exceeding the Commission's authority. This is a suit for judicial

review governed by section 2001.174 of the government code. That section authorizes the trial court

to reverse or remand, but not vacate, an agency decision if the agency's findings, inferences,

conclusions, or decisions exceeded its statutory authority. See Tex. Gov't Code Ann.

§ 2001.174 (2)(B). The court was not, in these circumstances, authorized to vacate the agency's

order. See BFI Waste Sys., Inc. v. Martinez Envtl. Group , 93 S.W.3d 570, 581 (Tex. App.--Austin

2002, pet. filed).

CONCLUSION

The Commission was without authority to determine San Antonio's TCOS apart from

a dispute which would entitle it to set rates. Because the appropriate remedy in this case was reversal

or remand to the Commission, we modify the judgment of the trial court to reverse the agency order

and render judgment in favor of San Antonio that the Commission was without authority to initially

set rates. See Pretzer v. Motor Vehicle Bd. , No. 3-02-403-CV, slip op. at 10, 2003 Tex. App. LEXIS

277 , at *15 (Tex. App.--Austin Jan. 16, 2003, pet. filed). As modified, we affirm the trial-court

judgment reversing the Commission's order.

Bea Ann Smith, Justice

Before Chief Justice Law, Justices B. A. Smith and Yeakel

Modified and, as Modified, Affirmed

Filed: June 12, 2003

1. In addition to the Commission, an intervenor, South Texas Electric Cooperative, Inc., urges

us to reverse the trial court's judgment. Because its arguments are substantially the same as the

Commission's, we will treat them together.

2. The supreme court did, however, find that the traditional, broad power of the Commission

to "establish and regulate" rates for investor-owned utilities, such as Houston Lighting and Power

Company, encompassed the power to set wholesale transmission rates for those utilities. The court

nonetheless affirmed our invalidation of the rules with respect to investor-owned utilities on the

ground that the access fee violates the provisions of PURA 95 prohibiting subsidies among utilities

and requiring that rates for wholesale transmission service be comparable to each utility's use of its

own system. See Public Util. Comm'n v. City Pub. Serv. Bd. of San Antonio , 53 S.W.3d 310, 323-24

(Tex. 2001).

3. In its motion for rehearing, San Antonio asks us to rephrase this sentence. Because our

formulation comports with the supreme court's opinion on this issue, we decline to do so. See id.

at 320 ("Once confronted with a dispute between utilities, the Commission can arrive at a reasonable

rate to resolve that dispute.").

4. The Commission also argued that district court was not authorized to vacate the order but

could only reverse and remand to the agency. See Tex. Gov't Code Ann. § 2001.174 (West 2000).

5. In 1999, the legislature amended PURA and authorized the Commission to set wholesale

transmission rates using a method similar to that invalidated by the supreme court. See Tex. Util.

Code Ann. § 35.004 (d) (West Supp. 2003). In this opinion, however, we are concerned only with

the authority of the Commission to determine a utility's TCOS when it issued its final order in 1997.

6. To support this claim, it cites to a rule requiring utilities to make filings with the

Commission separating out their costs and rates, based on the costs associated with their generation,

transmission, and distribution operations. In the declaratory-judgment case, the supreme court

referred to this rule as an example of Commission authority to "adopt rules relating to wholesale

transmission service, rates, and access"--which the Commission was entitled to do under PURA 95.

See City Pub. Serv. Bd. , 53 S.W.2d at 319. The Commission apparently argues that the separation

of a utility's "costs and rates" associated with it transmission operations from the "costs and rates"

associated with its generation and distribution operations requires a determination of a utility's

TCOS.

7. We note that even if a determination of a utility's TCOS number were conceptually

distinct, in some meaningful way, from setting its rates initially, there surely would be little or no

practical distinction in situations where a utility attempts to charge a rate that would allow it to

recover more than its predetermined TCOS. Such a rate would immediately be "disputed" by its

transmission customers and the Commission could then step in to resolve this manufactured dispute

by setting a rate.

8. The Commission also attempts to argue that this very TCOS proceeding, where San

Antonio's costs were disputed by several intervening utilities, represents a dispute that it can resolve

by setting reasonable rates. This circular argument has no merit, as such disputes only arose in the

context of this invalid rate-setting procedure.