Bexar Metropolitan Water District v. Texas Commission on Environmental Quality, City of Bulverde and Guadalupe-Blanco River Authority

• Court: Court of Appeals of Texas
• Decided: October 20, 2005
• Docket: 03-04-00574-CV
• Status: Published

Opinion

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03-04-00574-CV

Bexar Metropolitan Water District, Appellant

v.

Texas Commission on Environmental Quality, City of Bulverde and Guadalupe-Blanco River Authority, Appellees

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 250TH JUDICIAL DISTRICT NO. GV302775, HONORABLE DARLENE BYRNE, JUDGE PRESIDING

OPINION

For an applicant to obtain a certificate of public convenience and necessity for water

utility service, the Texas Commission on Environmental Quality must “ensure” that the applicant

(i) possesses the financial, managerial, and technical capability to provide continuous and adequate

service, (ii) is capable of providing drinking water that meets specified statutory requirements, and

(iii) has access to an adequate supply of water. Tex. Water Code Ann. § 13.241(a)-(b) (West 2000).

The question presented is whether a municipality as applicant may demonstrate this capability

through contracts and interlocal agreements with a river authority that owns or operates water

distribution and treatment systems throughout a river basin. Bexar Metropolitan Water District

(“BexarMet”) sought judicial review of the Commission’s approval of the City of Bulverde’s

application for a certificate, after the Commission issued the certificate against the recommendation of an administrative law judge (“ALJ”). The district court denied BexarMet’s claims and affirmed

the Commission’s order.

In four issues, BexarMet appeals, contending that, by issuing a certificate to Bulverde,

the Commission violated the water code and its own rules. We hold that the Commission acted

within its authority when it granted a certificate to Bulverde. We therefore affirm the judgment of

the district court.

FACTUAL AND PROCEDURAL BACKGROUND

On June 28, 2000, the City of Bulverde, a new city located in a prime growth corridor

north of San Antonio, filed an application for a certificate to provide water utility service in western

Comal County. In addition to its incorporated limits, Bulverde sought to serve its extra-territorial

jurisdiction and some outlying areas. To provide a firm supply of treated water, Bulverde contracted

with Guadalupe-Blanco River Authority (“GBRA”) to join the Western Canyon Lake Treated Water

Supply Project. The operating agreement between GBRA and Bulverde obligates GBRA to design,

construct, finance, operate and maintain the water distribution system to provide treated water on

behalf of Bulverde. BexarMet, a water conservation district and municipal corporation created by

the Texas Legislature in 1945, requested a hearing on Bulverde’s application, and on November 3,

2000, BexarMet filed an application to amend its certificate to provide water utility service to an area

that overlapped with Bulverde’s requested service area.

After consolidating the two applications, a three-day hearing on the merits

commenced on June 11, 2002, before an ALJ. Specifically, the ALJ found that:

2 • Bulverde, by itself, does not possess the financial, managerial, and technical capability to provide continuous and adequate service;

• The Bulverde/GBRA contracts reveal an arms-length relationship with separate rights and duties between Bulverde and GBRA;

• A non-certificate holder in GBRA’s position would not be subject to the same enforcement authority from the Commission or the attorney general as a certificate holder would be;

• Bulverde failed to adequately demonstrate that it would not be feasible to satisfy some or all of its water needs from existing utilities;

• Bulverde did satisfy some of the statutory requirements for receiving a certificate if GBRA’s capabilities are also taken into consideration;

• In the long run, Bulverde’s access through GBRA to Canyon Lake water is superior to BexarMet’s projected water supplies;

• Based on GBRA’s long history of successfully providing drinking water to customers in several areas, Bulverde will be able to provide drinking water meeting applicable legal requirements;

• Bulverde will have sufficient funds to pay its $23,000 to $27,000 per year obligation for its right to 400 acre-feet of water from GBRA; and

• Granting the certificate would have a positive effect on Bulverde by helping to assure a long-term water supply to its residents, thereby promoting development, adding to its economic base, and attracting businesses.

Despite finding that Bulverde proposed the most reliable long-range water source and

would have satisfied the statutory requirements for a certificate if its contractual relationship with

GBRA were considered, the ALJ recommended that its application be denied. The ALJ further

recommended that the BexarMet application be approved in part.

After considering the ALJ’s proposal for decision and the arguments presented at a

hearing, the Commission rejected his recommendation. The Commission disagreed with the ALJ

3 on the threshold question of whether Bulverde could acquire the requisite capabilities through

contracts with GBRA, and found that the ALJ’s conclusion was not founded in law or based on the

policy of the Commission. The Commission further determined that Bulverde had the capability to

provide continuous and adequate service through its contracts with GBRA and had the more reliable

water supply for the long term needs of the requested service area. It unanimously approved

Bulverde’s application, denied BexarMet’s, and amended the order to reflect those determinations.

BexarMet filed suit for judicial review of the Commission’s decision. The district

court denied BexarMet’s request to remand the matter for additional evidence, dismissed BexarMet’s

request for a temporary injunction as moot, and affirmed the Commission’s order. This appeal

ensued.

ANALYSIS

The Controversy

BexarMet contends that water code section 13.241(a) requires the applicant itself to

possess the necessary capabilities to obtain a water service certificate, and urges that Bulverde’s

reliance on GBRA to satisfy the requirements of the statute is not allowed by the water code. See

id. § 13.241(a). Alternatively, BexarMet argues that if section 13.241(a) were interpreted to allow

applicants to acquire the requisite capabilities through contract, the agreement between Bulverde and

GBRA does not grant Bulverde sufficient control to satisfy the “continuous and adequate” service

requirement. See id. BexarMet further contends that the Commission abused its discretion by failing

to observe its own regulations requiring an applicant to prove that consolidation with another

existing utility in the area is not economically feasible.

4 The Commission responds that it correctly construed section 13.241(a) to allow

contracts to satisfy the water code’s requirements for certification and that Bulverde and GBRA

created an adequate contractual framework to accomplish this goal. The Commission further

responds that Bulverde’s application fulfilled state policy objectives regarding regionalization.

We are therefore asked whether a municipality, after assessing its internal capabilities

and finding them inadequate, can acquire the capability to provide water service through contracts

and interlocal agreements with a river authority.

Standard of Review

We review issues of statutory construction de novo. City of San Antonio v. City of

Boerne, 111 S.W.3d 22, 25 (Tex. 2003). Here, we are asked to construe section 13.241(a) of the

water code, concerning the granting of certificates by the Commission. Construction of a statute by

the administrative agency charged with its enforcement is entitled to great weight by reviewing

courts. State v. Public Util. Comm’n, 883 S.W.2d 190, 196 (Tex. 1994) (citing Dodd v. Meno, 870

S.W.2d 4, 7 (Tex. 1994)).

We review the Commission’s determination that Bulverde’s certificate application

satisfied the regulatory standards and was superior to BexarMet’s application under the substantial

evidence standard. See Tex. Gov’t Code Ann. § 2001.174 (West 2000). When a court is applying

the substantial evidence standard of review to an agency decision, the issue for the reviewing court

is not whether the agency’s decision was correct, but whether the record demonstrates some

reasonable basis for the agency’s action. Central Power & Light Co. v. Public Util. Comm’n, 36

S.W.3d 547, 557 (Tex. App.—Austin 2000, pet. denied). The test here is primarily one of

5 rationality. If the Commission based its order on substantial relevant evidence and it has made no

clear error of judgment, we are not authorized to overturn that order.

We also use the substantial evidence standard to determine whether the Commission

satisfied its own regionalization rules. An agency’s interpretation of its own regulations is entitled

to deference by the courts, even though that interpretation is not binding. Public Util. Comm’n v.

Gulf States Utils. Co., 809 S.W.2d 201, 207 (Tex. 1991); Lone Star Salt Water Disposal Co. v.

Railroad Comm’n, 800 S.W.2d 924, 929 (Tex. App.—Austin 1990, no writ). We will reverse the

Commission when it fails to follow the clear, unambiguous language of its own regulations, that is,

when its actions are arbitrary and capricious. Power Res. Group, Inc. v. Public Util. Comm’n, 73

S.W.3d 354, 357 (Tex. App.—Austin 2002, pet. denied). Thus, absent evidence that the

Commission is disregarding the plain language of its rules, we look to its expertise in calibrating

various policy considerations. Id. The agency responsible for regulating an industry must be

afforded sufficient flexibility to determine and carry out its clear legislative mandate. Id.

Interpreting Water Code Section 13.241(a)

Section 13.241(a) of the water code governs the granting of certificates. Tex. Water

Code Ann. § 13.241(a). It states, “In determining whether to grant a certificate . . . the commission

shall ensure that the applicant possesses the financial, managerial and technical capability to provide

continuous and adequate service.” Id. We look first to the plain and common meaning of the

statute’s words. Fitzgerald v. Advanced Spine Fixation Sys., Inc., 996 S.W.2d 864, 865 (Tex. 1999)

(citing Liberty Mut. Ins. Co. v. Garrison Contractors, Inc., 966 S.W.2d 482, 484 (Tex. 1998)).

6 “In determining whether to grant a certificate . . . the Commission shall ensure”

“[E]very word in a statute is presumed to have been used for a purpose, and a cardinal

rule of statutory construction is that each sentence, clause and word is to be given effect if reasonable

and possible.” Texas Workers’ Comp. Ins. Fund v. Del Indus., Inc., 35 S.W.3d 591, 593 (Tex. 2000)

(citing Perkins v. State, 367 S.W.2d 140, 146 (Tex. 1963)). Likewise, every word excluded from

the statute must be presumed to have been excluded for a purpose. Morrison v. Chan, 699 S.W.2d

205, 208 (Tex. 1985) (citing Cameron v. Terrell & Garrett, Inc., 618 S.W.2d 535, 540 (Tex. 1981)).

The opening words of this section are words of discretion. The phrases, “[i]n

determining whether to grant a certificate,” and “the commission shall ensure,” give the Commission

broad discretion in characterizing the requisite capabilities, and in determining which candidates for

certificates meet the statutory requirements. The legislature could have limited the Commission’s

discretion by using language that appears later in the same section, but it chose not to do so.

Specifically, section 13.241(e) requires the Commission to develop “by rule . . . a standardized

method,” while section 13.241(d) states what “the applicant must demonstrate.” Tex. Water Code

Ann. § 13.241(d)-(e) (West 2000). Thus, the language makes clear that the legislature vested

discretion in the Commission to evaluate the competing interests and their various capabilities.

“The applicant possesses”

The term “possess” is defined neither in the statute nor in the Commission’s

regulations.1 While section 13.241 of the water code requires the Commission to ensure that the

1 When the legislature has failed to define a specific word in a statute, courts apply its ordinary meaning. Tex. Gov’t Code Ann. § 312.002(a) (West 2005). Black’s Law Dictionary defines “possess” as “to have in one’s actual control.” Black’s Law Dictionary 1183 (7th ed., 1999).

7 certificate applicant possesses certain capabilities, it does not require the applicant to own the

facilities. This is consistent with the water code’s definition of “retail public utility” as a

“municipality [or] political subdivision . . . operating, maintaining, or controlling in this state

facilities for providing potable water service . . . .” Id. § 13.002(19) (West 2000). We agree with

Commissioner White’s statement at the hearing that, “[o]wnership is not something legally required,

which may be the only thing absent in Bulverde’s application on the first criteria.”

Companion Statutes

The determination that a municipality may demonstrate the required capabilities

through contracts and interlocal agreements with a river authority is also consistent with the

Interlocal Cooperation Act. See Tex. Gov’t Code Ann. § 791.026 (West 2004). Designed by the

legislature “to increase the efficiency and effectiveness of local governments by authorizing them

to contract, to the greatest possible extent, with . . . agencies of the state,” the statute specifically

contemplates contracts for water supply facilities. Id. §§ 791.001, .026 (West 2004). Section

791.026(a) states in pertinent part, “A municipality, district, or river authority of this state may

contract with another municipality, district, or river authority of this state to obtain or provide part

or all of: (1) water supply or wastewater treatment facilities . . . .” Id. § 791.026(a).

It defines “control” as “the direct or indirect power to direct the management and policies of a person or entity whether . . . by contract or otherwise.” Id. at 330. According to the ordinary meaning of the terms, then, Bulverde possesses the necessary capabilities to provide continuous and adequate service through its contracts with the GBRA.

8 To be sure, the Interlocal Cooperation Act does not supersede the specific

requirements for certificate applicants. It makes clear, however, the legislature’s intent to allow

municipalities to obtain the required capabilities to operate and construct water systems through

contracts with river authorities and its belief that these contracts increase the efficiency and

effectiveness of local government.

Continuous and Adequate Service

Before granting a certificate, the statute requires the Commission to ensure that the

proposed system possesses “the financial, managerial, and technical capability to provide continuous

and adequate service” to its customers. Therefore, the requirement of “continuous and adequate”

in section 13.241(a) is the standard to which Bulverde’s capabilities must rise before the

Commission may grant it a certificate. The statutory “continuous and adequate” standard for the

actual provision of water service arises elsewhere in the code, apart from the requirements for

receiving a certificate. See Tex. Water Code Ann. § 13.250 (West 2000). This is consistent with

the notion that the granting of a certificate is not an indication that the Commission approves of all

aspects of a particular plan, nor does it imply that a carrier is prepared to begin service at once. The

purpose of certification is to provide for a rational distribution of public utility services within

defined geographical areas. See Bradley Toben, Certificates of Convenience and Necessity Under

the Texas Public Utility Regulation Act, 28 Baylor L. Rev. 1115, 1116 (1976). Therefore, as its

name implies, the certificate is intended to be a “necessary” but not a sufficient condition of

operation.

9 There is substantial evidence in the record to support the conclusion that Bulverde

possesses the capabilities that would allow it to provide continuous and adequate service to its

customers. The Commission’s order recognizes that GBRA successfully operates five water

treatment plants and has over thirty years’ experience providing water to more than 70,000 persons

in Texas. At the time of the hearing before the ALJ, GBRA employed 27 water system operators.

The ALJ and the Commission found that Bulverde had over $1,000,000 in liquid assets for the fiscal

year ending December 31, 2000, and that it had sufficient funds budgeted for its annual water supply

contract obligations to GBRA.

There is also substantial evidence that Bulverde is capable of providing safe drinking

water and that it has access to an adequate supply of water. See Tex. Water Code Ann. § 13.241(a)-

(b). The ALJ found a “demonstrated need for service in the area,” and concluded that “[i]n the long

run, Bulverde’s access through GBRA to Canyon Lake water is superior to BexarMet’s projected water

supplies.” The ALJ found—and the Commission agreed—that Bulverde, through its contracts with

GBRA for a long-term supply of surface water, could provide the more reliable water supply for the

long-term needs of the area. In addition, the ALJ found that “[g]ranting the [certificate] would have

a positive effect on Bulverde by helping to assure a long-term water supply to its residents, thereby

promoting development, adding to its economic base, and attracting business.”

The ALJ also recognized the merits of BexarMet’s application, highlighting its

experience and capability as a water supplier for over 50 years, with 70,000 accounts and 250

employees. As Chairman Robert J. Huston observed, the Commission had to make a choice between

“two competing interests by . . . two quality players.” But it cannot be said that the Commission failed

10 to consider the relevant data, or that its decision was arbitrary, capricious, or represented an abuse of

discretion. While we recognize that agency action is not without bounds, if the Commission has

crystallized the competing interests and drawn rational conclusions from the evidence presented, we

can require no more. We find substantial evidence to support the Commission’s determinations that

Bulverde’s certificate application satisfied the regulatory standards and was superior to BexarMet’s

application.

Enforcement

While it is undisputed that Bulverde, as the certificate holder, is subject to the

enforcement of the Commission, BexarMet argues that the Commission is powerless to bring an

enforcement action against GBRA. The breadth of the Commission’s authority over public water

suppliers and retail public utilities, however, also allows it to enforce the statutory standards against

GBRA.

The Commission cites water code section 13.411 as its authority to enforce service

obligations against GBRA. Id. § 13.411(a) (West 2000). Section 13.411(a) empowers the attorney

general to bring an action on behalf of the Commission against any retail public utility that violates

Chapter 13 of the water code or an act of the Commission adopted under it. Id. In any enforcement

action against GBRA, section 13.411(a) would work in conjunction with one of the water code

provisions that impose obligations on retail public utilities that provide water without a certificate.

These sections include section 13.250(c), which prohibits any discontinuance, reduction, or

impairment of water service without Commission approval and section 13.250(d), which specifically

prohibits a retail public utility that has not been granted a certificate from discontinuing, reducing, or

11 impairing retail water or sewer service without approval of the Commission. Id. § 13.250(c)-(d) (West

2000). Additionally, section 13.139 mandates every district that furnishes retail water to provide

service, instrumentalities, and facilities that are safe, adequate, efficient, and reasonable. Id. § 13.139

(West 2000). The Commission may enforce these statutory obligations through administrative action

or civil suits, including suits for injunctive relief. Id. § 13.411.

Substantial evidence also supports the Commission’s determination that GBRA is

contractually obligated to operate the system in compliance with applicable legal standards. The

operating agreement between Bulverde and GBRA is “specifically subject to all applicable sections

of the Texas Water Code and Commission rules.” Additionally, GBRA must comply with all city

ordinances concerning the construction of the system and has agreed to provide Bulverde with enough

treated water per day to meet the service area’s projected needs for 20 years. We therefore disagree

with BexarMet’s assertion that there are inadequate enforcement mechanisms available to the

Commission in these circumstances to ensure a continuous and adequate water supply to Bulverde’s

service area.

Regionalization

BexarMet contends that the Commission erred by not requiring Bulverde, as an

applicant, to comply with the Commission’s own regionalization rules. It is the policy of the State of

Texas to encourage the optimum regional development of systems built for the filtration, treatment,

and transmission of water. Tex. Const. art. III, § 49-d(a). This policy, which prevents redundancy and

ensures low rates for water service, is codified in the water code and the health and safety code. See

Tex. Water Code Ann. § 13.241(d); Tex. Health & Safety Code Ann. § 341.0315(b) (West 2001).

12 Section 13.241(d) of the water code states that before the Commission grants a certificate for an area

which would require construction of a “physically separate” water system, an applicant must

demonstrate that regionalization or consolidation with another retail public utility is not economically

feasible. The Commission’s own rules implement the policy. 30 Tex. Admin. Code § 291.102(b)

(2003).

Substantial evidence supports the Commission’s finding that Bulverde’s system is not

“physically separate.” Bulverde’s system will be part of the Western Canyon Treated Water Project,

a regional treated water supply system that will deliver 10,000 acre-feet of water annually from Canyon

Lake to Comal, Kendall and parts of Bexar County. GBRA’s Director of Project Development

explained that the project draws raw water from Canyon Lake, sends it to a storage unit, treats it, and

then distributes it to several systems in the area, including Bulverde. He testified that Bulverde’s

system is not a stand-alone system because “Bulverde’s distribution system will be connected to the

[Western Canyon Project].” Additionally, the Commission found that, “having water supplied from

a regional provider such as the GBRA’s Western Canyon Project should result in economies of scale

and thus lower costs to consumers.” Because Bulverde’s water system is a regional system as

contemplated by the statutory scheme, Bulverde’s application met the requirements of the water code.

In its final issue, BexarMet argues that its motion to remand was improperly denied by

the district court. Because the district court did not abuse its discretion in failing to remand the case

to allow BexarMet to present additional evidence, we disagree. Section 2001.175(c) of the

Administrative Procedure Act allows a party in an appeal of an agency decision to apply to the court

to present additional evidence. Tex. Gov’t Code Ann. § 2001.175(c) (West 2000). However, the party

13 must demonstrate to the court’s satisfaction that the additional evidence is material and that there were

good reasons for failing to present it in the proceeding before the agency. Id. In the instant case, the

evidence in question is neither material nor new, as it was presented in the contested hearing and was

considered by the Commission before Bulverde’s application for a certificate was approved.

CONCLUSION

We agree with the district court that the Commission acted within its authority when

it granted a certificate to Bulverde. We overrule the issues presented by BexarMet and affirm the

judgment of the district court.

__________________________________________

Jan P. Patterson, Justice

Before Justices Patterson, Puryear and Waldrop

Affirmed

Filed: October 20, 2005