Entergy Texas, Inc. v. Public Utility Commission of Texas Cities of Beaumont, Bridge City, Conroe, Groves, Huntsville, Montgomery, Navasota, Nederland, Orange, Pinehurst, Port Neches, Shenandoah, Silsbee, and Willis And Texas Industrial Energy Consumers

Opinion

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03-11-00005-CV

Entergy Texas, Inc., Appellant

v.

Public Utility Commission of Texas; Cities of Beaumont, Bridge City, Conroe, Groves, Huntsville, Montgomery, Navasota, Nederland, Orange, Pinehurst, Port Neches, Shenandoah, Silsbee, and Willis; and Texas Industrial Energy Consumers, Appellees

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 201ST JUDICIAL DISTRICT NO. D-1-GN-10-000645, HONORABLE STEPHEN YELENOSKY, JUDGE PRESIDING

MEMORANDUM OPINION

Entergy Texas, Inc. appeals from the district court’s judgment affirming a final order

of appellee Public Utility Commission of Texas. In the order, the Commission set Entergy’s

2010 energy efficiency cost recovery factor (EECRF). See Tex. Util. Code Ann. § 39.905 (West

Supp. 2010); 16 Tex. Admin. Code § 25.181 (2008) (Public Util. Comm’n of Tex., Energy

Efficiency Goal).1 On appeal, Entergy contends that the Commission misconstrued section 39.905

of the utilities code and misapplied the rule against retroactive ratemaking. Because we conclude

that the Commission’s construction comports with the plain language of the statute, we affirm the

district court’s judgment affirming the Commission’s final order.

1 Section 39.905 of the utilities code was amended in 2011, see Act of May 17, 2011, 82d Leg., R.S., ch. 1346, § 1, 2011 Tex. Gen. Laws 180 (effective Sept. 1, 2011), and Commission rule 25.181 was amended in 2010. See 35 Tex. Reg. 7747 (2010). We refer to section 39.905 and rule 25.181 as they existed prior to the 2010 and 2011 amendments. BACKGROUND

Statutory Framework

In 1999, as part of the restructuring of the electric utility industry, the legislature

enacted section 39.905 of the utilities code, a part of the Public Utility Regulatory Act (PURA). See

Act of May 27, 1999, 76th Leg., R.S., ch. 405, § 39, 1999 Tex. Gen. Laws 2543, 2600 (amended

2005) (current version at Tex. Util. Code. Ann. § 39.905). At that time, section 39.905, titled “Goal

For Energy Efficiency,” provided that “electric utilities will administer energy savings incentive

programs” and that a goal for the programs was “to acquire additional cost-effective energy

efficiency equivalent to at least 10 percent of the electric utility’s annual growth in demand.” Id.

The legislature directed the Commission that it “shall provide oversight and adopt rules and

procedures, as necessary, to ensure that the goal of this section is achieved by January 1, 2004.” Id.

Electric utilities recovered the costs of these programs through their base rates as

operating expenses. See Tex. Util. Code Ann. § 36.051 (West 2007).2 Once base rates are set,

utilities’ revenues from their rates are not reconciled with actual costs; the base rates are only

changed prospectively in rate proceedings. Id. §§ 36.101–.156 (West 2007); Public Util. Comm’n

v. GTE-Southwest, Inc., 901 S.W.2d 401, 406 (Tex. 1995) (“[U]tility rates, like any other legislation,

2 Section 36.051 of the utilities code provides the parameters for setting base rates:

In establishing an electric utility’s rates, the regulatory authority shall establish the utility’s overall revenues at an amount that will permit the utility a reasonable opportunity to earn a reasonable return on the utility’s invested capital used and useful in providing service to the public in excess of the utility’s reasonable and necessary operating expenses.

Tex. Util. Code Ann. § 36.051 (West 2007).

2 generally can have only prospective application and cannot be used to recoup losses or gains incurred

under prior legal rates.”).

In 2007, the legislature amended section 39.905, increasing its benchmark goals

applicable to residential and commercial customers. See id. § 39.905(a)(3).3 As part of the

amendment, the legislature created a new type of rate schedule separate from base rates for utilities

to recover their energy efficiency expenditures. The legislature directed the Commission to establish

an “energy efficiency cost recovery factor” (EECRF). See id. § 39.905(b)(1). The legislature did

not expressly define EECRF, but stated that “[t]he commission shall provide oversight and adopt

3 Subsection (a)(3) of section 39.905, as amended in 2007, stated:

[E]ach electric utility will provide, through market-based standard offer programs or limited, targeted, market-transformation programs, incentives sufficient for retail electric providers and competitive energy service providers to acquire additional cost-effective energy efficiency for residential and commercial customers equivalent to at least:

(A) 10 percent of the electric utility’s annual growth in demand of residential and commercial customers by December 31, 2007;

(B) 15 percent of the electric utility’s annual growth in demand of residential and commercial customers by December 31, 2008, provided that the electric utility’s program expenditures for 2008 funding may not be greater than 75 percent above the utility’s program budget for 2007 for residential and commercial customers, as included in the April 1, 2006, filing; and

(C) 20 percent of the electric utility’s annual growth in demand of residential and commercial customers by December 31, 2009, provided that the electric utility’s program expenditures for 2009 funding may not be greater than 150 percent above the utility’s program budget for 2007 for residential and commercial customers, as included in the April 1, 2006, filing; . . . .

Id. § 39.905(a)(3)). Subsection (a)(3) was further amended in 2011, but the 2011 amendment is not applicable here. See Act of May 17, 2011, 82d Leg., R.S., ch. 1346, § 1, 2011 Tex. Gen. Laws 180 (effective Sept. 1, 2011).

3 rules and procedures to ensure that the utilities can achieve the goal of this section, including . . .

establishing an energy efficiency cost recovery factor for ensuring timely and reasonable cost

recovery for utility expenditures made to satisfy the goal of this section.” Id. In contrast with the

procedure for recovering operating expenses in base rates, the legislature authorized EECRFs to be

adjusted to “match revenues against energy efficiency costs.” Id. § 39.905(b-1).

In accordance with the legislature’s directive, the Commission adopted a new rule

25.181 in 2008. See 16 Tex. Admin. Code § 25.1814; see also Tex. Util. Code Ann. § 39.001 (West

2007). Subsection (f) of the new rule 25.181 addressed cost recovery and provided the procedures

for electric utilities to establish EECRFs. With this context, we turn to the parties’ dispute.

The Parties’ Dispute

In May 2009, Entergy applied to set its 2010 EECRF rate schedule. In that

proceeding, Entergy sought to revise its EECRF to allow for the recovery of energy efficiency costs

that it alleged that it incurred but did not recover from 2005 to 2008. Entergy did not seek to recover

those costs in its initial proceeding to establish an EECRF. Entergy applied for its first EECRF in

May 2008, which was approved effective January 1, 2009.

Appellees the Cities of Beaumont, Bridge City, Conroe, Groves, Huntsville,

Montgomery, Navasota, Nederland, Orange, Pinehurst, Port Neches, Shenandoah, Silsbee, and Willis

intervened in the proceeding to set Entergy’s 2010 EECRF rate schedule, contesting Entergy’s right

to recover its alleged energy efficiency costs incurred but unrecovered from 2005 to 2008. The

4 Rule 25.181 was further amended effective December 1, 2010, but the amendment is not applicable here. See 35 Tex. Reg. 7747 (2010). As stated previously, references to rule 25.181 are to the rule as it existed prior to the 2010 amendment. See 33 Tex. Reg. 3585 (2008).

4 parties ultimately reached a stipulation that included the recovery of approximately $2.7 million

through Entergy’s 2010 EECRF for energy efficiency costs that Entergy contended that it incurred

prior to 2009.

The Commission, however, did not allow Entergy to include an adjustment in its

2010 EECRF for under-recovered energy efficiency costs prior to January 1, 2009. In its order, the

Commission’s conclusions of law included that it could not adopt a stipulation that did not comport

with PURA and Commission rules and that, “[u]nder PURA, a utility may not adjust its EECRF for

over- or under-collected energy-efficiency costs recovered through base rates rather than through an

EECRF.” The Commission explained:

The Commission has previously concluded that adjustments to an EECRF under PURA § 39.905(b-1) and P.U.C. Subst. R. 25.181(f) are allowed only for those periods when an EECRF was in place. The adjustments are limited to those energy- efficiency costs for which the EECRF was set to recover. Energy-efficiency costs that were previously included in and collected through base rates—prior to the establishment of an EECRF—are not properly included in such an adjustment. [Entergy]’s first EECRF was approved in August 2008 to recover energy-efficiency cost incurred in 2009. Thus, the energy-efficiency costs incurred prior to 2009 were properly recovered through base rates, and are not recoverable under [Entergy]’s EECRF. The Commission affirms its previous conclusion that under PURA § 39.905(b-1) and P.U.C. Subst. R. 25.181(f), a utility may seek adjustment of its EECRF to reflect any over- or under-collection of energy-efficiency-costs-recovery factor revenues from previous years in which the utility has an EECRF in place, but not from pre-EECRF years. (Footnotes omitted.)

Among its authority for denying Entergy’s request, the Commission cited State v. Public Utility

Commission, 883 S.W.2d 190, 199 (Tex. 1994), to support its conclusion that an adjustment for pre-

2009 costs would violate the prohibition against retroactive ratemaking. The Commission also cited

a prior order concerning a different utility in which it had reached the same conclusion. Tex. Pub.

5 Util Comm’n, Application of Oncor Elec. Co. for 2010 Energy Efficiency Cost Recovery Factor,

Docket No. 36958, Order, at 1–2 (Nov. 23, 2009).

Entergy filed a motion for rehearing and then sought judicial review of the

Commission’s order. See Tex. Util. Code Ann. § 15.001 (West 2007). The district court affirmed

the Commission’s final order. This appeal followed.

ANALYSIS

In three issues, Entergy challenges the Commission’s denial of Entergy’s request to

adjust its 2010 EECRF rate schedule to recover energy efficiency costs incurred prior to Entergy’s

establishment of an EECRF. Entergy contends that the district court’s judgment should be reversed

because the Commission’s decision to deny its request for energy efficiency costs incurred but

unrecovered from 2005 to 2008 violates sections 39.905(b-1) and (b)(3) of the utilities code, the

Commission’s decision conflicts with its statutory obligation to adopt rules and procedures for

establishing an EECRF that ensures the timely recovery of reasonable costs expended on energy

efficiency programs, and the Commission’s decision misapplies the rule against retroactive

ratemaking.

Scope and Standard of Review

The Commission is “a creature of the legislature and has no inherent authority.”

GTE-Southwest, Inc., 901 S.W.2d at 406. As an administrative agency, the Commission “may

exercise only those specific powers that the law confers upon it in clear and express language.” Id.

at 407. The Commission may not “contravene specific statutory language, . . . or impose additional

burdens, conditions, or restrictions in excess of or inconsistent with the relevant statutory

6 provisions.” Cities of Corpus Christi v. Public Util. Comm’n, 188 S.W.3d 681, 690 (Tex.

App.—Austin 2005, pet. denied) (citation omitted).

The parties’ dispute concerns statutory construction.5 We review matters of statutory

construction de novo. See Texas Mun. Power Agency v. Public Util. Comm’n, 253 S.W.3d 184, 192

(Tex. 2007). Of primary concern in construing a statute is the express statutory language.

See Galbraith Eng’g Consultants, Inc. v. Pochucha, 290 S.W.3d 863, 867 (Tex. 2009). We

apply the plain meaning of the text unless a different meaning is supplied by legislative

definition or is apparent from the context or the plain meaning leads to absurd results. Marks

v. St. Luke’s Episcopal Hosp., 319 S.W.3d 658, 663 (Tex. 2010) (citing City of Rockwall v. Hughes,

246 S.W.3d 621, 625–26 (Tex. 2008)). We consider the entire act, not isolated portions. 20801, Inc.

v. Parker, 249 S.W.3d 392, 396 (Tex. 2008).

Section 39.905

In its first issue, Entergy challenges the Commission’s construction of section

39.905(b-1), contending that the Commission’s construction conflicts with the plain language of the

statute. See Tex. Util. Code Ann. § 39.905(b-1). Subsection (b-1) states:

The energy efficiency cost recovery factor under Subsection (b)(1) may not result in an over-recovery of costs but may be adjusted each year to change rates to enable

5 The utilities code generally requires a court to review the Commission’s decisions under the substantial evidence rule. See Tex. Util. Code. Ann. § 15.001 (West 2007); Tex. Gov’t Code Ann. § 2001.174(2) (West 2008). The substantial evidence rule requires a court to reverse or remand a case to the administrative agency for further proceedings “if substantial rights of the appellant have been prejudiced because the administrative findings, inferences, conclusions, or decisions” are, among other grounds, “not reasonably supported by substantial evidence,” or are “arbitrary or capricious or characterized by abuse of discretion or clearly unwarranted exercise of discretion.” Tex. Gov’t Code Ann. § 2001.174(2)(E), (F).

7 utilities to match revenues against energy efficiency costs and any incentives to which they are granted. The factor shall be adjusted to reflect any over-collection or under-collection of energy efficiency cost recovery revenues in previous years.

Id. § 39.905(b-1). The Commission interprets this subsection to authorize adjustments for energy

efficiency costs expended in EECRF years, but not in years prior to the establishment of an EECRF.

Entergy counters that the second sentence in this subsection “expressly permits utilities to adjust

their EECRFs to account for the over- or under-collection of energy efficiency costs in ‘previous

years’ – whether such costs were then recovered through base rates or through an EECRF.” Entergy

focuses on the words “previous years,” urging that those words are not ambiguous and expressly

include pre-EECRF years. Entergy also argues that the Commission’s construction renders

“previous years” meaningless in the first year of EECRF rate schedules and that the legislature easily

could have drafted the section to include the limitation that the Commission has imposed.

We begin with the statute’s plain language. Reading the words “previous years” in

context, they follow the preposition “in” after the words “energy efficiency cost recovery revenues.”

The plain meaning of the prepositional phrase “in previous years” then is to qualify or limit “energy

efficiency cost recovery revenues.” Had the legislature intended a broader category of revenues,

such as from base rates, or “costs” expended prior to the establishment of an EECRF, it could have

easily said so. See Hughes, 246 S.W.3d at 628–29 (declining to read additional words into statute

in construing statute). We also find the subject and verb of the sentence—“factor [EECRF] shall be

adjusted”—significant. See City of Marshall v. City of Uncertain, 206 S.W.3d 97, 105 (Tex. 2009)

(courts “‘presume that every word of a statute has been included or excluded for a reason’”) (citation

8 omitted). Before the collection of revenues from an EECRF may be “adjusted,” an EECRF

necessarily had to be in existence.

To support its argument that the legislature did not intend to limit “previous years”

to years in which an EECRF was in place, Entergy separates the first sentence from the second

sentence in subsection (b-1), arguing that the first sentence addresses the future and the second

sentence the past. The Commission’s construction, however, harmonizes the first and second

sentences and gives meaning to each word and clause. See City of San Antonio v. City of Boerne,

111 S.W.3d 22, 25 (Tex. 2003) (effect must be given to each word and clause). The first sentence

references the “energy efficiency cost recovery factor [EECRF] under subsection (b)(1),” and

subsection (b)(1) states the legislature’s directive to the Commission to “[establish] an energy

efficiency cost recovery factor [EECRF] for ensuring timely and reasonable cost recovery for utility

expenditures made to satisfy the goal of this section.” Tex. Util. Code Ann. § 39.905(b)(1). At the

same time that it authorized the Commission to establish EECRFs, the legislature amended the

benchmark goals for 2007, 2008, and 2009. Id. § 39.905(a)(3).

Consistent with its directive to the Commission “for ensuring timely and reasonable

cost recovery” to satisfy the legislature’s goals, the legislature in the first sentence of subsection (b-1)

authorized EECRFs to be adjusted each year so that prospective revenues could reasonably

approximate the projected costs as well as any incentives. The second sentence also addresses the

new EECRF rate structure, but it addresses a further adjustment that does not have to be made on

an annual basis. The second sentence requires a reconciliation adjustment but it provides utilities

with the option of not seeking this additional adjustment every year. In this context, the plain

9 language of “previous years” has meaning in that it recognizes that this adjustment may be made for

more than one year at a time to reconcile actual revenues with energy efficiency costs. See Tex.

Gov’t Code Ann. § 311.012(b) (West 2005) (“The singular includes the plural and the plural includes

the singular.”); City of San Antonio, 111 S.W.3d at 29.

Entergy argues that the Commission’s construction contravenes section 39.905(b)(3).

See Tex. Util. Code Ann. § 39.905(b)(3). Subsection (b)(3) allows utilities to defer costs of

complying with section 39.905 when they are unable to establish an EECRF due to a rate freeze. Id.6

Entergy argues that, if the Commission’s construction of subsection (b-1) is correct, it is impossible

for a utility to recover deferred costs under subsection (b)(3) through an EECRF because the utility

would not have had an EECRF in place when it incurred the deferred costs. Under the plain

language of section (b)(3), however, the subsection is an exception to the general rule when a utility

is not able to implement an EECRF to allow the utility to defer its energy efficiency costs and to

adjust its first EECRF to recover the energy efficiency cost recovery revenues that should have been

6 Section 39.905(b)(3) states:

(b) The commission shall provide oversight and adopt rules and procedures to ensure that the utilities can achieve the goal of this section, including:

(3) providing a utility that is unable to establish an energy efficiency cost recovery factor in a timely manner due to a rate freeze with a mechanism to enable the utility to:

(A) defer the costs of complying with this section; and

(B) recover the deferred costs through an energy efficiency cost recovery factor on the expiration of the rate freeze period; ....

Tex. Util. Code Ann. § 39.905(b)(3).

10 collected while the utility was in a base rate freeze. The Commission’s construction of subsection

(b-1) then does not conflict with subsection (b)(3).

The Commission’s construction also is consistent with the statutory scheme as a

whole. See Parker, 249 S.W.3d at 396 (in construing statutes, courts consider entire act, not isolated

portions). In enacting a new rate schedule and authorizing a reconciliation under the new rate

schedule between revenues and costs, we presume that the legislature acted with reference to the

established base rate scheme. See Tex. Util. Code Ann. § 36.051; Acker v. Texas Water Comm’n,

790 S.W.2d 299, 301 (Tex. 1990) (“A statute is presumed to have been enacted by the legislature

with complete knowledge of the existing law and with reference to it.”). The legislature then was

aware that, prior to the establishment of an EECRF, a utility’s energy efficiency costs would

continue to be accounted for in its base rates and that there would be no reconciliation between

actual revenues and costs. See Tex. Util. Code Ann. § 36.051; GTE-Southwest, Inc., 901 S.W.2d

at 407; Public Utility Comm’n, 883 S.W.2d at 199 (“Fundamental in the utility ratemaking process

is the principle that utility rates are set for the future, and not the past.”). Allowing the recovery of

costs expended for years in which a utility was recovering costs under a base rate would be

inconsistent with this statutory scheme. Further, under Entergy’s proposed construction, a utility

would be authorized on an open-ended basis to adjust its EECRFs to recover “costs” that were

accounted for in a utility’s prior base rates, a significant departure from the statutory scheme. See

Presidio Ind. Sch. Dist. v. Scott, 309 S.W.3d 927, 931 (Tex. 2010) (citation omitted) (“Courts must

not give the words used by the Legislature an ‘exaggerated, forced, or constrained meaning.’”).

As part of its first issue and in its second issue, Entergy argues that the Commission’s

construction is unreasonable and not entitled to deference because it defeats one of the stated

11 purposes of the statute by denying Entergy the right to recover costs incurred to administer

statutorily-mandated energy efficiency programs. See Railroad Comm’n v. Texas Citizens for a Safe

Future & Clean Water, 336 S.W.3d 619, 624 (Tex. 2011) (citations omitted) (administrative

agency’s “interpretation of statute it is charged with enforcing is entitled to ‘serious consideration,’

so long as the construction is reasonable and does not conflict with the statute’s language”). The

legislature directed the Commission in section 39.905(b)(1) to establish an EECRF “for ensuring

timely and reasonable cost recovery for utility expenditures made to satisfy the goal of this section.”

Tex. Util. Code Ann. § 39.905(b)(1). Although the 2007 amendments became effective September

1, 2007, the Commission did not adopt its new rule 25.181 until 2008, and the first EECRFs were

not implemented until January 1, 2009. Entergy argues that, under the Commission’s construction,

utilities cannot recover their 2008 expenditures because of the Commission’s inaction and that the

legislature could not have intended for utilities to be unable to recover their 2008 costs incurred to

satisfy the legislature’s goals for that year simply because the Commission was unable to amend its

rules prior to May 2008.

That utilities were unable to obtain an EECRF before January 1, 2009, however, is

not dispositive. We presume that the legislature was aware of the time that it would take for the

Commission to adopt rules for EECRFs and of the “regulatory lag” in setting rates. See Public Util.

Comm’n, 883 S.W.2d at 193 n.3, 199 (discussing “regulatory lag” in resetting rates “due to the

inherent inability in the regulatory process to allow for immediate rate decreases or increases” and

“recogniz[ing] that regulatory lag is ordinarily an element of the risk associated with investment in

a utility”); Acker, 790 S.W.2d at 301 (presume legislature aware of law and acting with reference to

it). Further, prior to its establishment of an EECRF, a utility could have sought to change its base

12 rates if they were not sufficient because of increased energy efficiency goals. See Tex. Util. Code

Ann. §§ 36.101–.111.

Entergy also argues that the Commission’s construction of section 39.905(b-1) is not

entitled to deference because it is directly contrary to its contemporaneous construction of the statute.

In its order, however, the Commission cited a separate order concerning a different utility in which

it had reached the same conclusion. See Tex. Pub. Util. Comm’n, Application of Oncor Elec. Co.

for 2010 Energy Efficiency Cost Recovery Factor, Docket No. 36958, Order, at 1–2. Further, the

plain language of the Commission’s rule adopting the procedures for establishing an EECRF is

consistent with its construction of the statute. See 16 Tex. Admin. Code § 25.181; Rodriguez

v. Service Lloyds Ins. Co., 997 S.W.2d 248, 254 (Tex. 1999) (courts review administrative rules in

the same manner as statutes).

Rule 25.181 states that a utility may recover its energy efficiency program costs

through an EECRF, base rates, or deferred until the costs may be included in an EECRF.

16 Tex. Admin. Code § 25.181(f)(1), (2), & (7). The rule also states: “Each year, a utility with an

EECRF shall apply to adjust the EECRF in order to . . . minimize any over- or under-collection of

energy efficiency costs resulting from the use of the EECRF.” Id. § 25.181(f)(4) (emphasis added).

The rule further requires that a utility’s application to establish or change an EECRF to “contain the

actual revenues attributable to the EECRF for any period for which the utility seeks to adjust the

EECRF for an under- or over-recovery of EECRF revenues,” see id. § 25.181(f)(9)(C) (emphases

added), and places the burden on the utility to prove that the “calculations of any under- or

over-recovery of EECRF revenues is consistent with this section.” Id. § 25.181(f)(11)(B) (emphasis

added). Consistent with the Commission’s construction of section 39.905(b-1), the plain language

13 of rule 25.181 makes clear that the reconciliation adjustment is between revenues and costs incurred

under an EECRF.

We conclude that the Commission’s construction of section 39.905(b-1) comports

with the plain language of the statute. We overrule Entergy’s first and second issue.

Retroactive Ratemaking

In its third issue, Entergy urges that its interpretation of section 39.905 that would

allow Entergy to adjust its EECRF to reflect under-recoveries of its energy efficiency program costs

from pre-EECRF years would not constitute retroactive ratemaking or violate the constitutional

prohibition on retroactive laws. See Tex. Const. art. I, § 16; Public Util. Comm’n, 883 S.W.2d

at 199. Because we have concluded that the Commission’s construction of section 39.905(b-1)

comports with the plain language of the statute, we need not address this issue. See Tex. R. App.

P. 47.1.

CONCLUSION

For these reasons, we affirm the district court’s judgment affirming the final order

of the Commission.

__________________________________________

Melissa Goodwin, Justice

Before Justices Puryear, Rose and Goodwin

Affirmed

Filed: August 8, 2012