CPS Energy, Time Warner Cable Texas LLC, and Southwestern Bell Telephone Company D/B/A AT&T// Public Utility Commission of Texas v. Public Utility Commission of Texas// Cross-Appellee, CPS Energy, Time Warner Cable Texas LLC and Southwestern Bell Telephone Company D/B/A AT&T

Opinion

ACCEPTED 03-14-00340-CV 4961132 THIRD COURT OF APPEALS AUSTIN, TEXAS 4/20/2015 5:45:55 PM JEFFREY D. KYLE CLERK

FILED IN 3rd COURT OF APPEALS AUSTIN, TEXAS 4/20/2015 5:45:55 PM M EG AN N EA L (512) 475-4009 JEFFREY D. KYLE A SSISTAN T A TTO RN EY G EN E RA L megan.neal@texasattorneygeneral.gov Clerk

April 20, 2015

Honorable Jeffrey D. Kyle, Clerk Via Electronic Filing Court of Appeals, Third District of Texas P.O. Box 12547 Austin, TX 78711-2547

Re: No. 03-14-00340-CV,

Appellants, CPS Energy, Time Warner Cable Texas LLC, and Southwestern Bell Telephone Company d/b/a AT&T// Cross-Appellant Public Utility Commission of Texas, v. Appellee, Public Utility Commission of Texas// Cross Appellee, CPS Energy, Time Warner Cable Texas LLC, and Southwestern Bell Telephone Company d/b/a AT&T.

Dear Mr. Kyle:

In preparation for oral argument in this case, we determined the Court does not have jurisdiction to decide one of the issues. CPS Energy does not have standing to question the Commission’s declarations regarding amendments to the applicable federal regulation. (CPS Energy’s Appellant’s Point of Error No. 2; Findings of Fact 84-87; Conclusion of Law 27.) Those amendments became effective on June 8, 2011—several months after the time period for which the Commission determined the maximum allowable pole-attachment rate. That period ended with CPS Energy’s test year 2009, billing year 2010. Thus, the Court cannot review this issue.

This Court and the Texas Supreme Court have held that statements about the future are advisory and a party does not have standing to complain about them. The two attached cases demonstrate these holdings. Please provide copies to the Court.

PO S T OF F I C E BO X 12548, AU S T I N , TE X A S 78711-2548 TEL: (512)463-2100 W W W .TEX A SAT T O R N E YGEN ER A L.G O V A n Equa l Em pl o ym ent O pp or t unit y Em pl o ye r ·

Hon. Jeffrey Kyle Page 2 April 20, 2015

Thank you for your assistance.

/s/ Megan Neal Megan Neal Assistant Attorney General State Bar No. 24043793 (512) 475-4009 Tel. (512) 457-4639 Fax

cc: Counsel of record w/ attachments Stephen Journeay - PUC

Certificate of Service

I certify that a true and correct copy of this document was electronically filed with the Court of Appeals for the Third District of Texas. All counsel were served with a true and correct copy of this document electronically or by email on the 20th day of April, 2015, to the following:

Alfred R. Herrera Michael T. Sullivan Felipe Alonso III MAYER BROWN LLP HERRERA & BOYLE, PLLC 71 S. Wacker Drive 816 Congress Avenue, Suite 1250 Chicago, IL 60606 Austin, TX 78701 (312) 782-0600 (512) 474-1492 (312) 706-8689 (fax) (512) 474-2507 (fax) msullivan@mayerbrown.com aherrera@aherreraboylelaw.com falonso@aherreraboylelaw.com Joseph E. Cosgrove, Jr.

Katherine C. Swaller Curt D. Brockman Thomas Ballo CPS Energy AT&T LEGAL DEPARTMENT 145 Navarro 816 Congress Avenue, Suite 1100 P. O. Box 1771 Austin, TX 78701 San Antonio, TX 78296 (512) 457-2304 (210) 353-5689 (512) 870-3420 (fax) (210) 353-6832 (fax) joseph.cosgrove.jr@att.com cdbrockmann@cpsenergy.com katherine.swaller@att.com Attorneys for CPS Energy thomas.ballo@att.com

Hon. Jeffrey Kyle Page 3 April 20, 2015

Valerie P. Kirk Paul A. Drummond Melissa Lorber Natalie L. Hall ENOCH KEVER PLLC AT&T LEGAL DEPARTMENT 600 Congress Avenue, Suite 2800 1010 N. St. Mary’s, Rm 14Q Austin, TX 78701 San Antonio, TX 78215 (512) 615-1200 (210) 351-4830 (512) 615-1198 (fax) (210) 886-2127 (fax) vkirk@enochkever.com paul.drummond@att.com mlorber@enochkever.com natalie.hall@att.com Attorneys for Time Warner Attorneys for AT&T

John Davidson Thomas Paul A. Werner James Aaron George SHEPPARD MULLIN RICHTER & HAMPTON LLP 2099 Pennsylvania Ave., N.W. Suite 100 Washington, D.C. 20006 (202) 747-1900 (202) 747-1901 (fax) dthomas@sheppardmullin.com pwerner@sheppardmullin.com ageorge@sheppardmullin.com Attorneys for Time Warner

/s/ Megan Neal Megan Neal

Not Reported in S.W.3d, 2014 WL 4058727 (Tex.App.-Austin) (Cite as: 2014 WL 4058727 (Tex.App.-Austin))

Judge Presiding.

Briefs and Other Related Documents From the District Court of Travis County, 126th Judicial District, No.

Judges and Attorneys D–1–GN–10–003982, Stephen Yelenosky, Judge Presiding.

Only the Westlaw citation is currently Douglas Fraser, Assistant Attorney Generavailable .

al, Environmental Protection Division, SEE TX R RAP RULE 47.2 FOR DESIG- Kellie E. Billings, Assistant Attorney Gen- NATION AND SIGNING OF OPINIONS. eral, Environmental Protection & Admin.

Law Division, Austin, TX, for Appellant.

MEMORANDUM OPINION Dane McKaughan, Greenberg Traurig, Court of Appeals of Texas, LLP, Austin, TX, for Appellee.

Austin.

The RAILROAD COMMISSION OF Before Justices PURYEAR, GOODWIN, TEXAS, Appellant and FIELD.

v.

CENTERPOINT ENERGY RESOURCES CORP. d/b/a CenterPoint Energy Entex MEMORANDUM OPINION and CenterPoint Energy Texas Gas, Ap- MELISSA GOODWIN, Justice.

pellee. *1 The Texas Railroad Commission The Railroad Commission of Texas, Ap- (the Commission) appeals the trial court's pellant reversal in part of its final orders in three v. annual review proceedings under cost-

Texas Gas Service Company, a Division of of-service adjustment (COSA) tariffs in-

ONEOK, Inc., Appellee. volving essentially identical issues. Center-

The Railroad Commission of Texas, Ap- Point Energy Resources Corp. d/b/a pellant CenterPoint Energy Entex and CenterPoint v. Energy Texas Gas (CenterPoint) and Texas CenterPoint Energy Resources Corp. d/b/a Gas Service Company, a Division of CenterPoint Energy Entex and CenterPoint ONEOK, Inc. (Texas Gas) (the Utilities)

Energy Texas Gas, Appellee. sued for judicial review of final orders issued by the Commission denying the Utilit-

Nos. 03–13–00533–CV, ies' recovery of certain expenses for meals, 03–13–00534–CV, 03–13–00535–CV. lodging, and other items and ordering cer-

Aug. 14, 2014. tain guidelines for recovery of similar expenses in future COSA reviews. Because From the District Court of Travis County, we conclude that the Utilities' claims are 98th Judicial District, No.

not ripe, we reverse the trial court's judg-

D–1–GN–10–003981, Stephen Yelenosky, ment and dismiss the Utilities' claims.

Judge Presiding. From the District Court of Travis County, FACTUAL AND PROCEDURAL 200th Judicial District, No. BACKGROUND D–1–GN–10–003983, Stephen Yelenosky, In April 2010, the Utilities applied for

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Not Reported in S.W.3d, 2014 WL 4058727 (Tex.App.-Austin) (Cite as: 2014 WL 4058727 (Tex.App.-Austin))

cost-of-service adjustments to their rates the Utilities could not produce itemized repursuant to annual reviews authorized un- ceipts. FN1 In its final orders, the Commisder their respective COSA tariffs for cer- sion made certain findings of fact and contain service areas. Rates for the affected clusions of law concerning the disallowed customers were initially determined in con- expenses and included two “ordering paratested case hearings that resulted in the ad- graphs” requiring the Utilities to meet ceroption of tariffs with COSA clauses. A tain evidentiary criteria for recovery of COSA clause is a formula included in a similar expenses in the future.FN2 The two utility's tariff that allows adjustments to ordering paragraphs provided: customer charges without the necessity of a full-blown “Statement of Intent” rate case. FN1. The removal of the disputed See Texas Coast Utils. Coal. v. Railroad expenses did not result in any Comm'n, 423 S.W.3d 355, 357, 374 change to the Utilities' proposed ad- (Tex.2014) (upholding authority of Com- justments, and the record reflects mission to adopt gas utility rate schedule that the Utilities withdrew their reproviding for automatic annual adjustments quests for the questioned expenses. based on increases or decreases in utility's FN2. In each case, calculation ercost of service, i.e., COSA clause). The rors not relevant to this appeal were terms of a COSA clause vary depending on corrected and a nunc pro tunc order what is approved as part of the tariff in the issued.

rate case. The tariffs in these cases provide that the annual rate adjustment is to be de- *2 IT IS FURTHER ORDERED that termined by a calculation based on calen- [the Utilities] shall not include any emdar year operating expenses, return invest- ployee or contractor expenses from emment , and certain taxes. If the resulting ployee or contractor expense reports rechange is positive, the amount charged imbursement in future COSA filings that goes up; if it is negative, the amount cannot be supported by a detailed itemcharged goes down. The adjustment is ized receipt which shows the specific capped at 5% of the customer charge that amounts and line item charges. was in effect at the end of the preceding calendar year in CenterPoint's tariffs and at IT IS FURTHER ORDERED that [the the percentage change in the Consumer Utilities] shall identify and justify each Price Index for All Urban Consumers in meal expense that exceeds $25.00 per Texas Gas's tariff. These were the first person and any lodging expense over COSA filings made by the Utilities under $150.00 per person per night that [the their respective tariffs. Utilities] propose[ ] to include in future COSAs.

A COSA tariff annual review is a streamlined procedure that does not include The Utilities filed motions for reheara hearing; instead, the adjustment is de- ing complaining that the findings of fact, termined following staff review of the conclusions of law, and ordering paraevidence filed by the utility. In each of the graphs concerning the disallowed expenses present cases, the Commission questioned were statements of new policy, not backed and ultimately disallowed certain expenses by any rule or guideline, and were therefor meals, travel, and other items for which fore made through unlawful procedure, ar-

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Not Reported in S.W.3d, 2014 WL 4058727 (Tex.App.-Austin) (Cite as: 2014 WL 4058727 (Tex.App.-Austin))

bitrary and capricious, and not supported future,” not an advisory opinion. by substantial evidence. The Commission denied the motions for rehearing, and the FN3. The Commission also con- Utilities filed suits for judicial review as- tends that the Utilities lack standing serting the same claims. See Tex. Util.Code because in their motions for rehear- § 105.001(a) (any party to proceeding be- ing, they did not challenge the fore Commission entitled to judicial review Commission's final decisions on under substantial evidence rule). The Com- rate adjustments and instead atmission filed motions to dismiss based, in tacked only the underlying findings part, on its contention that the Utilities of fact and conclusions of law. This were requesting advisory opinions because Court has held that to have standing their claims are not ripe. The trial court to seek judicial review, one must be denied the Commission's motions to dis- aggrieved by the final order and not miss and reversed the final orders, finding merely by an underlying finding or that the Commission acted arbitrarily and conclusion, see GTE Sw. Inc. v. capriciously by imposing a new policy in Public Util. Comm'n of Tex., 37 the orders and that the policy was made S.W.3d 546, 548 (Tex.App.-Austin through unlawful procedure and was not 2001, no pet.) (citing Champlin Exsupported by substantial evidence. These ploration, Inc. v. Railroad Comm'n, appeals followed. 627 S.W.2d 250, 252 (Tex.App.-Austin 1982, writ ref'd DISCUSSION n.r.e.)). However, the Utilities' mo-

In its first issue, the Commission ar- tions for rehearing expressly chalgues that the Utilities' claims are not ripe lenged the ordering paragraphs as and they therefore seek an impermissible well as the findings and concluadvisory opinion.FN3 The Commission sions. We overrule the Commiscontends that the Utilities request a prede- sion's first issue as to this argument. termination of a hypothetical matter that could arise in the future, which is not a “The courts of this state are not emmatter fit for judicial consideration. The powered to give advisory opinions[, and] Utilities argue that the orders “expressly [t]his prohibition extends to cases that are appl [y] ... to future COSA proceedings,” not yet ripe.” Patterson v. Planned Parent- “mandate the manner in which all future hood of Hous. & Se. Tex., Inc., 971 S.W.2d rate adjustments filed pursuant to the ap- 439, 443 (Tex.1998) (citations omitted). plicable COSA tariff will be resolved,” and The ripeness doctrine “serves to avoid pre- “fundamentally change the way in which mature adjudication” and “focuses on COSA adjustments are calculated in future whether the case involves ‘uncertain or COSA proceedings.” They further contend contingent future events that may not occur that the orders place “obligations and bur- as anticipated, or indeed may not occur at dens on [them] now, and that failure to all.’ “ Perry v. Del Rio, 66 S.W.3d 239, abide by these new obligations and burdens 250 (Tex.2001) (citations omitted). “A case could bar recovery in a future COSA pro- is not ripe when its resolution depends on ceeding.” Thus, the Utilities contend, they contingent or hypothetical facts, or upon seek real relief and an opinion that will af- events that have not yet come to pass.” fect “all COSA cases [they] will file in the Patterson, 971 S.W.2d at 443. “Ripeness is

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Not Reported in S.W.3d, 2014 WL 4058727 (Tex.App.-Austin) (Cite as: 2014 WL 4058727 (Tex.App.-Austin))

both a question of timing, that is, when one constitute a hardship on the Utilities. See may sue, a question of discretion, or Perry, 66 S.W.3d at 250; Atmos Energy, whether the court should hear the suit, and 127 S.W.3d at 858. Whether there may be not whether it can hear the suit.” Atmos an actual controversy between the Utilities Energy Corp. v. Abbott, 127 S.W.3d 852, and the Commission is too uncertain and 858 (Tex.App.-Austin 2004, no pet.) speculative to support the Utilities' conten- (internal citations omitted) (citing Perry, tion that their claims are ripe. Because the 66 S.W.3d at 249–50; Patterson, 971 Utilities complain of future enforcement, S.W.2d at 442; City of Waco v. Texas Nat- they must show that enforcement is ural Res. Conserv. Comm'n, 83 S.W.3d “imminent or sufficiently likely.” See Trin- 169, 177 (Tex.App.-Austin 2002, pet. ity Settlement, 417 S.W.3d at 506; Rea v. denied)). “In the administrative-law con- State, 297 S.W.3d 379, 383 text, moreover, avoiding premature litiga- (Tex.App.-Austin 2009, no pet.) (to estabtion over administrative determinations lish ripeness, plaintiffs must demonstrate prevents courts from ‘entangling them- injury is imminent, direct, and immediate, selves in abstract disagreements over ad- not merely remote, conjectural, or hypoministrative policies' while simultaneously thetical); Atmos Energy, 127 S.W.3d at 856 allowing the agency to perform its func- ; City of Waco, 83 S.W.3d at 175. A pertions unimpeded.” Trinity Settlement ceived threat of enforcement does not cre- Servs., LLC v. Texas State Secs. Bd., 417 ate a justiciable controversy. Compare Mitz S.W.3d 494, 506 (Tex.App.-Austin 2013, v. Texas State Bd. of Veterinary Med. Expet . denied) (quoting Patterson, 971 am'rs, 278 S.W.3d 17, 25 S.W.2d at 443). The determination of ripe- (Tex.App.-Austin 2008, pet. dism'd), with ness depends on “(1) the fitness of the is- Beacon Nat'l Ins. Co. v. Montemayor, 86 sues for judicial decision; and (2) the hard- S.W.3d 260, 267–68 (Tex.App.-Austin ship occasioned to the party by the court's 2002, no pet.). denying judicial review.” Atmos Energy, 127 S.W.3d at 858 (citing Perry, 66 The Utilities attempt to characterize S.W.3d at 250 (citing Abbott Labs. v. their claims as ripe by arguing that the lan- Gardner, 387 U.S. 136, 149, 87 S.Ct. 1507, guage of the ordering paragraphs will re- 18 L.Ed.2d 681 (1967); City of Waco, 83 quire them to meet evidentiary require- S.W.3d at 177)). Ripeness should be de- ments in all future annually required COSA cided on the basis of all the information filings and that the orders place available to the court, and we may consider “obligations and burdens” on them now. intervening events that occur after the de- Tellingly, however, the Utilities argue that cision in the lower court. Perry, 66 S.W.3d their failure to meet these obligations and at 250; 13 Charles Alan Wright, Arthur R. burdens could bar recovery in a future Miller, & Edward H. Cooper, Federal COSA proceeding. This perceived threat as Practice & Procedure § 3532.1, at 136–37 to future COSA filings does not rise to the (2d ed.1984). level of imminent or likely injury so as to present a justiciable claim. See Mitz, 278 *3 We do not believe the Utilities have S.W.3d at 25 (contrasting actual initiation affirmatively established that the issues of administrative action suggesting imminthey presented were fit for review and that ent proceeding in that case with mere perthe failure to address those issues would ceived threat in Beacon Nat'l, 86 S.W.3d at

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Not Reported in S.W.3d, 2014 WL 4058727 (Tex.App.-Austin) (Cite as: 2014 WL 4058727 (Tex.App.-Austin))

267–68). And while we may consider inter- party's business and places it in jeopardy of vening events that occur after a decision in sanction or penalty, that is sufficient to the lower court, see Perry, 66 S.W.3d at show a hardship. Id.; Atmos Energy, 127 250, the Utilities have not presented any S.W.3d at 859. evidence that the Commission has taken any steps to impose the requirements on Here, the ordering paragraphs require them since issuing the final orders or that the Utilities to present itemized receipts there is any existing or continuing threat of and identify and justify certain expenses if liability or penalty. Cf. Mitz, 278 S.W.3d at they want the Commission to allow their 25–26 (constitutional claim ripe for review inclusion in the calculation of future adconsidering continuing threat of civil and justments. Documenting and justifying excriminal liability against practitioners and penses to be included in rate calculations direct effect act had on business enter- does not constitute “a significant change in prise); Patel v. Texas Dep't of Licensing & [the Utilities'] conduct.” See Abbott Labs., Regulation, No. 03–11–00057–CV, 2012 387 U.S. at 153; Mitz, 278 S.W.3d at 26; Tex.App. LEXIS 6187, at *23,2012 WL see also 18 C.F.R. pt. 201, General Instruc- 3055479 (Tex.App.-Austin July 25, 2012, tions, (2) Records (A) (Federal Energy pet. granted) (constitutional claims ripe Regulatory Commission's (FERC's) Uniwhere appellants subject to continuing form System of Accounts (USOA) threat of civil and criminal liability, as well (providing utilities shall keep books and reas administrative penalties and sanctions). cords “so as to be able to furnish readily Thus, the Utilities have not established that full information as to any item included in enforcement is imminent or sufficiently any account” and support each entry shall likely, see Trinity Settlement, 417 S.W.3d “by such detailed information as will perat 506; Atmos Energy, 127 S.W.3d at 856; mit ready identification, analysis, and veri- City of Waco, 83 S.W.3d at 175, and we fication of all facts relevant thereto”); 16 conclude that the Utilities' issues are not fit Tex. Admin. Code § 7.310(a) (Railroad for judicial review, see Perry, 66 S.W.3d at Comm'n of Tex., System of Accounts 250; Atmos Energy, 127 S.W.3d at 858. (requiring gas utilities to use FERC's USOA for all operating and reporting pur-

*4 To prevail, the Utilities must show poses); Tex. Util.Code § 104.008(1) (in that they would suffer hardship if judicial proceeding involving rate change proposed review is withheld until enforcement of the by utility, utility has burden of proving rate requirements in the ordering paragraphs. change is just and reasonable); City of Am- See Perry, 66 S.W.3d at 250; Atmos En- arillo v. Railroad Comm'n, 894 S.W.2d ergy, 127 S.W.3d at 858. Hardship is 491, 498 (Tex.App.-Austin 1995, writ shown when the statute, rule, or policy at denied) (in any proceeding to change rates, issue “ ‘requires an immediate and signific- utility bears burden of proof to show rate ant change in the plaintiffs' conduct of their change and components thereof, such as affairs with serious penalties attached to operating expenses, are just and reasonnoncompliance .’ “ Mitz, 278 S.W.3d at 26 able). (quoting Abbott Labs. v. Gardner, 387 U.S. 136, 153, 87 S.Ct. 1507, 18 L.Ed.2d 681 Moreover, the Utilities have not made (1967)). When the requirement at issue has the requisite showing of hardship. See a direct and immediate impact on the Perry, 66 S.W.3d at 250; Atmos Energy,

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Not Reported in S.W.3d, 2014 WL 4058727 (Tex.App.-Austin) (Cite as: 2014 WL 4058727 (Tex.App.-Austin))

127 S.W.3d at 859–60. Significantly, they the trial court's judgment. See Tex.R.App. are not aggrieved by the Commission's dis- P. 47.1 (appellate court opinions should be allowance of undocumented expenses, as “brief as practicable”), 47 .4 which did not result in any changes to their (memorandum opinions should be “no requested rates. Nor do they face any other longer than necessary to advise the parties sanction or penalty for noncompliance. See of the court's decision and the basic reas- Atmos Energy, 127 S.W.3d at 859 ons for it”). (concluding appellants were not in jeopardy of sanction or penalty because viola- CONCLUSION tion of statute carried no sanction or pen- Having concluded that these cases are alty). Likewise, here, the Utilities face no not fit for judicial decision and that denial sanction or penalty for failure to comply of the requested relief will not constitute a with the requirements because the ordering hardship on the Utilities, we reverse the paragraphs include no provision for sanc- judgment and dismiss the Utilities' claims. tions or penalties. Id.; cf. Mitz, 278 S.W.3d Tex.App.-Austin,2014.

at 26 (appellants showed hardship where Railroad Com'n of Texas v. CenterPoint they faced continuing threat of civil and Energy Resources Corp.

criminal liability). As noted above, the Not Reported in S.W.3d, 2014 WL Utilities argue that failure to meet the re-

4058727 (Tex.App.-Austin)

quirements could bar recovery in the future . Even assuming future recovery of Briefs and Other Related Documents (Back some expenses is actually barred at some to top) point, the inability to recover all expenses does not necessarily harm the Utilities. In • 2014 WL 644359 (Appellate Brief) Brief fact, even after the questioned expenses of Appellee Centerpoint Energy Resources were deducted because the Utilities were Corp., d/b/a Centerpoint Energy Entex and unable to present the required documenta- Enterpoint Energy Texas Gas (Feb. 10, tion, the Utilities' requested rates were not 2014) Original Image of this Document affected, and the Commission approved with Appendix (PDF) their requested rates. Nor is it certain that • 2014 WL 644360 (Appellate Brief) Brief the Utilities will request the expenses at is- of Appellee Texas Gas Service Company, a sue in future COSA filings; in these cases, Division of Oneok, Inc. (Feb. 10, 2014) they withdrew the questioned expenses and Original Image of this Document with Apnonetheless received the requested rates. pendix (PDF) Thus, the Utilities are not faced with the • 2014 WL 644361 (Appellate Brief) Brief dilemma of compliance or sanction, and of Appellee Centerpoint Energy Resources they have failed to show the requisite hard- Corp., d/b/a Centerpoint Energy Entex and ship. See Perry, 66 S.W.3d at 250; Atmos Centerpoint Energy Texas Gas (Feb. 10, Energy, 127 S.W.3d at 859–60. 2014) Original Image of this Document with Appendix (PDF)

*5 Because the Utilities have failed to • 2013 WL 6712920 (Appellate Brief)

establish a justiciable controversy, we sus- Amended Brief of Railroad Commission of tain the Commission's first issue as to ripe- Texas (Dec. 10, 2013) Original Image of ness. We therefore do not reach the Com- this Document with Appendix (PDF) mission's second issue as to the merits of • 2013 WL 6712921 (Appellate Brief)

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Not Reported in S.W.3d, 2014 WL 4058727 (Tex.App.-Austin) (Cite as: 2014 WL 4058727 (Tex.App.-Austin))

Amended Brief of Railroad Commission of Texas (Dec. 10, 2013) Original Image of this Document with Appendix (PDF) Attorneys • 2013 WL 6712922 (Appellate Brief)

Attorneys for Appellant Amended Brief of Railroad Commission of • Fraser, Douglas Burt Texas (Dec. 10, 2013) Original Image of Austin, Texas 78701 this Document with Appendix (PDF)

Litigation History Report | Profiler Attorneys for Appellee Judges and Attorneys(Back to top) • McKaughan, Dane Austin, Texas 78701 Judges | Attorneys Litigation History Report | Profiler Judges • Field, Hon. Scott K. END OF DOCUMENT State of Texas Court of Appeals, 3rd District

Austin, Texas 78701 Litigation History Report | Judicial Reversal Report | Judicial Expert Challenge Report | Profiler • Goodwin, Hon. Melissa Young State of Texas Court of Appeals, 3rd District

Austin, Texas 78701 Litigation History Report | Judicial Reversal Report | Judicial Expert Challenge Report | Profiler • Puryear, Hon. David E. State of Texas Court of Appeals, 3rd District

Austin, Texas 78701 Litigation History Report | Judicial Reversal Report | Judicial Expert Challenge Report | Profiler • Yelenosky, Hon. Stephen Andrew State of Texas District Court, 345th District

Austin, Texas 78701 Litigation History Report | Judicial Reversal Report | Judicial Expert Challenge Report | Profiler

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51 S.W.3d 275, Util. L. Rep. P 26,789, 44 Tex. Sup. Ct. J. 854, 44 Tex. Sup. Ct. J. 1126 (Cite as: 51 S.W.3d 275)

current data; and (6) in an opinion by Hecht, Briefs and Other Related Documents J., the PUC was not required to reallocate overpayments or underpayments of transition Oral Argument Transcripts with Streaming charges by any one class among all customers. Media Affirmed in part, reversed in part, and remanded .

Judges and Attorneys Owen, J., dissented in part and filed opin-

Supreme Court of Texas.

ion joined by Enoch and Baker, JJ.

TXU ELECTRIC COMPANY, et al., Appellants , *275 Opinion by Justice Owen v.

PUBLIC UTILITY COMMISSION OF West Headnotes TEXAS, et al., Appellees.

[1] Electricity 145 8 No. 00–0936.

Argued Jan. 31, 2001. 145 Electricity Decided June 6, 2001. 145k2 Electric Companies Rehearing Overruled Aug. 30, 2001. 145k8 k. Indebtedness, liens, and mortgages . Most Cited Cases Incumbent electric utility and intervenors Public Utility Commission (PUC) could appealed decision by the Public Utility Com- employ a second present value test to determmission (PUC) on financing for recovery of ine whether tangible and quantifiable benefits utility's regulatory assets and stranded costs to ratepayers were provided by securitization during deregulation to competitive market. The through bonds secured by incumbent electric 250th District Court, Travis County, reversed utility's transition charges to recover regulatand remanded in part. Appeal was taken. The ory assets and stranded costs during deregula- Supreme Court, Owen, J., held that: (1) the tion to competitive market, but the PUC was PUC could employ a second present value test required to assume that, absent securitization, to determine whether tangible and quantifiable regulatory assets and stranded costs would be benefits to ratepayers were provided by secur- recovered through competition transition itization through bonds secured by transition charges in considerably less than forty years. charges; (2) the PUC was required to assume V.T.C.A., Utilities Code §§ 39.201, 39.262, that, absent securitization, regulatory assets 39.301, 39.303(a). and stranded costs would be recovered through competition transition charges in less than [2] Electricity 145 8 forty years; (3) it was not required to use the 145 Electricity weighted average life of six years over which 145k2 Electric Companies utility's transition bonds would be outstanding;

145k8 k. Indebtedness, liens, and mort-

(4) it lacked the discretion to consider utility's gages. Most Cited Cases regulatory assets on an asset-by-asset basis; (5)

Public Utility Commission (PUC) was not it may apply the rate design methodology esrequired to use the weighted average life of six tablished in an utility's last rate design case to years over which incumbent electric utility's the data in that rate case, rather than to more

© 2015 Thomson Reuters. No Claim to Orig. US Gov. Works.

51 S.W.3d 275, Util. L. Rep. P 26,789, 44 Tex. Sup. Ct. J. 854, 44 Tex. Sup. Ct. J. 1126 (Cite as: 51 S.W.3d 275)

transition bonds would be outstanding for the allocation factors that determine how transition recovery of regulatory assets and stranded charges are to be allocated among classes of costs during deregulation to competitive mar- customers in connection with deregulation to ket; rather, to determine whether the amount competitive market. V.T.C.A., Utilities Code securitized would exceed the present value of §§ 39.253(c-h). the revenue requirement over the life of the proposed transition bond associated with the [5] Electricity 145 8 regulatory assets or stranded costs sought to be 145 Electricity securitized, the PUC could take into account 145k2 Electric Companies the actual timing of bond payments until the 145k8 k. Indebtedness, liens, and mortlast payment is made on the oldest bond after gages. Most Cited Cases twelve years. V.T.C.A., Utilities Code § Finding and conclusion by Public Utility 39.301.

Commission (PUC) on adjustment for loss on [3] Electricity 145 8 reacquired debt in future proceeding involving electric utility were advisory and premature.

145 Electricity 145k2 Electric Companies [6] Electricity 145 11.5(1)

145k8 k. Indebtedness, liens, and mort-

145 Electricity gages. Most Cited Cases 145k11.5 Discrimination and Overcharge Public Utility Commission (PUC) lacked 145k11.5(1) k. In general. Most Cited the discretion to consider incumbent electric Cases utility's regulatory assets on an asset-by-asset Public Utility Commission (PUC) was not basis in determining the amount to be securitrequired to reallocate overpayments or underized through transition bonds for the recovery payments of transition charges by any one of regulatory assets and stranded costs during class among all customers of incumbent elecderegulation to competitive market; rather, the tric utility and thereby fully cross-collateralize PUC was required to consider regulatory assets responsibility for the transition to a competitin the aggregate to determine whether those asive market; rather, it could engage in a nonsets met the requirements for securitization standard true-up of reallocating transition and could not categorically exclude certain charges among classes. V.T.C.A., Utilities types of regulatory assets from securitization.

Code §§ 39.253, 39.307.

V.T.C.A., Utilities Code §§ 39.301, 39.303(a).

*276 Roy Q. Minton, Minton Burton Foster & [4] Electricity 145 11.5(1)

Collins, Robert J. Hearon, Jr., Mary A. Keeney 145 Electricity , Graves Dougherty Hearon & Moody, Austin, 145k11.5 Discrimination and Overcharge Robert A. Wooldridge, Robert M. Fillmore, 145k11.5(1) k. In general. Most Cited Howard V. Fisher, Worsham Forsythe Cases Wooldridge, Dallas, for Appellant.

(Formerly 145k11.3(1))

*277 Thomas K. Anson, Sheinfeld Maley & Public Utility Commission (PUC) may ap-

Kay, Geoffrey M. Gay, Lloyd Gosselink Blevply the rate design methodology established in ins Rochelle, Austin, Alan W. Harris, Dallas, an incumbent electric utility's last rate design Marianne Carroll, David B. Gross, Carroll & case to the data in that rate case, rather than to Gross, Andrew Kever, Bickerstaff Heath Smimore current data, in order to establish demand

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51 S.W.3d 275, Util. L. Rep. P 26,789, 44 Tex. Sup. Ct. J. 854, 44 Tex. Sup. Ct. J. 1126 (Cite as: 51 S.W.3d 275)

ley Pollan Kever & McDaniel, Mark C. Davis, appealed from the district court to this Brickfield Burchette & Ritts, James K. Rourke Court). , Thomas Lane Brocato, Suzi Ray McClellan, Office of Public Utility Counsel, Steven Baron We hold that: 1) in order to ensure that se- , Office of Attorney General of Texas, John curitization provides tangible and quantifiable Cornyn, Attorney General of the State of benefits to ratepayers greater than would have Texas, Jeffrey S. Boyd, Karen Watson Kornell, been achieved absent the issuance of transition Douglas Fraser, Bryan L. Baker, Office of the bonds,FN3 the Commission may apply a Attorney General, Jonathan Day, Lino Men- present value test in addition to the present diola, Mayor Day Caldwell & Keeton, Diane value and revenue requirement tests expressly Barlow–Sparkman, Mark W. Smith, J. Kay set forth in sections 39.301 and 39.303(a) of Trostle, Elizabeth H. Drews, James G. Boyle, the PURA; 2) in applying an additional present Law Office of Jim Boyle, Austin, for Appellee. value test, the Commission should assume that recovery of regulatory assets and stranded costs absent securitization would occur in sub-

PER CURIAM. stantially less than forty years; 3) the Commis-

In 1999, the Legislature amended the Pub- sion must consider regulatory assets that a utillic Utility Regulatory Act (PURA) to usher in ity seeks to securitize in the aggregate to dederegulation of retail electric utility rates in termine whether those assets meet the require- Texas. FN1 As part of that plan, the Legis- ments for securitization and cannot categoriclature concluded that, subject to certain restric- ally exclude certain types of regulatory assets tions, an existing utility like TXU Electric from securitization; 4) section 39.253 permits Company may recover amounts that the PURA the Commission to apply the rate design methdefines as “regulatory assets” by using securit- odology established in a utility's last rate ization financing. Securitization is accom- design case to the data in that rate case rather plished through a financing order issued by the than to more current data, in order to establish Commission that authorizes a utility to issue demand allocation factors that determine how transition bonds. The transition bonds are re- transition charges are to be allocated among paid or secured by transition charges to rate- classes of customers; 5) the Commission is aupayers in a utility's service area. TXU reques- thorized by section 39.307 to adopt a nonted the Commission to issue a financing order standard true-up provision that reallocates securitizing certain of its regulatory assets. transition charges among classes of customers The Commission authorized securitization of in a manner that differs from the allocation some but not all of those assets. A district procedures set forth in section 39.253; 6) none court reversed the Commission's order in part of the other issues regarding allocation of and remanded the case for further proceedings. transition costs among classes of customers TXU and others bring this direct appeal to our has *278 merit; and 7) certain findings of fact Court.FN2 and conclusions of law by the Commission are advisory. Accordingly, we affirm the judgment FN1. Act of May 27, 1999, 76th Leg., of the district court in part, reverse it in part, R.S., ch. 405, 1999 Tex. Gen. Laws and remand this case to the Commission for 2543.

further proceedings. Justice Owen's concurring FN2. TEX. UTIL.CODE § 39.303(f) opinion is the opinion of the Court with re- (providing that review of financing or- spect to the issues that it addresses, and Justice ders under the PURA are to be directly Hecht's concurring opinion is the opinion of

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51 S.W.3d 275, Util. L. Rep. P 26,789, 44 Tex. Sup. Ct. J. 854, 44 Tex. Sup. Ct. J. 1126 (Cite as: 51 S.W.3d 275)

the Court with respect to the issues that it ad- tion with the Public Utility Commission for a dresses. financing order in which TXU sought to securitize $1.65 billion in regulatory assets and oth-

FN3. All statutory references are to the er costs and proposed to write off about $285 Texas Utilities Code, unless otherwise million in regulatory assets. The Commission indicated. allowed TXU to securitize $363 million of regulatory assets. TXU and several of the forty-

Justice OWEN filed a concurring opinion, in four parties who had intervened in the prowhich Chief Justice PHILLIPS, Justice ceedings before the Commission appealed to HECHT, Justice ENOCH, Justice BAKER, district court in Travis County. The district Justice ABBOTT, Justice HANKINSON, and court held that: 1) the Commission did not err Justice JEFFERSON joined.

in applying a present value test in addition to Justice HECHT filed a concurring opinion, in the present value and revenue requirement which Chief Justice PHILLIPS, Justice ABtests set forth in sections 39.301 and 39.303(a)

BOTT, Justice HANKINSON, and Justice of the PURA; 2) the Commission had the dis-

JEFFERSON joined.

cretion to consider TXU's regulatory assets on Justice OWEN filed a dissenting opinion, in an asset-by-asset basis in determining whether which Justice ENOCH and Justice BAKER securitization would provide tangible benefits joined.

to ratepayers; 3) the Commission should have Justice O'NEILL did not participate in the deexamined how long it would take TXU to recision .

cover the regulatory assets at issue under the Justice OWEN, joined by Chief Justice PHILregulatory scheme established by the 1999 LIPS, Justice HECHT, Justice ENOCH, amendments to the PURA rather than under Justice BAKER, Justice ABBOTT, Justice the previously existing regulatory scheme; 4)

HANKINSON, and Justice JEFFERSON, conthe Commission was not required to use the curring.

average life of the transition bonds that would In 1999, the Legislature determined that be issued under the financing order in calculatpartial deregulation of the electric power ining the maximum amount that TXU could sedustry was in the public interest. To that end, curitize; 5) the Commission's Finding of Fact the Legislature amended the Public Utility 113 and references to that finding in Conclu-

Regulatory Act (PURA).FN1 In City of Corpus sion of Law 41 and Ordering Paragraph 37, re-

Christi v. Public Utility Commission,FN2 also garding future treatment of reacquired debt sedecided today, we describe in some detail the curitized under the financing order, are advissections of the PURA that permit an electric ory and have no res judicata effect; and 6) the utility to securitize regulatory assets and stran-

Commission did not *279 err in its treatment ded costs as part of the transition to marketof certain rate design, allocation, and true-up based retail electric rates. We need not repeat issues.

that discussion here.

TXU, the Commission, the State of Texas, FN1. Act of May 27, 1999, 76th Leg., the Office of Public Utility Counsel, Texas In-

R.S., ch. 405, 1999 Tex. Gen. Laws dustrial Energy Consumers, Texas Retailers 2543.

Association, the Steering Committee of Cities FN2. 51 S.W.3d 231 (Tex.2001). Served by TXU, the Coalition of Independent Colleges and Universities, and Nucor Steel, a TXU Electric Company filed an applica- division of Nucor Corporation, appealed dir-

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51 S.W.3d 275, Util. L. Rep. P 26,789, 44 Tex. Sup. Ct. J. 854, 44 Tex. Sup. Ct. J. 1126 (Cite as: 51 S.W.3d 275)

ectly to this Court pursuant to section coverable regulatory assets and stranded 39.303(f) of the PURA. costs, as determined by the commission in accordance with this chapter, through the re-

I financing or retirement of utility debt or [1] One of the principal issues in this ap- equity. The commission shall ensure that sepeal is how to determine the amount of regu- curitization provides tangible and quantifilatory assets that a utility may securitize under able benefits to ratepayers, greater than the PURA. Section 39.303(a) says that when a would have been achieved absent the issuutility applies to recover its regulatory assets ance of transition bonds. The commission and eligible stranded costs, the Commission shall ensure that the structuring and pricing shall adopt a financing order upon finding that of the transition bonds result in the lowest “the total amount of revenues to be collected transition bond charges consistent with marunder the financing order is less than the rev- ket conditions and the terms of the financing enue requirement that would be recovered over order. The amount securitized may not exthe remaining life of the stranded costs using ceed the present value of the revenue reconventional financing methods and that the quirement over the life of the proposed transfinancing order is consistent with the standards ition bond associated with the regulatory asin Section 39.301.” FN3 The parties disagree sets or stranded costs sought to be securitabout what constitute “the standards in Section ized. The present value calculation shall use 39.301.” Specifically, the parties diverge on a discount rate equal to the proposed interest how the Commission is to carry out section rate on the transition bonds. FN5 39.301's directive that it “shall ensure that securitization provides tangible and quantifiable benefits to ratepayers, greater than would have FN5. Id. been achieved absent the issuance of transition § 39.303. Financing Orders; Terms bonds.” FN4 (a) The commission shall adopt a financing FN3. TEX. UTIL.CODE § 39.303(a).

order, on application of a utility to recover FN4. Id. § 39.301. the utility's regulatory assets and eligible stranded costs under Section 39.201 or A 39.262, on making a finding that the total Section 39.301 and the relevant parts of amount of revenues to be collected under the section 39.303 provide: financing order is *280 less than the revenue requirement that would be recovered over the § 39.301 Purpose remaining life of the stranded costs using conventional financing methods and that the The purpose of this subchapter is to enable financing order is consistent with the standutilities to use securitization financing to reards in Section 39.301.

cover regulatory assets and stranded costs, because this type of debt will lower the car- (b) The financing order shall detail the rying costs of the assets relative to the costs amount of regulatory assets and stranded that would be incurred using conventional costs to be recovered and the period over utility financing methods. The proceeds of which the nonbypassable transition charges the transition bonds shall be used solely for shall be recovered, which period may not exthe purposes of reducing the amount of re- ceed 15 years.

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51 S.W.3d 275, Util. L. Rep. P 26,789, 44 Tex. Sup. Ct. J. 854, 44 Tex. Sup. Ct. J. 1126 (Cite as: 51 S.W.3d 275)

*** suance of transition bonds,” the Commission is (e) The commission shall issue a financing required to ascertain the present value of the order under Subsections (a) and (g) not later revenue requirements of the regulatory assets than 90 days after the utility files its request without securitization, using the actual schedfor the financing order.FN6 uled life of the assets under the regulatory scheme as it existed before the 1999 amend-

FN6. Id. § 39.303(a), (b), (e). ments to the PURA. The Commission maintains that it is then required to compare the All parties agree that there are at least two outcome of that analysis with the present value limitations on the maximum amount of regucomputation specified in the final two senlatory assets or stranded costs that can be setences of section 39.301 to see if securitization curitized. One limitation is found in the last results in a greater benefit to ratepayers.

two sentences of section 39.301. They require a present value test. The present value test ex- The revenue requirement over the fortypressly set forth in section 39.301 examines year remaining life of the assets that TXU the revenue requirement over the life of the seeks to securitize was about $2.467 billion. bonds, which under the PURA cannot exceed Using the interest rates that TXU expected fifteen years.FN7 would apply to the transition bonds, the revenue requirement of the bonds was about $124 FN7. Id. § 39.302(6).

million less than $2.467 billion. Using TXU's Another limitation on the amount that may “worst case” scenario for interest rates, the be securitized is the revenue requirement test revenue requirement of the bonds was about required by section 39.303(a). All parties agree $100,000 less than the $2.467 billion. TXU that under that provision, the total revenues to thus meets the revenue requirement test. be collected under the financing order, includ- However, the Commission argues that when ing the costs of issuing and servicing the the present value of transition charges collecbonds , must be less than the revenue require- ted over the twelve-year life of the transition ment using conventional financing methods bonds is compared with the present value of over the remaining life of the assets, which in payment for the regulatory assets over their this case is presently up to forty years. There is *281 forty-year life through utility rates, it can no present value test component in determin- be seen that securitization will harm, not beneing whether the total revenue requirement is fit, ratepayers. The Commission's financing ormet . The revenue requirement in total dollars der in this case reflects that if a remaining life over the life of the bonds is compared with the of up to forty years for the regulatory assets is revenue requirement in total dollars over the used in a present value analysis, the increased remaining life of the regulatory assets. cost to ratepayers could be $204 million. Some of the intervenors assert that increased costs The Commission and other parties to this could be as much as $500 million, using a appeal have taken the position that there is a forty-year life without taking into account oththird limitation on the amount that may be se- er benefits that there might be to ratepayers. curitized. They contend that in order for the Commission to discharge its obligation to TXU takes the position that the Commis- “ensure that securitization provides tangible sion is not authorized to engraft onto the and quantifiable benefits to ratepayers, greater PURA's securitization provisions a present than would have been achieved absent the is- value test that is different from or in addition

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51 S.W.3d 275, Util. L. Rep. P 26,789, 44 Tex. Sup. Ct. J. 854, 44 Tex. Sup. Ct. J. 1126 (Cite as: 51 S.W.3d 275)

to the present value test expressly set forth in sections 39.301 and 39.303(a) best comports section 39.301. TXU contends that the only with the express provisions of the PURA. We computations that the Legislature intended to agree with the district court that the Commisbe performed in determining the amount to be sion is authorized to impose a second present securitized are the two computations to be per- value test in determining the amount of reguformed under sections 39.301 and 39.303(a), latory assets or stranded costs that can be sewhich are the present value calculation re- curitized, but in determining present value quired by the last two sentences of section “absent the issuance of transition bonds,” the 39.301 and the total revenue test under section Commission should use a remaining life for 39.303(a). TXU contends that the requirement the assets that is far less than forty years. The that ratepayers receive a tangible and quantifi- PURA contemplates that the transition to “a able benefit from securitization is measured by fully competitive electric power industry” FN8 these tests and other considerations. TXU says will span considerably less than forty years. that there are quantifiable benefits to ratepayers from securitizing the $1.65 billion of regu- FN8. Id. § 39.001(a). latory assets because to meet the total revenue

B

test in section 39.303(a) and the present value We begin our analysis with the text of sectest set forth in the last two sentences of section 39.301. As indicated above, the sentence tion 39.301, TXU would write off and never that gives rise to the controversy says, “The recover from ratepayers approximately $285 commission shall ensure that securitization million in regulatory assets.

provides tangible and quantifiable benefits to The district court adopted somewhat of a ratepayers, greater than would have been middle ground. It concluded that the Commis- achieved absent the issuance*282 of transition sion had the discretion to apply a second bonds.” FN9 The first question that must be present value test to determine whether secur- answered in order to satisfy this statutory reitization provides “tangible and quantifiable quirement is what would happen to the regulatbenefits ” within the meaning of section 39.301 ory assets at issue if they were not securitized. . But the district court differed with the Com-

FN9. Id. § 39.301.

mission about how the second present value test should be calculated. The district court The PURA provides that if a utility does concluded that the phrase “absent the issuance not securitize all or some of its regulatory asof transition bonds” in section 39.301 required sets and stranded costs, they can be recovered the Commission to base its second present through nonbypassable “competition transition value calculation “on the asset recovery period charge[s].” FN10 Section 39.201(k) gives the that exists under the new regulatory scheme” Commission discretion to determine the length of the PURA. More specifically, the district of time over which regulatory assets and strancourt held that the Commission's second ded costs may be recovered by this method. present value test could not “lawfully be based FN11 All parties, including the Commission, upon the recovery periods under the earlier agree that the Commission could shorten the system of rate regulation that provided for as- remaining life over which regulatory assets set lives up to 40 years.” and stranded costs will be recovered to a time period far less than the remaining life of up to For the reasons considered below, we conforty years that those assets and costs would clude that the district court's construction of have had absent the 1999 amendments to the

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51 S.W.3d 275, Util. L. Rep. P 26,789, 44 Tex. Sup. Ct. J. 854, 44 Tex. Sup. Ct. J. 1126 (Cite as: 51 S.W.3d 275)

PURA. The determination of the appropriate ition charges. Each electric utility was required recovery period would occur in a rate proceed- to file by April 1, 2000 proposed tariffs that ining that is separate from securitization. cluded any expected competition transition charges. All or any part of a utility's regulatory FN10. Id. § 39.201. assets that are not securitized can be recovered through competition transition charges.FN12 FN11. Id. § 39.201(k).

Section 39.201(k) sets forth the factors that the A large part of the regulatory assets that Commission is to consider in determining the TXU seeks to securitize are Statement of Fin- length of time over which stranded costs, inancial Accounting Standard (SFAS) 109 as- cluding regulatory assets, will be recovered.

FN13 The PURA indicates that a *283 considsets . SFAS 109 assets essentially represent amounts that TXU would have recovered un- erable portion of these costs are to have been der the former regulatory scheme from rate- recovered within the two-year period after cuspayers over a period of forty years to pay fed- tomer choice begins on January 1, 2002.FN14 eral income taxes that it will owe in connec- Section 39.201(l ) provides for a true-up protion with expenditures it made in the past that ceeding in January 2004 in which adjustments were capitalized instead of expensed. The may be made to recover “any remaining stran- Commission asks this Court to authorize a ded costs.” FN15 The Commission may extend present value test for these assets based on a the collection period for competition transition remaining life of forty years even though the charges, if necessary.FN16 This indicates that Commission knows that in all probability, un- the recovery period for the competition transder section 39.201(k), it will shorten the re- ition charge initially set by the Commission maining life to something far less than forty will be a relatively short period of time, and years. Notwithstanding the Commission's re- that any extension will likewise be a relatively cognition of this fact, it maintains that the dis- short period of time. Section 39.262 contemtrict court erred in requiring it to use a remain- plates that if, during the 2004 true-up proceeding life of less than forty years because amount ing, there are stranded costs in addition to of any reduction to the forty-year recovery those previously estimated, those remaining period has yet to be determined. The Office of costs can be added to the amounts to be re- Public Utility Counsel similary argues says covered by competition transition charges, or that “the essential problem with the lower at the utility's option, securitized through court's position is that neither TXU, the Dis- bonds that cannot have a life longer than fiftrict Court, or anyone else can state with any teen years.FN17 The fact that a utility may selevel of precision over what period the non- curitize remaining stranded costs and regulatsecuritized assets will be recovered.” ory assets, but over a period of time not to exceed fifteen years,FN18 indicates that the Le-

Although there may be some uncertainty as gislature had something considerably less than to precisely how much the Commission would forty years in mind for the transition to “a fully shorten the recovery period for the regulatory competitive electric power industry.” FN19 assets at issue if they were not securitized, that uncertainty does not justify the use of a forty- FN12. See id. § 39.201(i). year life. The PURA contemplates a far shorter FN13. Section 39.201(k) provides:

recovery period for regulatory assets and other stranded costs that are not securitized but are (k) In determining the length of time instead recovered through competition trans- over which stranded costs under Sub-

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51 S.W.3d 275, Util. L. Rep. P 26,789, 44 Tex. Sup. Ct. J. 854, 44 Tex. Sup. Ct. J. 1126 (Cite as: 51 S.W.3d 275)

section (h) may be recovered, the FN16. Id. commission shall consider:

FN17. Section 39.262(c) provides:

(1) the electric utility's rates as of the end of the freeze period; (c) After January 10, 2004, at a schedule and under procedures to be (2) the sum of the transmission and determined by the commission, each distribution charges and the system transmission and distribution utility, benefit fund fees; its affiliated retail electric provider, and its affiliated power generation (3) the proportion of estimated stran- company shall jointly file to finalize ded costs to the invested capital of the stranded costs under Subsections (h) electric utility; and and (i) and reconcile those costs with the estimated stranded costs used to (4) any other factor consistent with develop the competition transition the public interest as expressed in this charge in the proceeding held under chapter.

Section 39.201. Any resulting differ-

Id. § 39.201(k). ence shall be applied to the nonbypassable delivery rates of the trans-

FN14. Section 39.102(a) provides that mission and distribution utility, excustomer choice begins, with certain cept that at the utility's option, any or exceptions not material here, on Janu- all of the remaining stranded costs ary 1, 2002. Id. § 39.102(a). may be securitized under Subchapter G.

FN15. Section 39.201(l) says:

Id. § 39.262(c). The recovery period Two years after customer choice is for transition charges under the introduced, the stranded cost estimate PURA's securitization scheme is limunder this section shall be reviewed ited to fifteen years by section and, if necessary, adjusted to reflect a 39.303(b), and the life of transition final, actual valuation in the true-up bonds is similarly limited to fifteen proceeding under Section 39.262. If, years by section 39.302(6). Id. §§ based on that proceeding, the compet- 39.303(b), 39.302(6). ition transition charge is not sufficient , the commission may extend the FN18. Id. § 39.303(b). collection period for the charge or, if necessary, increase the charge. Al- FN19. Id. § 39.001(a). ternatively, if it is found in the true-

Statements made by PUC Commissioners up proceeding that the competition at an open meeting in this case are consistent transition charge is larger than is with our understanding of the Legislature's inneeded to recover any remaining tent. Those Commissioners indicated that comstranded costs, the commission petition transition charges, which would be the may:....

method for recovering regulatory assets and Id. § 39.201(l). stranded costs absent securitization, would be collected over a period of time that would be

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51 S.W.3d 275, Util. L. Rep. P 26,789, 44 Tex. Sup. Ct. J. 854, 44 Tex. Sup. Ct. J. 1126 (Cite as: 51 S.W.3d 275)

unlikely to exceed fifteen years and that *284 on the transition bonds. could be as few as eight years. Those statements are not binding, but they indicate that Id. § 39.301. the Commission understands that the Legis-

The Commission's method of calculating lature did not intend for the transition to a fully present value takes into account the actual timcompetitive market to be protracted.

ing of bond payments until the last payment is We therefore conclude that the district made on the oldest bond. The Commission court did not err in holding that the Commis- concluded, and we agree, that accounting for sion could employ a present value test in addi- the actual timing of payments is necessary to tion to the present value test expressly set forth determine present value. TXU's averaging in section 39 .301, but that the Commission method does not mathematically account for must assume that absent securitization, regu- transition charges that will be collected until latory assets and stranded costs would be re- the last of the series of transition bonds macovered through competition transition charges tures twelve years from the date of issuance. in considerably less than forty years.

III

II [3] Another significant issue presented is [2] The financing order in this case ap- whether, in determining the amount to be seproved the issuance of a series of transition curitized, the Commission must consider the bonds with differing maturity dates TXU ex- regulatory assets or other stranded costs to be plains that this was designed to allow its regu- securitized in the aggregate or, instead, may latory assets to be securitized at the lowest conduct an asset-by-asset analysis. We conoverall interest rate on the best possible terms, clude that the Commission must consider reguand no one takes issue with that assertion. The latory assets in the aggregate for the same bonds' maturity dates range from one to twelve reasons expressed in Corpus Christi.FN21 years after their issuance. TXU contends that FN21. 51 S.W.3d at 231 – 255.

in performing the present value test set forth in the last two sentences of section 39.301,FN20 Briefly, what is at issue in this case are regthe Commission should have used the ulatory assets that do not currently earn a reweighted average life over which the bonds turn. The majority of TXU's regulatory assets will be outstanding, which would be approxim- fall into this category. Among TXU's regulatately six years, rather than twelve years. We ory assets that earn no return are approximapprove of the Commission's methodology. ately $1.45 billion in SFAS 109 assets. As explained above, these assets essentially repres-

FN20. The last two sentences of section ent amounts that TXU would have recovered 39.301 provide:

under the former regulatory scheme from rate-

The amount securitized may not ex- payers to pay federal income taxes that it will ceed the present value of the revenue owe, when it recovers through rates, expenditrequirement over the life of the pro- ures it made in the past that were capitalized posed transition bond associated with instead of expensed. the regulatory assets or stranded costs Some of TXU's regulatory assets do earn a sought to be securitized. The present return, as much as 13.637 percent. The provalue calculation shall use a discount posed interest rate on TXU's transition bonds rate equal to the proposed interest rate

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51 S.W.3d 275, Util. L. Rep. P 26,789, 44 Tex. Sup. Ct. J. 854, 44 Tex. Sup. Ct. J. 1126 (Cite as: 51 S.W.3d 275)

was 7.24 percent. Accordingly,*285 there was bonds” FN27 authorizes the Commission to considerable room to aggregate some of TXU's “maximize” benefits to ratepayers by refusing regulatory assets that earned no return with to securitize certain types of regulatory assets regulatory assets that earn a relatively high rate when 100 percent of regulatory assets are of return and still have a net benefit to ratepay- “qualified costs” under the PURA.FN28 ers from securitization.

FN22. Id.

The State of Texas, the Office of Public Utility Counsel, and Texas Industrial Energy Con- FN23. TEX. UTIL.CODE § 39.303(a). sumers have taken the position that to maxim-

FN24. Id. § 39.302(5).

ize the benefit of securitization to ratepayers, all regulatory assets that do not earn a rate of FN25. Id. §§ 39.302(4), 39.201(i)(1). return should be declared ineligible for securitization . The State and those aligned with it on FN26. Id. §§ 39.303(a), 39.301. these issues contend that each regulatory asset must be analyzed on a stand-alone basis to de- FN27. Id. § 39.301. termine if securitization of that asset benefits FN28. Id. § 39.302(4).

ratepayers. As we explain in Corpus Christi, the PURA does not support that position.FN22 The district court erred in concluding that the The PURA says that all regulatory assets are to Commission has the discretion to consider regbe securitized on application of a utility, sub- ulatory assets on an asset-by-asset basis. Beject to the requirement that “the total amount cause the Commission did not consider the of revenues to be collected under the financing regulatory assets and other costs that TXU order” meets certain requirements.FN23 The sought to securitize in the aggregate, the Com- PURA defines “regulatory asset” with spe- mission must do so on remand. cificity.FN24 Regulatory assets are defined with reference to a utility's 1998 Securities and IV Exchange Commission Form 10–K, which lists [4] A number of parties have challenged the regulatory assets. A utility is entitled to secur- manner in which the Commission allocated itize 100 percent of its regulatory assets,FN25 transition charges among customer classes. subject only to the tests in sections 39.303(a) TXU proposed and the Commission adopted and 39 .301.FN26 The present value test in seven regulatory asset recovery classes for section 39.301 ensures that a utility will not re- purposes of collecting transition charges. cover a return on these assets higher than the Those classes and the regulatory asset allocareturn it would receive under the existing regu- tion factors assigned to each under section latory scheme. Neither the present value test 39.253 are: nor the requirement in section 39.301 that the Commission “ensure that securitization provides tangible and quantifiable benefits to ratepayers, greater than would have been achieved absent the issuance of transition

Class: Allocation Factor: Residential 41.2705% General Service—Secondary 44.7323%

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51 S.W.3d 275, Util. L. Rep. P 26,789, 44 Tex. Sup. Ct. J. 854, 44 Tex. Sup. Ct. J. 1126 (Cite as: 51 S.W.3d 275)

General Service—Primary 5.8982% High Voltage Service 2.7875% Lighting Service 0.6836% Instantaneous Interruptible 1.8568% Noticed Interruptible 2.7711% Total 100.0000% FN29. Id. § 39.253(c)-(h).

Nucor Steel is in the Instantaneous Interruptible regulatory asset recovery class. Nucor FN30. 51 S.W.3d at 257. Steel is a nonfirm, also known as an interruptible , customer on TXU's system. A utility may FN31. Tex. Util.Code § 39.253(c)-(e). interrupt service to an interruptible customer FN32. Id. § 39.253(c).

for specified reasons, typically during periods of high demand from other customers on that FN33. Id. § 39.253(g). utility's system. Texas Industrial Energy Consumers *286 (TIEC) is a voluntary association FN34. Cf. Corpus Christi, 51 S.W.3d at of companies that operates industrial facilities 259. in TXU's service area. Nucor Steel and TIEC take issue with how the Commission determ- We conclude in Corpus Christi and in this ined the percentage of transition costs each case that the PURA is unclear in this regard.

FN35 In such a situation, we give some defercustomer class would bear. Nucor Steel and TIEC assert that the Commission should have ence to the Commission as long as its interused the more current, 1999 data rather than pretation of a code provision is a reasonable the data used in TXU's most recent rate-design one and does not conflict with the code's lancase , which was 1997 data. guage.FN36 The Commission construed section 39.253 to mean that the methodology used The pertinent section of the PURA is in a utility's last rate design case is to be ap-

39.253(c)-(h).FN29 As we explain in greater plied to the data used in that rate case. That is detail in Corpus Christi,FN30 the allocation of a reasonable construction of the PURA that stranded costs under section 39.253 has two does not contradict any of its language, and we basic components. One is determined by ap- agree with the Commission's construction. plying the same “methodology used to allocate the costs of the underlying assets in the electric FN35. Id. utility's most recent commission order address-

FN36. See Stanford v. Butler, 142 Tex.

ing rate design.” FN31 The other is the energy 692, 181 S.W.2d 269, 273 (1944)

consumption of the respective classes FN32 (observing that courts will ordinarily “based on the relevant class characteristics as adopt and uphold a construction placed of May 1, 1999, adjusted for normal weather upon a statute by a department charged conditions.” FN33 The question presented here with its administration if the statute is is whether the Commission should apply the ambiguous or uncertain, and the consame methodology used in TXU's last rate struction is reasonable); Texas Ass'n of design case to the data used in that rate case, or Long Distance Tel. Cos. v. Pub. Util.

whether the Commission is free to choose Comm'n, 798 S.W.2d 875, 884 more recent data.FN34

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51 S.W.3d 275, Util. L. Rep. P 26,789, 44 Tex. Sup. Ct. J. 854, 44 Tex. Sup. Ct. J. 1126 (Cite as: 51 S.W.3d 275)

(Tex.App.—Austin 1990, writ denied) customers shall be allocated stranded (observing that construction of a statute costs equal to 150 percent of the by an administrative agency charged amount allocated to that class”). with its enforcement is entitled to great weight, particularly if the statute is am- TIEC says that in determining how much biguous, so long as the agency's con- of the transition costs should be allocated to struction is reasonable and does not the industrial classes, the Commission should contradict the plain language of the have excluded load lost when customers statute); TEX. GOV'T CODE § switched to sources of power that exempt them 311.023(6) (providing that in constru- from paying transition charges.FN39 Again, ing a statute, whether or not the statute for the reasons we consider in Corpus Christi, is considered ambiguous on its face, a we reject that argument.FN40 court may consider the administrative FN39. See id. § 39.262(k).

construction of the statute).

FN40. 51 S.W.3d at 259 – 261.

V

Several parties who are also parties in Cor- VI pus Christi raise many of the same issues in [5] Several parties to this appeal, including both cases.FN37 Our decision in CP & L re- the Commission, contend that the district court solves each of these issues, and we will not erred when it held that the Commission's Findlengthen this opinion by reiterating all the ing of Fact 113 and references to that finding reasons for our holdings. We instead briefly in Conclusion of Law 41 and Ordering Parasummarize each issue and our disposition. graph 37 were “advisory and superfluous to the Order and therefore [have] no res judicata FN37. Those parties include the Office effect.” The finding of the Commission that is of Public Utility Counsel, Texas Indusat issue concerned loss on reacquired debt.

trial Consumers, and Nucor Steel, who filed an amicus brief with this Court in TXU reacquired preferred stock and high- Corpus Christi. cost debt before the maturity date of that debt by paying a premium. The loss TXU sustained Certain of TXU's customers assert that the in those transactions is included in the defini-

Commission failed to follow section 39.253 in tion of regulatory assets under the PURA, and allocating transition costs to the *287 non-firm the Commission allowed TXU to include loss industrial customer classes. They contend that on reacquired debt as part of the amount securthe Commission erred in applying the 150 peritized in the financing order. This same loss on cent demand allocator required by section reacquired debt is also reflected as an increase 39.253(d) FN38 to all the transition costs in TXU's cost of capital, and that in turn inrather than first subtracting the transition costs creases TXU's rate of return. The Commission allocated to residential customers. We hold in and others were concerned that TXU would this case, as we do in Corpus Christi, that secenjoy a double recovery of its losses. Respondtion 39.253 is ambiguous in this regard and ing to that concern, the Commission concluded that the Commission's construction is a reasonthat loss on reacquired debt “should not be reable one and should be accorded deference.

moved from [TXU's] cost-of-capital calcula-

FN38. TEX. UTIL.CODE § 39.253(d) tion for purposes of the annual report submit- (requiring that “[n]on-firm industrial ted pursuant to PURA § 39.257,” but that in-

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51 S.W.3d 275, Util. L. Rep. P 26,789, 44 Tex. Sup. Ct. J. 854, 44 Tex. Sup. Ct. J. 1126 (Cite as: 51 S.W.3d 275)

stead an adjustment should be made in future Commission should assume that recovery of proceedings.FN41 In the Financing Order, regulatory assets and stranded costs absent se- Finding of Fact 113, the Commission said that: curitization would occur in substantially less than forty years; 3) the Commission must con-

FN41. Tex. Pub. Util. Comm'n, Applic- sider regulatory assets that a utility seeks to seation of TXU Electric Company for curitize in the aggregate to determine whether Financing Order to Securitize Regulat- those assets meet the requirements for securitory Assets and Other Qualified Costs, ization and cannot categorically exclude cer- Docket No. 21527 (May 2, 2000). tain types of regulatory assets from securitization ; 4) section 39.253 permits the Commis-

[A]n adjustment should be made in the true sion to apply the rate design methodology esup proceeding under PURA § 39.262 to actablished in a utility's last rate design case to count for the effect of securitizing the loss on the data in that rate case rather than to more reacquired debt on [TXU's] cost of capital.

current data, in order to establish demand al-

This treatment is necessary to comply with location factors that determine how transition the Legislature's mandate in PURA § charges are to be allocated among classes of 39.262(a) that a utility and its affiliates “may customers; 5) none of the other issues regardnot be permitted to overrecover stranded ing allocation of transition costs among classes costs” by using any of the methods provided of customers has merit; and 6) certain findings in Chapter 39 [§ 39.262(a) ]. In addition, any of fact and conclusions of law by the Commisdeterminations regarding the effect of secursion are advisory.

itizing loss on reacquired debt on the calcula-

Justice HECHT, joined by Chief Justice PHILtion of stranded costs should not be made in LIPS, Justice ABBOTT, Justice HANKINSON this docket but should be made in [TXU's]

, and Justice JEFFERSON, concurring.

cost unbundling case under PURA § 39.201. FN42 We join fully in the Court's judgment and in JUSTICE OWEN's concurring opinion. This FN42. Id. (footnote omitted). is the opinion of the Court regarding the validity of the “non-standard true-up” included in We agree with the district court that this the Public Utility Commission's financing orwas an advisory and premature finding.*288 der for TXU Electric Company. Whether an adjustment is required in a true-up or other future proceeding should await resolu- [6] The financing order for TXU contains a tion in that proceeding. non-standard true-up procedure essentially identical to the one in the financing order for ***** Central Power and Light Company, which we For the reasons considered above, we con- approve today in City of Corpus Christi v.

clude that: 1) in order to ensure that securitiza- Public Utility Commission, 51 S.W.3d 231 tion provides tangible and quantifiable benefits (Tex.2001). A Commission witness testified to ratepayers greater than would have been that if any TXU customer class experienced a achieved absent the issuance of transition decrease in power usage of more than six to bonds, the Commission may apply a present nine percent, that class would be “at risk for a value test in addition to the present value and cascading loss scenario.” The arguments for revenue requirement tests expressly set forth in and against that procedure in this case are the sections 39.301 and 39.303(a) of the PURA; 2) same as those made in Corpus Christi with one in applying an additional present value test, the exception. Nucor Steel, one of TXU's largest

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51 S.W.3d 275, Util. L. Rep. P 26,789, 44 Tex. Sup. Ct. J. 854, 44 Tex. Sup. Ct. J. 1126 (Cite as: 51 S.W.3d 275)

customers, argues that any overpayments or underpayments of transition charges by any one class should be reallocated among all Judges and Attorneys(Back to top) TXU's customers, thereby fully cross-

Judges | Attorneys collateralizing responsibility for the transition as TXU proposed to the Commission. Without Judges deciding whether the Commission was empowered to depart this far from the allocation • Abbott, Hon. Michael requirements of section 39.253, we easily con- State of Texas Municipal Court, City of Vidor clude that the Commission was not required to Vidor, Texas 77662 adopt this approach instead of the somewhat Litigation History Report | Judicial Reversal more restricted non-standard true-up. For the Report | Profiler same reasons explained in our concurring opinion in that case, we approve of the non- • Enoch, Craig T. standard true-up procedure in this case.

Litigation History Report | Judicial Reversal Justice OWEN, joined by Justice ENOCH and Report | Profiler Justice BAKER, dissenting.

• Hankinson, Hon. Deborah G.

The financing order for TXU contains a non-standard true-up provision that is virtually Litigation History Report | Judicial Reversal identical to the non-standard true-up provision Report | Profiler at issue in *289City of Corpus Christi v. Public Utility Commission,FN1 which the Court • Hecht, Hon. Nathan L. also decides today. For the reasons set forth in State of Texas Supreme Court my dissent in that case, I also dissent from the Austin, Texas 78701 Court's approval of the non-standard true-up Litigation History Report | Judicial Reversal procedure in TXU's financing order. Report | Judicial Expert Challenge Report | Profiler FN1. 51 S.W.3d 231 (Tex.2001).

• Jefferson, Hon. Wallace B.

Tex.,2001. Litigation History Report | Judicial Reversal TXU Elec. Co. v. Public Utility Com'n of Report | Profiler Texas 51 S.W.3d 275, Util. L. Rep. P 26,789, 44 Tex. • O'Neill, Hon. Alice Sup. Ct. J. 854, 44 Tex. Sup. Ct. J. 1126 State of Texas Municipal Court, City of Houston

Briefs and Other Related Documents (Back to Houston, Texas 77002-1553 top) Litigation History Report | Judicial Reversal Report | Judicial Expert Challenge Report | • 00-0936 (Docket) (Sep. 11, 2000)

Profiler Oral Argument Transcripts with Streaming • Owen, Hon. Priscilla Richman Media (Back to top)

United States Court of Appeals, Fifth Circuit • 2001 WL 36161699 (Oral Argument) Oral New Orleans, Louisiana 70130-3408 Argument (Jan. 31, 2001) Litigation History Report | Judicial Reversal

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51 S.W.3d 275, Util. L. Rep. P 26,789, 44 Tex. Sup. Ct. J. 854, 44 Tex. Sup. Ct. J. 1126 (Cite as: 51 S.W.3d 275)

Report | Judicial Expert Challenge Report | • Cornyn, John Profiler Washington, District of Columbia 20510 Litigation History Report | Profiler Attorneys • Davis, Mark C.

Austin, Texas 78701-2415 Attorneys for Appellant Litigation History Report | Profiler • Fillmore, Hon. Robert M. Unknown State • Day, Jonathan Litigation History Report | Profiler Houston, Texas 77002 Litigation History Report | Profiler • Hearon, Robert J. Jr. Austin, Texas 78701 • Drews, Elizabeth H. Litigation History Report | Profiler Austin, Texas 78701-4093 Litigation History Report | Profiler • Keeney, Mary A. Austin, Texas 78701 • Gay, Geoffrey M. Litigation History Report | Profiler Austin, Texas 78701 Litigation History Report | Profiler • Minton, Roy Q. Austin, Texas 78701-2198 • Gross, David B. Litigation History Report | Profiler Ridgeland, Mississippi 39157-8766 Litigation History Report | Profiler Attorneys for Appellee • Anson, Thomas K. • Kever, Andrew Austin, Texas 78701 Austin, Texas 78701 Litigation History Report | Profiler Litigation History Report | Profiler • Baker, Bryan Lawrence • Mendiola, Lino III Austin, Texas 78701 Austin, Texas 78701 Litigation History Report | Profiler Litigation History Report | Profiler • Baron, Steven • Rourke, James K. Jr. Austin, Texas 78763 Austin, Texas Litigation History Report | Profiler Litigation History Report | Profiler • Boyd, Hon. Jeffrey S. Unknown State Litigation History Report | Profiler • Brocato, Thomas L. Austin, Texas 78701 Litigation History Report | Profiler • Carroll, Marianne Austin, Texas 78701-4093 Litigation History Report | Profiler

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51 S.W.3d 275, Util. L. Rep. P 26,789, 44 Tex. Sup. Ct. J. 854, 44 Tex. Sup. Ct. J. 1126 (Cite as: 51 S.W.3d 275)

END OF DOCUMENT

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