State v. Public Utility Com'n of Texas

883 S.W.2d 190, 1994 WL 278112

• Court: Texas Supreme Court
• Decided: October 6, 1994
• Docket: D-3154, D-3155
• Status: Published

Opinions

ENOCH, Justice,

delivered the opinion of the Court,

in which PHILLIPS, Chief Justice, and HIGHTOWER, HECHT and CORNYN, Justices, join.

These two causes were submitted together because both involve the Public Utility Commission’s (Commission) treatment of various costs associated with the operation of a newly constructed nuclear power plant.¹ The question presented by each case is whether the Commission has the authority under the Public Utility Regulatory Act (PURA)² to allow a public utility to defer certain costs incurred during the “regulatory lag” period in order to protect the utility’s financial integrity.³ We answer this yes, and consequently affirm the judgment of the court of appeals in part and reverse and remand in part.

In 1972, Central Power and Light Company (CP & L), Houston Lighting and Power Company (HL & P), the City of Austin, and the City of San Antonio began construction of a two-unit nuclear powered electricity generating station in Matagorda County, Texas, known as the South Texas Project. Unit One of the project (STP-1) was completed and began commercial operation on August 25, 1988. Under standard accounting procedures, CP & L and HL & P would have stopped accruing carrying costs on their invested funds and would have begun charging operations and maintenance, depreciation, insurance and taxes (collectively “operating costs”) as expenses against income at this time. During the interval between the time STP-1 was placed in service and the time the investment in the plant would be included in rate base (i.e., the “regulatory-lag” period), HL & P and CP & L would have incurred carrying costs and operating costs on their invested funds that they would never recover. As a result, both CP & L and HL & P applied to the Commission for deferred-accounting treatment of such costs during the regulatory lag period.

In Docket No. 7560 the Commission granted CP & L’s request for deferred accounting treatment for a period from August 25, 1988, to no later than February 15,1990. In Docket No. 8230 the Commission granted HL & P’s request for deferred accounting treatment from August 25, 1988, through the earlier of either the date rates which reflect those costs became effective or November 23, 1989. The order also provided that if by November 23, 1989, rates were not in effect to reflect the prudently incurred costs of the plant, HL & P could file a petition to request an extension of the deferral period beyond that date. Later, in Docket No. 9010, the Commission extended HL & P’s deferral period beyond November 23, 1989, until such time as the cost of STP-1 was reflected in rates approved by the Commission. By granting deferred accounting treatment during such time periods, the Commission allowed CP & L and HL & P to capitalize their costs associated with STP-1 during those periods and carry them as separate assets on their balance sheets. The reasonableness of the amount of the costs was to be determined by the Commission in a separate ratemaking proceeding in which the balance-sheet asset consisting of the deferred costs would be reviewed using the same criteria as any other asset.

The State of Texas on behalf of certain State agencies, and the Office of Public Utility Counsel (OPUC) sought judicial review of the Commission’s orders granting deferred accounting treatment to CP & L and HL & P. The trial court upheld all three orders. The court of appeals affirmed the portion of the trial court’s judgment which affirmed the Commission’s order allowing the deferral of post-in-service operating costs. 840 S.W.2d 650, 657. The court of appeals reversed the portion of the trial court’s judgment which affirmed the Commission’s order allowing the deferral of post-in-service carrying costs.⁴ Id. All parties filed applications for writ of error in this court. For the reasons stated below, we reverse the judgment of the court of appeals to the extent that it disallows the deferral of post-in-service carrying costs and remand this cause to the court of appeals for further proceedings consistent with this opinion. In all other respects, the judgment of the court of appeals is affirmed.

I.

A.

The Public Utility Regulatory Act

As a general rule, an administrative agency is a creation of the legislature and, as such, has only those powers expressly conferred and those necessary to accomplish its duties. State v. Jackson, 376 S.W.2d 341, 344 (Tex.1964); Sexton v. Mount Olivet Cemetery Ass’n, 720 S.W.2d 129, 137 (Tex.App.—Austin 1986, writ ref'd n.r.e.). This Court must determine the scope of the Commission’s authority under the Public Utility Regulatory Act (PURA), both express and implied, and must determine whether the Commission’s actions comported with this grant of authority. Tex.Gov’t Code Ann. § 2001.-174 (Vernon Pamphlet 1994). See Public Utility Regulatory Act, Tex.Rev.Civ.Stat. Ann. art. 1446c, §§ 4, 16 (Vernon Supp.1994).

PURA section 27 grants to the Commission broad authority in setting and defining a utility’s system of accounts. Specifically, under PURA section 27(a), the Commission has the power to prescribe forms of books and accounts “which in the judgment of the Commission may be necessary to carry out any of the provisions of’ PURA.⁵ Thus, section'27 provides authority for the Commission to determine the manner in which specific expenditures are to be recorded in carrying out the provisions of PURA.⁶ This includes section 39(a). Section 39(a) requires the Commission to set, as a minimum lawful rate, revenues at a level which will permit the utility “a reasonable opportunity to earn a reasonable return on its invested capital used and useful in rendering service to the public over and above [the utility’s] reasonable and necessary operating expenses.”⁷ Tex.Rev.Civ.Stat.Ann. art. 1446c, § 39(a); see also Railroad Comm’n of Texas v. Lone Star Gas Co., 656 S.W.2d 421, 426 (Tex.1983). By allowing the deferral of costs incurred during the regulatory lag period, the Commission has provided a mechanism, through accounting procedures under section 27, to ensure that the requirements of section 39 are met. This is within the Commission’s authority under PURA.⁸

The State and the OPUC contend that because the deferral of post-in-service costs is not explicitly included in PURA section 43 as a remedy for regulatory lag, the Commission exceeded its authority by pro-viding a remedy for regulatory lag not contemplated by the legislature.⁹ We disagree. In ascertaining the scope of the Commission’s authority, we must read PURA as a whole to ascertain the underlying legislative intent. Citizens Bank of Bryan v. First State Bank, 580 S.W.2d 344, 348 (Tex.1979). Further, the contemporaneous construction of a statute by the administrative agency charged with its enforcement is entitled to great weight. Dodd v. Mena, 870 S.W.2d 4, 7 (Tex.1994); Tarrant Appraisal Dist. v. Moore, 845 S.W.2d 820, 823 (Tex.1993). As noted, the Commission possesses the authority under section 27 to determine accounting classifications in order to carry out the provisions of PURA. And, the existence of the methods included in section 43 to ameliorate the impact of regulatoiy lag does not foreclose the Commission from authorizing deferred accounting pursuant to its authority under section 27. Rather, section 43 is a component of the overall scheme provided by PURA for regulating utilities and assuring that rates are just and reasonable. See Tex. Rev.Civ.StatAnn. art. 1446c, § 2.¹⁰

B.

Regulatory Lag and the Financial Integrity Standard

Because deferred accounting alleviated the effects of regulatory lag, the State and the OPUC argue that the Commission violated the principle that regulatory lag is ordinarily an element of the risk associated with investment in a utility. While we agree that regulatory lag is ordinarily an element of risk for utilities, Railroad Comm’n of Texas v. Lone Star Gas Co., 656 S.W.2d 421, 425 (Tex.1983), we do not accept that the legislature intended this general principle to subordinate the provisions of PURA. Rather, if the effects of regulatory lag infringe on the Commission’s ability to regulate in a manner necessary to carry out the provisions of PURA, then the Commission may respond within its powers, both express and implied, under PURA to alleviate the impact of regulatory lag in order to fulfill its statutorily imposed duties. See Tex.Rev.Civ.Stat.Ann. art. 1446c, § 16. At the same time, the authority to allow the deferral of post-in-service costs is not unfettered. Rather, the Commission must not alleviate regulatory lag unless necessary to comply with the provisions of PURA.

In Dockets Nos. 7560, 8230 and 9010, the Commission granted deferred accounting treatment in order to protect the financial integrity of CP & L and HL & P. The financial integrity of the utilities was at risk due to the effect of extraordinary regulatory lag.¹¹ Under PURA section 39, a utility must be allowed a reasonable opportunity to recover its operating expenses together with a reasonable return on its invested capital. Tex.Rev.Civ.Stat.Ann. art. 1446c, § 39; Railroad Comm’n of Texas v. High Plains Natural Gas Co., 628 S.W.2d 753 (Tex.1981) (per curiam). This requirement is met only if the return is sufficient to assure confidence in the financial integrity of the enterprise, so as to maintain its credit and to attract capital. Suburban Util. Corp. v. Public Util. Comm’n, 652 S.W.2d 358, 362 (Tex.1983); Federal Power Comm’n v. Hope Natural Gas Co., 320 U.S. 591, 603, 64 S.Ct. 281, 288, 88 L.Ed. 333 (1944); Bluefield Water Works & Improvement Co. v. Public Serv. Comm’n of the State of West Virginia, 262 U.S. 679, 692-93, 43 S.Ct. 675, 678-79, 67 L.Ed. 1176 (1923). Thus, the financial integrity standard applied by the Commission ensured that the utilities will receive an opportunity to recover the minimum rates mandated by PURA.

When an administrative agency is created to centralize expertise in a certain regulatory area, it is to be given a large degree of latitude in the methods it uses to accomplish its regulatory function. City of El Paso v. Public Util. Comm’n of Texas, 609 S.W.2d 574, 579 (Tex.App.—Austin 1980, writ ref'd n.r.e.). Section 16 of PURA grants to the Commission “the general power to regulate and supervise the business of every public utility within its jurisdiction and to do all things, whether specifically designated in this Act or implied herein, necessary and convenient to the exercise of this power and jurisdiction.” Tex.Rev.Civ.Stat Ann. art. 1446c, § 16(a). The Commission determined that the financial integrity of the utilities was at risk and used a mechanism authorized by PURA to ensure that the utilities would receive the opportunity in a subsequent rate ease to recover at least the minimum rates required by PURA

Like any decision by the Commission, an order authorizing a utility to defer post-in-service costs is subject to review for an abuse of discretion. Tex.Gov’t Code Ann. § 2001.174 (Vernon Pamphlet 1994); Railroad Comm’n of Texas v. Lone Star Gas Co., 656 S.W.2d 421, 425 (Tex.1983). We hold that the Commission did not abuse its discretion by applying the financial integrity standard to determine whether to allow deferrals. The authorization of deferred accounting treatment is an appropriate response in such circumstances and is within the Commission’s authority under PURA Tex.Rev.Civ.Stat. Ann. art. 1446c, §§ 2, 16, 38, & 39.

II.

Accounting Proceeding v. Rate Proceeding

Section 43(a) of PURA provides that no utility may make a change in its rates except by first filing a statement of intent with the regulatory authority having original jurisdiction. Tex.Rev.Civ.Stat.Ann. art. 1446c, § 43(a). Section 3(d) defines the term “rate” as follows:

The term “rate,” when used in this Act, means and includes every compensation, tariff, charge, fare, toll, rental, and classification, or any of them demanded, observed, charged, or collected whether directly or indirectly by any public utility for any service, product, or commodity ... and any rules, regulations, practices, or contracts affecting any such compensation, tariff, charge, fare, toll, rental, or classification.

Id. § 3(d). The State argues that deferred accounting treatment is a “practice” that “affects compensation” and is therefore a “rate” as that term is defined by section 3(d). As a result, the State contends that the Commission erred in failing to follow the ratemaking procedures set forth in PURA section 43. We disagree.

By allowing deferred accounting treatment, the Commission authorized the utilities to recognize a deferred cost asset on its books until a subsequent rate hearing. At that subsequent hearing, the deferred cost asset will be evaluated just as any other asset before inclusion in rate base.¹² Thus, only upon the issuance of a subsequent order by the Commission setting rates under PURA section 43 mil the “practice” of deferred accounting treatment “affect” the utilities’ “compensation.”

We do not agree with the State’s contentions that the orders, in fact, changed the rates because deferred accounting will necessarily result in increased rates in the future. Although we recognize that accounting practice and ratemaking procedure are inherently intertwined, they are two distinct and separate concepts.¹³ See Office of Consumers’ Counsel v. Public Util. Comm’n of Ohio, 6 Ohio St.3d 377, 453 N.E.2d 673, 675 (1983). See also Norfolk & Western Railway Co. v. U.S., 287 U.S. 134, 141-42, 53 S.Ct. 52, 54, 77 L.Ed. 218 (1932). The recording of deferred charges and the recovery of deferred charges are different acts. While we agree that accounting practices may impact future rates, we do not accept that all regulatory decisions that will have subsequent effects on rates are necessarily “ratemaking” proceedings under PURA section 43. See City of El Paso v. Public Util. Comm’n of Texas, 609 S.W.2d 574, 579 (Tex.App. —Austin 1980, writ ref'd n.r.e.). See also Texas-New Mexico Power Co. v. Texas Indus. Energy Consumers, 806 S.W.2d 230, 233 (Tex.1991) (recognizing that the “certifícate of convenience and necessity affords only a right to begin construction, not a guarantee that every inefficient or imprudent expenditure will be passed on to the consuming public”).

For example, if a certificate of convenience and necessity (CCN) to construct a new plant is granted, the costs of the new plant will eventually be considered in setting future rates. However, the approval of construction does not constitute a ratemaking proceeding subjeet to PURA section 43. See City of El Paso v. Public Util. Comm’n of Texas, 609 S.W.2d 574, 579 (Tex.App.—Austin 1980, writ ref'd n.r.e.). "When a CCN is granted, the utility receives the right to invest capital in an asset and upon completion of the asset, the amount of the investment found to be prudent will be placed in the utility’s rate base. However, that asset will not be included in the utility’s rate base until a rate hearing is conducted and the Commission determines that the costs of building the asset are prudent, reasonable and necessary and related to property that is used and useful in providing service. See Texas-New Mexico Power Co. v. Texas Indus. Energy Consumers, 806 S.W.2d 230, 233 (Tex.1991). Similarly, in providing the utilities’ deferred accounting treatment for post-in-service costs, the Commission has allowed the utilities to begin recording a deferred cost asset. However, that asset will be subject to the same review as any other asset before inclusion in the utility’s rate base. At a subsequent ratemaking proceeding, the Commission has retained the responsibility to determine what portion of the deferred expenses are properly chargeable to ratepayers with the burden of proving “the prudence and reasonableness of [each element of] its expenditures” firmly fixed on the utility. See Coalition of Cities v. Public Util. Comm’n, 798 S.W.2d 560, 563 (Tex.1990), cert. denied, 499 U.S. 983, 111 S.Ct. 1641, 113 L.Ed.2d 736 (1991).

III.

Retroactive Ratemaking

Fundamental in the utility rate-making process is the principle that utility rates are set for the future, and not the past. Railroad Comm’n of Texas v. Lone Star Gas Co., 656 S.W.2d 421, 425 (Tex.1983). Section 43(f) of PURA implicitly recognizes this principle by prescribing that rates set by order of the Commission “are thereafter to be ob-served_” Tex.Rev.Civ.Stat.Ann. art. 1446c, § 43(f). The State and OPUC contend that by allowing costs incurred during the regulatory lag period to be deferred, the Commission has violated the rule against retroactive ratemaking implicit in PURA. We disagree.

The rule against retroactive ratemaking is often misunderstood and misapplied. Stefan Krieger, The Ghost of Regulation Past: Current Applications of the Rule Against Retroactive Ratemaking in Public Utility Proceedings, 1991 U.Ill.L.Rev. 983, 988 (1991). The rule prohibits a public utility commission from setting future rates to allow a utility to recoup past losses or to refund to consumers excess utility profits. Id. at 984. Restated, the rule prohibits a utility commission from making a retrospective inquiry to determine whether a prior rate was reasonable and imposing a surcharge when rates were too low or a refund when rates were too high.

The State and OPUC argue that because the old rate is effective through the regulatory lag period, allowing expenses incurred during this period to be deferred and included in the rate base is tantamount to retroactive ratemaking. While we recognize that regulatory lag is ordinarily an element of the risk associated with investment in a utility, Railroad Comm’n of Texas v. Lone Star Gas Co., 656 S.W.2d 421, 425 (Tex.1983), reducing the impact of regulatory lag does not equate to retroactive ratemaking. In the orders giving rise to this case, the Commission was not inquiring into the reasonableness of prior rates. Rather, the Commission’s orders allowed the utilities to defer costs associated with construction and start-up of new power generation facilities. These costs were not a factor in the old rates. These orders do not allow the utilities to recoup losses resulting from previously set rates which were insufficient.

Inclusion of Capitalized Post-in-Service Expenses in Rate Base

The State and OPUC next contend that the inclusion of post-in-service costs in a utility’s rate base violates PURA Section 41(a), which sets out the components of a utility’s rate base. A utility’s rate base is its authorized level of invested capital. Ron Moss, Ratemaking in the Public Utility Commission of Texas, 44 Baylor L.Rev. 825, 844 (1992). By statute, the utility is allowed to recover its reasonable and necessary oper ating expenses and both a return on, and a return of, its rate base. Tex.Rev.Civ.Stat.Ann. art. 1446c, § 39(a). Texas follows the “original-cost” method of valuing a utility’s rate base. Section 41(a).of PURA provides in pertinent part:

Sec. 41. The components of invested capital ... shall be determined according to the following rales:

(a) Invested Capital. Utility rates shall be based upon the original cost of property used by and useful to the public utility in providing service including construction work in progress at cost as recorded on the books of the utility_ Original cost shall' be the actual money cost, or the actual money value of any consideration paid other than money, of the property at the time it shall have been dedicated to public use, whether by the utility which is the present owner or by a predecessor, less depreciation.

Tex.Rev.Civ.Stat.Ann. art. 1446c, § 41(a) (emphasis added).

The State and OPUC contend that “property” as used in Section 41(a) refers only to the physical plant and the phrase “at the time it shall have been dedicated to public use” establishes a cutoff point — the original commercial operation date of the plant — for the calculation of the cost of the plant. As a result, they conclude that operating and maintenance costs and carrying costs incurred after the plant begins commercial operations cannot be included in the cost of the plant and thus cannot be included in the utility’s rate base. We disagree.

In construing a statute, if the legislature does not define a term, its ordinary meaning mil be applied. Hopkins v. Spring Indep. School Dist, 736 S.W.2d 617, 619 (Tex.1987). By its ordinary meaning, the term “property” extends to “every species of valuable right and interest.” Womack v. Womack, 141 Tex. 299, 172 S.W.2d 307, 808 (1943). It is “commonly used to denote everything which is the subject of ownership, corporeal or incorporeal, tangible or intangible, visible or invisible, real or personal.” Black’s Law Dictionary 1216 (6th ed. 1991) (emphasis added). “Property” as used in Section 41 includes intangibles.

This interpretation is further supported by the fact that intangibles are ordinarily included in a utility’s rate base. See Ron Moss, Ratemaking in the Public Utility Commission of Texas, 44 Baylor L.Rev. 825, 844 (1992). On the other hand, if the term “property” is interpreted to include only tangible property, then the inclusion in invested capital of any intangibles would be incongruous with the language of section 41 which sets out the components of invested capital.

Having concluded that the term “property” as used in section 41(a) includes intangibles, we next address the meaning of the phrase “dedicated to public use.” The State and the OPUC argue that this language provides a cutoff date — when a plant begins commercial operation — after which no costs or expenditures can be included in a utility’s rate base. Because “property” includes intangibles, the State’s and OPUC’s interpretation of “dedicated to public use” lacks a logical foundation. When read to include intangibles, section 41(a) values original cost at the time any property is first dedicated to public use — not when the physical plant is first dedicated. Thus, the contention that “dedicated to public use” refers only to the plant facilities is not persuasive. “Dedicated to public use” means the time that capital is invested for utility purposes; i.e. when the expenditure is originally incurred.

This interpretation is consistent with the language of Section 41(a). The phrase “dedicated to public use” is immediately followed and qualified by the phrase “whether by the utility which is the present owner or by a predecessor.” This language defines original cost as the cost of investment to the utility that first dedicates property to public use, ignoring subsequent transfers. Virtually identical language was interpreted in the same manner by the U.S. Supreme Court in American Tel. & Teleg. Co. v. United States, 299 U.S. 232, 57 S.Ct. 170, 81 L.Ed. 142 (1936). That case involved the Federal Communications Commission’s system of accounts, which defined “original cost” as follows:

“Original cost” or “cost” ... means the actual money cost of (or the current money value of any consideration other than money exchanged for) property at the time when it was first dedicated to the public use, whether by the accounting company or by a predecessor public utility.

Id. at 238, 57 S.Ct. at 173 (emphasis added). The Court held that the purpose of the provision, among other things, was to prevent non-arm’s length transfers between affiliates for the purpose of inflating rate base. Id. at 239, 57 S.Ct. at 173; see also Office of Consumers’ Counsel v. Public Util. Comm’n of Ohio, 18 Ohio St.3d 264, 480 N.E.2d 1105, 1107 (1985) (interpreting similar language). The language included in section 41(a) was intended to achieve the same purpose, to value a utility’s rate base at its original cost rather than at a current value that may be inflated by artificial transactions. The language was not intended to establish a cutoff date after which no costs could be included in the rate base. Consequently, we hold that Section 41(a) does not prohibit the inclusion in rate base of capitalized expenditures made after the commercial operation date.¹⁴

C.

Violation of the “Test Year”

The OPUC argues that the Commission’s action also violated the test year requirement because it reached outside the test year to allow recovery of selective charges. Because we hold that the authorization to defer post-in-service costs is not the equivalent of a ratemaking function, this argument is misplaced. There is no requirement in PURA or the Commission’s procedures that the Commission must follow a test year when determining accounting policy. See 16 Tex.Admin.Code § 23.21(a) (West 1994).

D.

Single Issue Ratemaking

Further, the OPUC’s contention that deferred accounting violates a general prohibition against “single issue” ratemaking is also without merit. The OPUC argues that the Commission cannot authorize the deferral of post-in-service costs without considering all relevant factors affecting the financial condition of the utility. The OPUC cites no section of PURA and no Texas authority to support its position. We reject this argument.

IV.

The State’s Challenges

The State independently makes several arguments contending that the Commission’s authorization of deferred accounting treatment was arbitrary, capricious, in excess of its authority, and violated the State’s statutory due process rights. We will address each argument in the context of the applicable Docket.

Dockets 7560 & 8230

In determining whether the post-in-service costs would impact the financial integrity of the utilities, the Commission did not inquire as to whether a portion of the post-in-service costs could be expensed without negatively impacting the financial integrity of each utility. Rather, the Commission considered the post-in-service costs of each nuclear plant in their entirety. Although the State recognizes that it will have an opportunity to dispute the reasonableness of the deferred expenses in a subsequent rate case, the State independently argues that the Commission acted arbitrarily and capriciously by precluding it from contesting whether the deferrals of 100 percent of the post-in-service costs were necessary to protect the financial integrity of the utilities.¹⁵ The State also argues that the language of the Commission’s orders forecloses any opportunity at the subsequent rate hearings to make these arguments.

An exercise of discretion by the Commission may only be reversed as being arbitrary and capricious if it constitutes a clear abuse of discretion. See City of Carrollton v. Keeling, 560 S.W.2d 488, 493 (Tex.Civ.App.—Dallas 1977, writ ref'd n.r.e.). Docket numbers 7560 and 8230 were not ratemaking hearings. Rather, in the context of a request for a change in accounting procedure, the Commission determined that the deferral of post-in-service costs associated with new nuclear generation plants was necessary to preserve the financial integrity of each utility. By making this decision, the Commission effectively segregated the costs associated with the nuclear plant from other costs of the utility for bookkeeping purposes. Because this was an accounting hearing, we do not agree that the Commission abused its discretion by ordering the deferral of the post-in-serviee costs on the utilities’ books in toto until the subsequent rate hearing.¹⁶

However, we do agree that the language of the Commission’s orders improperly forecloses any opportunity at the subsequent rate hearings to make these inquiries.¹⁷ As noted, the decision to allow the deferral of post-in-service costs in order to protect the utilities’ financial integrity was not an abuse of discretion. See supra I.B. At the same time, however, the financial integrity standard must not be used merely as a threshold inquiry that once met, is never considered again. Under our holding today, the Commission must not alleviate regulatory lag unless necessary to comply with the provisions of PURA. See supra I.B. While this requirement is met by application of the financial integrity standard in an accounting hearing, it cannot be disregarded at the subsequent rate hearing. Rather, at the subsequent rate hearing, after the Commission determines what portion of the deferred expenses were prudently and reasonably incurred and related to property used and useful in providing service, the Commission must then determine to what extent the deferred costs are necessary to preserve the utilities’ financial integrity.

The State also contends that the Commission erred and abused its discretion by failing to balance the interests of consumers in deciding that the utilities should be granted deferred accounting. The PURA balances the important objective of protecting consumers from monopoly power with the need for financial stability which is required to attract the large amounts of investment capital essential to dependable utility service. Tex.Rev.Civ.Stat.Ann. art. 1446c, § 2. See Texas-New Mexico Power Co. v. Texas Indus. Energy Consumers, 806 S.W.2d 230, 232 (Tex.1991). When balancing the interests of consumers and utilities, the financial integrity of the utility weighs in favor of both sides. See Southern Louisiana Area Rate Cases v. Federal Power Comm’n, 428 F.2d 407, 435 (5th Cir.), cert. denied, 400 U.S. 950, 91 S.Ct. 243, 27 L.Ed.2d 257 (1970); Public System v. Federal Energy Regulatory Comm’n, 606 F.2d 973, 979 n. 27 (D.C.Cir.1979). If the utility is forced to pay higher costs of capitalization, the increased costs will eventually be borne by the consumer. The specific interests of the consumers are further protected because the deferred expenses will only be included in subsequent rates to the extent they are determined to be just and reasonable at a subsequent rate case. We reject the State’s argument on this point.

Finally, the State argues that the Commission acted arbitrarily and capriciously by approving a deferral period of one year from the filing of the request. The State provides no supporting argument explaining why the length of the deferral period was improper. We refuse to speculate as to the State’s arguments against the duration of the deferral period.

Docket No. 9010

In Docket No. 8230, the Commission approved HL & P’s request to allow the deferral of post-in-service costs from the date of commercial operation (August 25, 1988) and ending the earlier of either the date rates which reflect those costs became effective or November 23,1989. The order also provided that “[i]f by November 23,1989, rates are not in effect that reflect the prudently incurred costs of the plant, HL & P may file a petition with the Commission alleging what extraordinary circumstances, if any, exist which would warrant an extension of the deferral period beyond November 23, 1989.” Docket No. 8230, supra note 1, at 2821-22. On August 11, 1989, HL & P filed a petition requesting continued deferred accounting treatment. Based upon a stipulated statement of facts and briefs of the parties, the Examiner’s Report was issued denying HL & P’s request on January 19, 1990. On February 24, 1990, the Commission overturned the Examiner’s recommendations and approved HL & P’s request to extend deferred accounting treatment.

The State contends that on June 9, 1989, HL & P implemented bonded rates and thus Docket No. 9010 was mooted because rates reflecting the costs of STP-1 were included in the bonded rates prior to November 23, 1989. The State notes that HL & P bonded its rates at an annualized $227 million increase on June 9, 1989. Contrary to the State’s contention, however, the evidence in Docket No. 9010 assumed that bonded rates were in effect. See Docket 9010, supra note 1, at 1942-53 (Examiner’s report, attachment B). Thus, the Commission concluded that the financial integrity of the HL & P was at risk even with the bonded rates. The State’s argument fails.

The State also argues that the Commission erred in authorizing the extended deferred accounting treatment because although HL & P bonded its rates at $227 million, it could have bonded its rates in excess of $430 million. As a result, the State claims that if HL & P was not recovering all its costs, it was because of its own failure to use a legislatively granted remedy for regulatory lag. As noted, see supra note 10, HL & P was not required to utilize bonded rates authorized by PURA section 43 in order to request and receive deferred accounting treatment. Thus, the fact that HL & P did not bond in rates at the highest possible level does not preclude it from requesting and receiving deferred accounting treatment so long as its financial integrity is at risk.

The State next claims the Commission did not apply a financial integrity standard to Docket No. 9010, but instead applied a lower standard which considered financial ratios that did not establish that HL & P’s financial integrity was at risk. We disagree. In two separate findings of fact, the Commission concluded that the evidence established that deferred accounting treatment was necessary to protect HL & P’s financial integrity during the pendency of the rate proceeding. Docket 9010, supra note 1, at 1963 (Findings of Fact 22 & 23). Thus, the State’s claim that the Commission applied an incorrect standard is without merit.¹⁸

The State further contends that there was not substantial evidence to support the Commission’s finding in Docket No. 9010. We disagree.

At its core, the substantial evidence rule is a reasonableness test or a rational basis test. Railroad Comm’n of Texas v. Pend Oreille Oil & Gas Co., 817 S.W.2d 36, 41 (Tex.1991). The reviewing court, then, concerns itself with the reasonableness of the administrative order, not the correctness of the order. Id. In applying this test, we may not substitute our judgment as to the weight of the evidence for that of the agency. Id. (the substantial evidence rule “prevents the court from ‘usurping the agency’s adjudicative authority even though the court would have struck a different balance’ ”).

Although substantial evidence is more than a mere scintilla, the evidence in the record actually may preponderate against the decision of the agency and nonetheless amount to substantial evidence. Texas Health Facilities Comm’n v. Charter Medical-Dallas, Inc., 665 S.W.2d 446, 452 (Tex.1984). The true test is not whether the agency reached the correct conclusion, but whether some reasonable basis exists in the record for the action taken by the agency. Id. The findings, inferences, conclusions, and decisions of an administrative agency are presumed to be supported by substantial evidence, and the burden is on the contestant to prove otherwise. Id. at 453; Imperial Am. Resources Fund, Inc. v. Railroad Comm’n, 557 S.W.2d 280, 286 (Tex.1977); City of San Antonio v. Texas Water Comm’n, 407 S.W.2d 752, 758 (Tex.1966).

The State makes two arguments supporting its claim that there was not substantial evidence to support the Commission’s finding, neither of which overcomes the presumption that the Commission’s order was supported by substantial evidence. First, the State argues that HL & P’s mortgage indicators were almost identical with or without deferred accounting treatment. Thus, the State claims that the Commission’s Finding of Fact number 22, that HL & P’s mortgage indicators were inadequate to preserve HL & P’s' financial integrity, was not supported by substantial evidence. However, the Commission’s Finding of Fact number 22 concluded that “the financial indicators in evidence in this case are inadequate to preserve HL & P’s financial integrity during the pendency of its rate case.” Docket 9010, supra note 1, at 1963. Thus, contrary to the State’s implications, the Commission’s finding was not based solely on the mortgage indicators. And, deferred accounting improved other financial indicators considered by the Commission. See Docket 9010, supra note 1, at 1942-53. Even if we agree that the mortgage indicators taken alone do not support the Commission’s holding, our inquiry is whether the Commission’s decision is reasonably supported by substantial evidence in view of the reliable and probative evidence in the record as a whole. Public Util. Comm’n of Texas v. Gulf States Utils. Co., 809 S.W.2d 201, 211 (Tex.1991). Thus, the State’s attempt to focus on only one eviden-tiary factor supporting the Commission’s holding is not persuasive.

Finally, the State argues that because the Commission did not adopt the Examiner’s Report, it could not rely on the record evidence summarized in the Examiner’s Report. As a result, the State claims that there was insufficient record evidence supporting the Commission’s decision. This argument is entirely unfounded. In its final order, the Commission states:

[T]he Examiner’s Report is NOT ADOPTED. Instead, based on the record evidence as summarized in the Examiner’s Report, the Commission issues the following Order: ....

The Commission is free to accept or reject the Examiner’s recommendations. See Ross v. Texas Catastrophe Prop. Ins., 770 S.W.2d 641, 642 (Tex.App.— Austin 1989, no writ). However, the rejection of the Examiner’s recommendations does not prohibit the Commission from considering the evidence summarized in the Examiner’s report.

V.

Conclusion

We hold that the Commission has the authority under PURA to authorize utilities to defer costs incurred during the regulatory lag period. We reverse the court of appeals to the extent that it disallowed the deferral of post-in-service carrying costs. Because of its erroneous conclusion that the deferral of post-in-service carrying costs violated PURA section 41, the court of appeals did not consider several arguments advanced by the State contesting the deferral of carrying costs, including that there was not substantial evidence to support the Commission’s finding. Consequently, causes D-3154 and D-3155 are remanded to the court of appeals for consideration of the State’s unresolved arguments. In all other respects, the judgments of the court of appeals are affirmed.

1 . The present disputes arise from the following three Commission orders: Tex. Public Utils. Comm’n, Application of Central Power and Light Co. for Approval of Deferred Accounting Treatment of Certain Costs Related to the South Texas Nuclear Project No. 1, Docket No. 7560, 14 Tex P.U.C.Bull. 2669 (April 19, 1989) (Docket No. 7560); Tex. Public Utils. Comm’n, Petition of Houston Lighting and Power Company for Approval of Deferred Accounting Treatment for Limestone Unit 2 and the South Texas Project Unit 1, Docket No. 8230, 14 TexP.U.C.Bull. 2752 (April 19, 1989) (Docket No. 8230); and Tex. Public Utils. Comm'n, Petition of Houston Lighting and Power Company to Continue Deferred Accounting Treatment for STP Unit One Beyond November 23, 1989, Docket No. 9010, 15 TexP.U.C.Bull. 1905 (February 28, 1990) (Docket No. 9010).

2 . Tex.Rev.Civ.Stat.Ann. art. 1446c (Vernon Supp. 1994).

3 . Generally, regulatory lag is the delay between the time when a utility’s profits are above or below standard and the time when an offsetting rate decrease or rate increase may be put into effect by commission order or otherwise. This delay is due to the inherent inability in the regulatory process to allow for immediate rate decreases or increases. For purposes of this opinion, “regulatory lag” is the period between the date a new plant begins commercial operation (the "in-service” date) and the effective date of the new rates that result from including the new plant’s costs in the rate base. See James C. Bonbright et al., Principles of Public Utility Rates 96 (2d ed. 1988).

4 . The court of appeals separated the costs into two categories: (1) depreciation, operation and maintenance, insurance, and tax costs; and (2) carrying costs. Our holding makes no distinction between these costs.

5 . PURA’s only limit to this authority prohibits the Commission from creating a system of accounts that conflicts with that established by a federal agency for that utility. Tex.Rev.Civ.Stat. Ann. art. 1446c § 27(a). Accordingly, the Commission has directed that utilities generally must follow the Federal Energy Regulatory Commission (FERC) Uniform System of Accounts. See 16 Tex.Admin.Code § 23.12(a)(2)(B) (West 1994). The FERC Uniform System of Accounts specifically provides for the recognition of deferred cost assets. See 18 C.F.R. Part 101 (1993). Further, generally accepted accounting procedures recognize and allow for the deferral and capitalization of expenses. See Accounting for the Effects of Certain Types of Regulation, Statement of Financial Accounting Standards No. 71 (Fin. Accounting Standards Bd.1982).

6 . A constant theme running throughout both the State’s and OPUC's briefs is the argument that there is a fundamental distinction between invested capital and expenses. However, there is no inherent or fundamental characteristic that determines whether a particular expenditure is an expense or a capital investment. Indeed, one of the primary objectives of accounting regulation is to distinguish between expenditures that should be expensed currently or capitalized and recovered over a future period of time. Charles F. Phillips, Jr., The Regulation of Public Utilities 206 (2d ed. 1988) ("accounting regulation is needed so as to distinguish between expenditures that should be charged to capital and those that should be charged to income”); James C. Bonbright et al., Principles of Public Utility Rates 256 (2d ed. 1988). See Accounting for the Effects of Certain Types of Regulation, Statement of Financial Accounting Standards No. 71, para. 9 (Fin. Accounting Standards Bd.1982). PURA grants to the Commission broad authority concerning accounting policy. Tex.Rev.Civ.Stat.Ann. art. 1446c, § 27. We recognize that uniformity is necessary in determining expenditures that should be charged to capital and those that should be charged against income. At the same time, the appropriate classification of a particular expenditure as capital or expense is dependent on the circumstances associated with the outlay. See Bonbright, at 256; see also Norfolk & Western Railway Co. v. United States, 287 U.S. 134, 141, 53 S.Ct. 52, 54, 77 L.Ed. 218 (1932) (Interstate Commerce Commission, which is authorized to prescribe a uniform system of accounts pursuant to section 20 of the Interstate Commerce Commission Act, has authority to make special accounting classifications to fit exceptional situations). We conclude that the complex decisions concerning this determination are better left to the agency created to centralize expertise in this area and granted broad authority concerning just such matters. See City of El Paso v. Public Util. Comm’n, 609 S.W.2d 574, 579 (Tex.App.—Austin 1980, writ ref’d n.r.e.).

7 . Section 39(a) provides in part:

... the regulatory authority shall fix its overall revenues at a level which will permit such utility a reasonable opportunity to earn a reasonable return on its invested capital used and useful in rendering service to the public over and above its reasonable and necessary operating expenses.

Tex.Rev.Civ.Stat.Ann. art. 1446c, § 39(a).

8 . At oral argument the State recognized that deferred accounting may be appropriate in certain circumstances. We note that deferred accounting treatment has been authorized by the vast majority of utility commissions that have addressed this issue. E.g., Re Arizona Public Service Co., 91 P.U.R.4th 399, 405 (April 6, 1988) (deferred accounting authorized where it was found that such accounting would preserve the financial integrity of the utility); Re Arizona Public Service Co., 79 P.U.R.4th 258, 262-63 (Dec. 5, 1986) (deferred accounting treatment authorized to preserve post-in-service costs occurring between the time the new plant became commercially operable and the time it was recognized in rate base); Re Georgia Power Co., 79 P.U.R.4th 604, 606-07 (Dec. 16, 1986) (utility commission ordered utility to defer post-in-service costs until subsequent rate hearing in order to .prevent loss of income); Re Commonwealth Edison Co., 103 P.U.R.4th 80, 91-93 (June 1, 1989) (Illinois) (utility allowed to continue to accrue allowance for funds used during construction and to defer depreciation after nuclear generation plant's in-service date and until such time as plant costs would be reflected in rates where necessary to avoid significant and adverse impact on the utility's earnings as well as its short-term and long-term cost of capital); Re Northern Indiana Public Service Co., 71 P.U.R.4th 462, 467 (Nov. 27, 1985) (utility allowed to continue to accrue carrying charges on the cost of a generating plant from the in-service date of the plant until the plant was included in rate base); Re Kentucky Power Co., 64 P.U.R.4th 56, 87-88 (Dec. 4, 1984) (utility allowed to continue to accrue allowance for funds used during construction and depreciation of plant from the in-service date until the effective date of rates where the utility commission found that the utility would never recover the capital costs incurred during that period absent the accounting modification); Ex Parte Gulf States Utilities, Co., 80 P.U.R.4th 370, 375 (Dec. 11, 1986) (Louisiana) (utility commission allowed utility to defer and accrue in a separate account all carrying and operation costs associated with a new nuclear generation plant from the date of commercial operations until the date rates became effective); Re Western Massachusetts Electric Co., 80 P.U.R.4A 479, 543-15 (June 30, 1986) (utility allowed to defer post-in-service operation and maintenance costs, depreciation, tax es, and carrying charges); Re Sierra Pacific Power Co., 73 P.U.R.4A 306, 380-81 (Oct. 28, 1985) (Nevada) (allowance for funds used during construction and depreciation expense incurred after the plant's in-service date and prior to Ae effective date of Ae new rate order auAorized so Aat Ae regulatory lag associated wiA Ae use of an historic test period did not cause significant shortfall in utility's earnings); Office of Consumers’ Counsel v. Public Utils. Comm’n of Ohio, 18 Ohio St.3d 264, 480 N.E.2d 1105, 1106-08 (1985) (affirming utility commission’s authoriza tion of deferred accounting treatment); Re Public Service Co. of Oklahoma, 67 P.U.R.4th 316, 319 (April 29, 1985) (utility allowed to continue to accrue allowance for funds used during con struction and depreciation after commercial operation date); Re Duke Power Co., 79 P.U.R.4th 145, 166-67 (Nov. 5, 1986) (setting amortization schedule in rate hearing for deferred post-in-service costs); see also Re United Illuminating Co., 74 P.U.R.4th 27 (May 6, 1986) (Connecticut) (where there is a delay between Ae date Aat a nuclear electric generating facility is placed in commercial operation and Ae date of Ae first rate case decision in which Ae new plant invest ment is recognized, alternative accounting treatment may be used to avoid serious impact upon Ae utility’s net earnings); Re Carolina Power & Light Co., 77 P.U.R.4th 203, 208-09 (July 24, 1986) (SouA Carolina) (where rate base phase-in procedure was approved so Aat 50% of Ae rate increase would be phased in, the electric utility was entitled to accrue allowance for funds used during construction for future rate making pur poses on Aat portion of Ae plant which was not included in rate base); Re Puget Sound Power and Light Co., 62 P.U.R.4th 436 (Sept. 28, 1984) (the commission denied a petition to allow a utility to continue to accrue allowance for funds used during construction after Ae plant was placed in service, but did not preclude Ae auAo-rization of such relief under appropriate circumstances).

9 . The State and the OPUC claim that the four methods for reducing the effect of regulatory lag provided by PURA section 43 are exclusive. They include: (1) a time schedule within which the Commission must reach a decision in a rate case; (2) the authority to implement temporary rates during the pendency of a case; (3) the utility’s ability to bond in proposed rates, without agency approval, by filing a bond adequate to protect customers if the agency ultimately approves a lower rate; and (4) the utility’s ability to include construction work in progress (CWIP) in invested capital if necessary for its financial integrity. Tex.Rev.Civ.Stat.Ann. art. 1446c, § 43.

10 . The State argues that the Commission erred in its findings of fact that the alternatives provided in PURA section 43, see supra note 9, were not sufficient to protect the utilities from regulatory lag. As noted, PURA authorizes the Commission to order deferred accounting treatment of post-in-service costs. There is no requirement that the Commission first determine that no other method is adequate before invoking its authority to order deferred accounting. Thus, contrary to the State's position, the Commission is not required to first find that the methods provided in section 43 would not sufficiently protect the utilities. See Railroad Comm’n of Texas v. Lone Star Gas Co., 656 S.W.2d 421, 425 (Tex.1983). Rather, the proper inquity is whether the Commission abused its discretion in ordering deferred accounting treatment in a particular case considering the surrounding circumstances, including the recognition that regulatory lag is ordinarily an element of risk associated with the utility. Id. at 427; see infra I.B.

11 .We note that both HL & P and CP & L were faced with atypically long regulatoiy lag periods. Part of the extended periods were due to the existence at the time the dockets were pending of the "Big Cajun” rule. The “Big Cajun" rule required a utility to wait until after the end of a calendar quarter during which a new plant was in service before filing a rate case seeking inclusion of the plant in rate base. See Tex. Public Utils. Comm’n, Application of Gulf States Utilities Co. for a Rate Increase, Docket No. 5560, 10 Tex.P.U.C.Bull. 405, 420-23 (July 13, 1984). The rule exacerbated the effect of regulatory lag on a utility because it increased the period from the time a plant began operations until the new rate became effective. The "Big Cajun” rule has since been repealed.

12 . The Commission’s orders explicitly provide that the deferred costs will be subject to review at a subsequent rate hearing and will be included in the rate base only to the extent that they are prudent, reasonable and necessary and are related to property that is used and useful in providing service. For example, the Commission provided in its order in Docket No. 7560 that:

Capitalized costs will be subject to review by the Commission in CPL’s subsequent ratemak-ing dockets. Those costs will be included in cost of service, and a return allowed on the unamortized balance, to the extent and only to the extent that the Commission determines that they are prudent, reasonable and neces-saiy expenses related to property that is used and useful in providing service.

Docket No. 7560, supra note 1, at 2740. See also Docket No. 8230, supra note 1, at 2822; Docket No. 9010, supra note 1, at 1960-65.

13 . The Commission itself has differentiated between ratemaking proceedings and other utilily regulation matters. City of El Paso, 609 S.W.2d at 579. The Commission’s Rules of Practice and Procedure specifically provide different forms of pleadings and types of hearings for “rate setting hearings.” See 16 Tex.Admin.Code § 21. .

14 . The State and OPUC also contend that inclusion of deferred costs in a utility's rate base violates section 41(a) because the deferred costs are not “used by and useful to the public utility in providing service....” Tex.Rev.Civ.Stat.Ann. art. 1446c, § 41(a). We disagree. By deferring costs that would otherwise not be recovered by the utility, the utility is able to avoid heightened costs of capital and the possibility of missed dividend payments which would adversely impact the ability to raise equity capital. Further, the deferred costs, when incurred, were necessary to the continued operations of the utility plant in the first instance.

15 . The State specifically asserts that the Commission’s orders did not preserve the ability to review whether "any or all” of the deferred costs were actually reasonable and necessary to protect the utilities' integrity. We interpret the State’s argument to mean that the State did not have an opportunity to argue that only a portion of the costs associated with the nuclear generation plants were actually necessary to preserve the utilities’ financial integrity. To the extent the State is arguing that the Commission foreclosed an opportunity to review whether the deferred costs, taken as a whole, were necessary to protect the utilities’ financial integrity, that argument is without merit. The very purpose of the hearings in question was to determine that issue.

16 . In Docket No. 8230, the State claims that its due process rights were violated because the Administrative Law Judge (AU) refused to consider a cosi/benefit analysis that established that through deferred accounting treatment, HL & P would earn more money than if it followed legal ratemaking methodologies. Because the focus of the inquiry was on whether HL & P's financial integrity was at risk, evidence relevant to the eventual rates was not within the scope of the hearing. Further, to the extent that the State claims that the analysis would establish that deferred accounting would earn HL & P more than "legal” ratemaking methodologies, the basis for its argument is flawed as deferred accounting treatment is an authorized and “legal” action by the Commission. We note that deferred accounting is not a ratemaking action. See supra II.

17 . The Commission's orders provide that the deferred costs will be subject to review at a subsequent rate hearing and will be included in the rate base only to the extent that they are prudent, reasonable and necessary and are related to property that is used and useful in providing service. However, the orders clearly foreclose the Commission from an opportunity to review the extent to which the deferred costs must actually be included in rate base in order to protect the utilities’ financial integrity. For example, the Commission provided in its order in Docket No. 7560 that:

Capitalized costs will be subject to review by the Commission in CPL’s subsequent ratemak-ing dockets. Those costs will be included in cost of service, and a return allowed on the unamortized balance, to the extent and only to the extent that the Commission determines that they are prudent, reasonable and necessary expenses related to property that is used and useful in providing service.

Docket No. 7560, supra note 1, at 2740. See also Docket No. 8230, supra note 1, at 2822; Docket No. 9010, supra note 1, at 1960-65.

18 . The State’s argument is, in actuality, a claim that there was not substantial evidence to support the Commission's decision. Although cloaked in terms of applying an incorrect standard, the State’s primary support for its argument is that the evidence relied on by the Commission does not support a conclusion that HL & P's financial integrity was in jeopardy.