Harris County Hospital District v. the Public Utility Commission of Texas

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03-10-00647-CV

Harris County Hospital District, Appellant

v.

The Public Utility Commission of Texas, Appellee

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

NO. D-1-GN-09-002116, HONORABLE SUZANNE COVINGTON, JUDGE PRESIDING

MEMORANDUM OPINION

Appellant Harris County Hospital District appeals the trial court’s order affirming a

final order by the Public Utility Commission of Texas which granted in part the District’s complaint

against Southwestern Bell Telephone, LP d/b/a AT&T (“AT&T”). The District sought a refund from

AT&T, the District’s telecommunications provider, for overcharges from 1995 to September 2008

under the Prompt Payment Act (“PPA”).1 In its final order, the Commission ordered AT&T to pay

the overcharges for half of this period—six and one-half years—with interest until paid. Because

we conclude that the Commission’s order was arbitrary and capricious and prejudiced substantial

rights of the District, we reverse the trial court’s order and remand with instructions that the case be

remanded to the Commission for further proceedings consistent with this opinion.

1

See Tex. Gov’t Code Ann. §§ 2251.001–.055 (West 2008).

BACKGROUND

From 1995 to September 2008, AT&T charged the District late payment fees for

telephone service. In 2007, the District filed a formal complaint with the Commission alleging that

AT&T had improperly charged the late payment fees in violation of the PPA. The Office of the

Attorney General on behalf of the State intervened, and the matter was referred to the State Office

of Administrative Hearings for a hearing on the merits.

After the Commission determined that the District was subject to the PPA, the parties

stipulated that the amount of overcharges and interest during the thirteen year period was

$487,273.32. The only issue then at the hearing on the merits was the appropriate amount of refund.

The position of the State and the District was that the District should receive a full refund of the

stipulated amount of overcharges for the entire period. Citing the Commission’s rules and AT&T’s

tariff, they argued that there was no legal basis for the refund to be anything less than the full

amount. AT&T and Commission staff countered that the Commission had discretion to order less

than the full refund and that it should exercise that discretion and limit the refund to approximately

four years of overbilling. They argued that the District was not “blameless” and that AT&T’s

conduct was in “good faith.” The Commission staff also argued that “public interest” required the

District’s failure to complain for thirteen years to be taken into account.

In his proposal for decision, the administrative law judge (“ALJ”) recommended a

refund of the full stipulated amount. He concluded that he could find no “basis in statute or rule”

to “recommend anything less than a full refund.” The ALJ also provided analysis of the parties’

policy arguments but stated that he could not “make such a policy determination” and that “any

2

policy exceptions . . . must be made by the Commission itself.”2 He further stated that the “only

arguable basis upon which the Commission could order less than a full refund would be for policy

reasons not previously enumerated in Commission precedent.” His conclusions of law included that,

under Commission substantive rule 26.27(a)(3)(B)(i) and the terms of AT&T’s tariff, the refund

must be for the entire period of overbilling. See 16 Tex. Admin. Code § 26.27 (2011) (Public Util.

Comm’n of Tex., Bill Payment and Adjustments).

After an open meeting, the Commission adopted the ALJ’s proposal for decision with

the exception that the Commission limited the refund to the preceding six and one-half years rather

than the full 13-year period of overbilling. In its order, the Commission stated its reasons for the

partial refund:

The Commission notes that the period of overbilling in this case, 1995 to 2008, is an

extraordinary long one, particularly when considering the nature of the complainant.

[The District] is a large, sophisticated public entity with sufficient resources to have

2

In his analysis, the ALJ found the arguments of AT&T and the Commission staff to be

“unjust and untenable.” He explained:

Staff and AT&T essentially argue that [the District]’s lack of diligence in

complaining of late payment charges should serve to limit the amount of refund paid

back to [the District]. On close examination, this argument seems patently

inequitable. Put bluntly, Staff and AT&T’s argument is this: because [the District]

should have never paid AT&T the late payment charges and because [the District]

did not realize it and complain for a long time, AT&T should be allowed to keep the

money—money it was never entitled to receive. To the ALJ, this argument seems

unjust and untenable. It allows AT&T to have a windfall simply because both AT&T

and [the District] were allegedly mistaken in their belief as to the applicability of the

PPA. At a minimum, it seems that equity would dictate that the parties at least be

restored to the positions they would have been in if the law had been followed by all

parties. Namely, all amounts that should not have been paid by [the District] should

be refunded to it.

3

discovered and addressed this situation long before it brought this complaint to the

Commission in 2007. It is in a better position than most other customers to discover

the overbilling of late charges at issue in this case. Thus, the Commission finds it

appropriate to hold [the District] partially responsible for the prolonged accrual of

overcharges in this case.

In addition, the Commission acknowledges that the question of whether the Prompt

Payment Act applied to late charges to entities such as [the District] was

unsettled until last year when the Commission issued its order denying the appeal

of Order No. 19. Prior to the decision, the Commission recognizes that

telecommunications utilities had a reasonable basis to the position that [the Public

Utility Regulatory Act] governed this question. Further, the Commission notes

AT&T’s assurances during the March 27, 2009 open meeting that it is conforming

its billing to the Prompt Payment Act, and the Commission expects that all other

telecommunications utilities will similarly follow the Prompt Payment Act.

“Consistent with the above discussion,” the Commission deleted the ALJ’s finding of fact 13 and

conclusions of law 8 and 11.3 The Commission also added the following findings of fact 10A, 10B,

and 15A and conclusions of law 6A and 11A:

Findings of Fact

10A. [The District] knew, or should have known, that from at least 1995 until 2008

AT&T was improperly charging [the District] late payment charges that were

not permitted under the Prompt Payment Act.

10B. It is appropriate to hold [the District] partially responsible for the prolonged

accrual of overcharges in this case.

3

In the ALJ’s proposal for decision, finding of fact 13 stated: “As far back as 2000, AT&T

recognized that the issue of payment penalties applicable to governmental entities was addressed by

the Prompt Payment Act.” In its final order, the Commission stated that it deleted finding of fact

13 because it was “premised, at least in part, on statements attributable to AT&T that were actually

made by a predecessor entity that is not . . . a party to this current case.”

The ALJ’s conclusions of law 8 and 11 stated that the District was entitled to a full refund

plus interest from 1995 to 2008 and that the District’s complaint and request for relief should

be granted.

4

....

15A. Given the specific facts of this case, it is appropriate to limit the amount that

AT&T should refund to the amount of overcharges over the last six and one-

half years, plus interest.

Conclusions of Law

6A. Under P.U.C. Subst. R. 26.3, the Commission possesses the discretion to

order a full refund, partial refund, or no refund as a result of overbilling by

a utility.

....

11A. The complaint of [the District] against AT&T and the request for the

Commission to grant relief to [the District] should be granted in part.

The State and the District filed motions for rehearing which were overruled by

operation of law. The District then filed its petition for judicial review of the Commission’s order.

See Tex. Util. Code Ann. § 15.001 (West 2007). After a hearing, the trial court signed its order

affirming the Commission’s final order. This appeal followed.

ANALYSIS

The District raises five issues on appeal. The District contends that: (1) the

Commission violated section 2003.049(g)–(h) of the government code when it modified the ALJ’s

proposal for decision, see Tex. Gov’t Code Ann. § 2003.049(g)–(h) (West 2008); (2) the

Commission exceeded its authority when it ordered a refund of only half of the period of admitted

overbilling or that it was an abuse of discretion, arbitrary and capricious, a prohibited ad hoc

rulemaking, or not reasonably supported by substantial evidence; (3) the Commission exceeded its

authority, abused its discretion and/or acted arbitrarily or capriciously by declaring it in the “public

5

interest” and therefore good cause to order a partial refund on admitted overbilling by AT&T; (4) the

Commission exceeded its authority, abused its discretion and/or acted arbitrarily or capriciously by

relying upon substantive rule 26.3 to make an exception to substantive rule 26.27(a)(3)(B)(i) when

the exception had a substantial negative fiscal impact on the District, see 16 Tex. Admin. Code

§ 26.3 (2011) (Public Util. Comm’n of Tex., Severability Clause), § 26.27(a)(3)(B)(i)); and (5) the

Commission exceeded its authority, abused its discretion and/or acted arbitrarily or capriciously by

relying on substantive rule 26.3 to make an exception to AT&T’s general exchange tariff.

Standard of Review

We review the Commission’s order in this case under the substantial evidence

standard of review described in section 2001.174 of the government code. See Tex. Util. Code Ann.

§ 15.001; Tex. Gov’t Code Ann. § 2001.174 (West 2008). Among the statutory grounds requiring

reversal or remand, a court applying the substantial evidence rule shall reverse or remand an

agency’s order “if substantial rights of the appellant have been prejudiced because the administrative

findings, inferences, conclusions, or decisions are . . . not reasonably supported by substantial

evidence” or are “arbitrary or capricious or characterized by abuse of discretion or clearly

unwarranted exercise of discretion.” Tex. Gov’t Code Ann. § 2001.174(2)(E), (F).

“In determining whether an agency has acted arbitrarily or capriciously the reviewing

court must decide whether the agency order was based on a consideration of all relevant factors.”

Starr Cnty. v. Starr Indus. Servs., Inc., 584 S.W.2d 352, 355 (Tex. Civ. App.—Austin 1979, writ

ref’d n.r.e.); see also Flores v. Employees Ret. Sys. of Tex., 74 S.W.3d 532, 544–45 (Tex.

App.—Austin 2002, pet. denied). “The major factor that runs throughout arbitrary-capricious review

6

cases is that parties must be able to know what is expected of them in the administrative process.”

Starr Cnty., 584 S.W.2d at 356. An agency also acts arbitrarily and capriciously when it

fails to follow the clear, unambiguous language of its own rules. See Rodriguez v. Service Lloyds

Ins. Co., 997 S.W.2d 248, 255 (Tex. 1999); Public Util. Comm’n of Tex. v. Gulf States Utils. Co.,

809 S.W.2d 201, 207 (Tex. 1991) (citation omitted) (“[I]f the Commission has failed to follow

the clear, unambiguous language of its own regulation, we must reverse its action as

arbitrary and capricious.”); see also Texas Health Facilities Comm’n v. Charter Med.–Dallas, Inc.,

665 S.W.2d 446, 454 (Tex. 1984) (discussing examples of agency action that are arbitrary

and capricious).

The District’s issues also address the construction of the Commission’s rules. We

review these questions de novo. Rodriguez, 997 S.W.2d at 254. “We construe administrative rules,

which have the same force as statutes, in the same manner as statutes.” Id. (citation omitted); see

also State v. Shumake, 199 S.W.3d 279, 284 (Tex. 2006) (addressing statutory construction).

“Unless the rule is ambiguous, we follow the rule’s clear language.” Rodriguez, 997 S.W.2d at 254

(citation omitted). We defer to an agency’s interpretation where there is vagueness, ambiguity, or

room for policy determinations in the regulation, but “we cannot defer to an administrative

interpretation that is ‘plainly erroneous or inconsistent with the regulation.’” Id. at 254–55 (quoting

Public Util. Comm’n of Tex., 809 S.W.2d at 207); BFI Waste Sys. of N. Am., Inc. v. Martinez Envtl.

Grp., 93 S.W.3d 570, 575 (Tex. App.—Austin 2002, pet. denied).

7

Amount of Refund

Because they are dispositive, we turn to arguments made by the District in its second

and third issues. The District contends that the Commission acted arbitrarily and capriciously when

it ordered a refund of fees from only half of the period of admitted overbilling and by declaring it

in the “public interest” and therefore good cause to order a partial refund. To support its arguments,

the District points to rule 26.27(a)(3)(B)(i), which states:

Overbilling. If charges are found to be higher than authorized by the DCTU’s tariffs

or the terms and conditions of service, an appropriate refund shall be made to the

customer. . . . The refund shall be made for the entire period of the overbilling.

16 Tex. Admin. Code § 26.27(a)(3)(B)(i).4 The Commission does not dispute that rule

26.27(a)(3)(B)(i) is clear and unambiguous and that its plain language supports a full refund “for the

entire period” to the District. See id.; Rodriguez, 997 S.W.2d at 254. Rather, the Commission

contends that under section 51.001(a) of Public Utility Regulatory Act and rule 26.3, it was within

its discretion to make an exception to rule 26.27’s refund requirement. See Tex. Util. Code Ann.

§ 51.001(a) (West 2007); 16 Tex. Admin. Code § 26.3.

a) Section 51.001(a)

The Commission argues that it has wide discretion under section 51.001(a) to balance

customer protection with public interest and that this discretion authorized it to order less than a full

4

Rule 26.27 uses the acronym DCTU to refer to a dominant certificated telecommunications

utility. 16 Tex. Admin. Code § 26.27(a) (2011) (Public Util. Comm’n of Tex., Bill Payment

and Adjustments).

8

refund to the District. See Public Util. Comm’n of Tex. v. Texas Tel. Assoc., 163 S.W.3d 204,

212–13 (Tex. App.—Austin 2005, no pet.) (discussing public interest determinations by

Commission).

During the relevant time period, section 51.001(a) stated in relevant part:

It is the purpose of this subtitle to grant the commission authority to make and

enforce rules necessary to protect customers of telecommunications services

consistent with the public interest.

Tex. Util. Code Ann. § 51.001(a).5 The Commission argues that this section authorizes it to balance

customer protection with public interest. Viewing the plain language of this section, however, it

does not support the Commission’s assertion that it has discretion to hold a customer responsible for

a utility’s overbilling or to protect a utility by not enforcing one of its rules. See Rodriguez,

997 S.W.2d at 254. Rather, the plain language of section 51.001(a) authorized the Commission to

enforce its rule “to protect customers of telecommunications services,” the District in this instance.

See id. We turn then to rule 26.3.

b) Rule 26.3

Rule 26.3 provides in relevant part that the Commission “may make exceptions to

this chapter for good cause.” 16 Tex. Admin. Code § 26.3. In its final order, the Commission

concluded that, under rule 26.3, “the Commission possesses the discretion to order a full refund,

5

This section was amended in May 2011, and the amendments deleted the quoted sentence

relied upon by the Commission here. See Act of May 1, 2011, 82d Leg., R.S., ch. 98, § 1, 2011 Tex.

Gen. Laws 98 (effective September 2011). Our references to section 51.001(a) refer to the section

prior to the 2011 amendments.

9

partial refund, or no refund as a result of overbilling by a utility.” On appeal, the Commission

explains that it “determined that good cause existed to make a policy decision to encourage large,

sophisticated entities to verify their phone bills more often than once every thirteen years.”

To support its discretion under rule 26.3 to order a partial refund or no refund for

overbilling for good cause on public interest grounds, the Commission points to prior decisions in

which it has stated its discretion to order partial or no refunds. See Tex. Pub. Util. Comm’n,

Application of Guadalupe Valley Elec. Coop., Inc., Docket No. 13168 (Nov. 4, 1994) (order)

(citing and addressing commission case precedent); see also Tex. Pub. Util. Comm’n,

Complaint of Memorial Hermann Healthcare Sys. Against Verizon Sw., Docket No. 34138

(July 31, 2007) (preliminary order) (recognizing Commission’s discretion); Tex. Pub. Util. Comm’n,

Complaint of Southwestern Tariff on Behalf of Frank Gillman Pontiac Against Sw. Bell Tel. Co.,

Docket No. 16310 (Feb. 5, 1997) (preliminary order) (same); Tex. Pub. Util. Comm’n, Complaint

of Manor Downs Against Sw. Bell Tel. Co., Docket No. 14452 (Nov. 25, 1996) (order on rehearing)

(same). These decisions, however, support the ALJ’s recommendation here to order a full refund.

In the Guadalupe Valley proceeding, the Commission adopted and incorporated the

portion of the ALJ’s proposal for decision in which the ALJ stated that the Commission “has long

followed a public interest standard in determining whether it is appropriate to order refunds in

various contested cases” and set out five “broad considerations” that the Commission used to decide

the amount of refund:

(1) the intent of the utility; (2) the character of the illegal charge; (3) the difficulty to

make a refund; (4) whether the utility (or shareholders) received excess profits due

10

to the illegal charge; and (5) whether the case arose as a result of a customer

complaint.

See Application of Guadalupe Valley, at 5–6. The ALJ noted that not every factor was mentioned

in each decision but that “the five identified issues encompass the generally applicable factors

balanced by the Commission in refund decisions.” See id. at 6. In that case, the issue of whether to

order a refund arose during a compliance audit initiated by the Commission, and the Commission

adopted the ALJ’s finding that the utility “demonstrated good cause not to order refunds.” See id.

at 15. The ALJ noted that no customers complained or sought to intervene to seek refunds in the

proceeding and found that “[i]t would be a long and tedious process . . . to determine a more accurate

refund.” See id. at 17, 20.

In both the Manor Downs and Gillman Pontiac proceedings, the Commission

referenced the Guadalupe Valley factors and its discretion to order a partial or no refund but ordered

a full refund for overbilling. In contrast with the Guadalupe Valley proceeding, these subsequent

proceedings were initiated by customer complaints seeking refunds for overbilling. In reaching its

decision in Manor Downs, the Commission found that “the equities in this instance might justify a

partial refund of the overcharges” but that it was “understandable that a customer overcharged by

a utility, such as Manor Downs, might presume that a full refund is forthcoming, based on the rule’s

present language.” Complaint of Manor Downs, at 6. The Commission directed its Staff “to develop

a substantive rule codifying the Guadalupe Valley factors” and to “incorporate any additional

considerations, principles, requirements, or limitations it finds to be in the public interest.” Id. at

6–7. Similarly, the Commission in Gillman Pontiac found as a threshold matter that the proceeding

11

should not be abated pending the adoption of an amended rule codifying the Guadalupe Valley

factors and that a “full refund should be required” if it was determined that the utility had

overcharged the complainants. Complaint of Sw. Tariff on Behalf of Frank Gillman Pontiac, at 4.

The Commission expressly referenced its order in the Manor Downs proceeding and the “lack of

specificity in the rule” as to the factors. Id. at 4–5. To date, the Commission has not codified the

Guadalupe Valley factors into a substantive rule.

As such, the ALJ observed the Guadalupe Valley factors and followed the

Commission’s precedent. The ALJ reviewed the five factors in his proposal for decision, concluding

that “three of these five factors clearly weigh against AT&T’s request to limit the refund” and

“[a]rguably” that a fourth factor also supported a full refund:

Specifically, factors three to five all support a full refund. It is easy to make a refund,

AT&T would receive a windfall and excess profits if allowed to keep the

unauthorized late payment charges, and the case has arisen as a result of a customer

complaint. Arguably, the character of the illegal charge—a late payment charge

prohibited by the PPA—might also support a full refund.

The ALJ concluded: “Thus, even considering past precedent that would allow less than a full refund,

the ALJ does not find it warrants such a recommendation in this case” and that “the only arguable

basis upon which the Commission could order less than a full refund would be for policy reasons

not previously enumerated in Commission precedent.”

The Commission adopted the ALJ’s proposal for decision except as to the relief

granted but set forth other factors that it considered to determine the appropriate amount of the

refund, such as the District’s size, sophistication, resources, and responsibility for the

12

“extraordinarily long” period of overbilling. The Commission in its final order also “emphasize[d]

that its conclusion in this docket regarding a partial refund [was] based on facts unique to this case

and [did] not signal a precedential deviation from prior Commission rulings regarding customer

refunds from utilities.” The Commission argues that, because there is no rule in place specifically

addressing the Guadalupe Valley factors, that it “continues to balance competing interests to

determine on a case-by-case basis what, if any amount, is appropriate to order for a refund” and

“continues to consider which, if any, of the factors are proper in a given case, and what policy

considerations to evaluate to determine the appropriate amount of a refund.”

Assuming without deciding that the Guadalupe Valley factors are valid, the

Commission fails to follow its own precedent. The Commission departs from its earlier

administrative policy to consider and balance the Guadalupe Valley factors in determining refund

cases and relies on factors after the hearing on the merits and the record was closed—such as the

size, sophistication, and resources of the customer and the customer’s fault in the period of

overbilling—contradicting the plain language of its rules. See 16 Tex. Admin. Code

§ 26.27(a)(3)(B)(i); Gulf States Utils. Co., 809 S.W.2d at 207. The Commission does not dispute

that rule 26.27(a)(3)(B)(i) supports a full refund “for the entire period” to the District. We also note

that the Commission has failed to cite, and we have not found, a Commission decision ordering less

than a full refund when the proceeding was initiated by customer complaint and the parties stipulated

to the amount of overbilling by the utility. Given the “clear, unambiguous language” of rule 26.27,

Commission precedent, and the absence of a codified rule setting forth factors to be considered in

13

refund cases for overbilling, we conclude that the Commission’s failure to follow rule 26.27’s refund

requirement was “arbitrary and capricious.” See Gulf States Utils. Co., 809 S.W.2d at 207.

We also find the analysis in the Flores opinion instructive. In that case, the Board

of Trustees for the Employees Retirement System of Texas denied Flores’s application for

occupational disability benefits based upon a policy that it adopted in a resolution several months

after Flores’s hearing. 74 S.W.3d at 544. This Court concluded that the post-hearing actions of the

Board were arbitrary and capricious. Id. at 545. We noted that, although administrative agencies

are not bound to follow their decisions in contested case hearings in the same way that courts are

bound, that courts “frequently require that an agency explain its reasoning when it ‘appears to the

reviewing court that an agency has departed from its earlier administrative policy or there exists an

apparent inconsistency in agency determinations.’” Id. at 544–45 (quoting City of El Paso v. El Paso

Elec. Co., 851 S.W.2d 896, 900 (Tex. App.—Austin 1993, writ denied)). Citing due process

concerns, this Court further noted that had Flores known about the change in policy, “she might have

presented her case differently.” Id. at 545. “For a hearing to be meaningful, the parties must be able

to present evidence on the issues to be decided.” Id. Applying this reasoning here, at a minimum,

had the District known that the Commission would be considering the factors that it did as

determinative of the amount of refund, the District “might have presented its case differently.” Id.

For these reasons, we conclude that the Commission’s finding that “it was appropriate

to limit the amount that AT&T should refund to the amount of overcharges over the last six and

one-half years, plus interest” and its corollary decision to order a partial refund to be arbitrary and

capricious. See id.; Starr Cnty., 584 S.W.2d at 356. We also conclude that the Commission’s

14

arbitrary limitation on the recovery period prejudiced substantial rights of the District. See Tex.

Gov’t Code Ann. § 2001.174(2). We sustain the District’s second and third issues on this basis and

need not address the District’s remaining arguments and issues.6 See Tex. R. App. P. 47.1.

CONCLUSION

Because we conclude that the Commission’s order was arbitrary and capricious and

prejudiced substantial rights of the District, we reverse the order of the trial court and remand with

instructions that the case be remanded to the Commission for further proceedings consistent with

this opinion.

__________________________________________

Melissa Goodwin, Justice

Before Justices Puryear, Rose and Goodwin

Reversed and Remanded

Filed: July 13, 2012

6

To the extent that the District seeks to have this Court order the Commission to adopt the

ALJ’s proposal for decision and to award it expert’s fees and attorney’s fees, we decline to do so.

See Tex. Gov’t Code Ann. § 2001.174(2) (West 2008); Tex. Util. Code Ann. § 15.003 (West 2007);

Ford Motor Co. v. Butnaru, 157 S.W.3d 142, 149 (Tex. App.—Austin 2005, no pet.) (“In a suit for

judicial review of an agency action, the reviewing court is empowered to issue only a general remand

when it finds error that prejudices an appellant’s substantial rights.”).

15