Aep Tex. Commercial & Indus. Retail Ltd. v. Pub. Util. Comm'n of Tex.

• Decision Date: 17 July 2014
• Docket Number: No. 03–13–00358–CV.,03–13–00358–CV.
• Citation: 436 S.W.3d 890
• Court: Texas Court of Appeals
• Parties: AEP TEXAS COMMERCIAL & INDUSTRIAL RETAIL LIMITED PARTNERSHIP, Appellant v. PUBLIC UTILITY COMMISSION OF TEXAS; Alliance for Retail Markets; Texas Energy Association for Marketers; CPL Retail Energy, LP; WTU Retail Energy, LP; and Direct Energy Business, LLC, Appellees.

436 S.W.3d 890

AEP TEXAS COMMERCIAL & INDUSTRIAL RETAIL LIMITED PARTNERSHIP, Appellant

v.PUBLIC UTILITY COMMISSION OF TEXAS; Alliance for Retail Markets; Texas Energy Association for Marketers; CPL Retail Energy, LP; WTU Retail Energy, LP; and Direct Energy Business, LLC, Appellees.

No. 03–13–00358–CV.

Court of Appeals of Texas,

Austin.

July 17, 2014.

David C. Duggins, Patrick J. Pearsall, Duggins, Wren, Mann & Romero, L.L.P., Austin, TX, for Appellant.

John K. Arnold, Carrie Collier–Brown, Winstead, P.C., Houston, TX, Stephen J. Davis, Law Offices of Stephen J. Davis, P.C., John R. Hulme, Assistant Attorney General, Environmental Protection Division, Catherine J. Webking, Andres Medrano, Gardere, Wynne, Sewell, L.L.P., Austin, TX, for Appellees.

Before Chief Justice JONES, Justices PEMBERTON and FIELD.

OPINION

BOB PEMBERTON, Justice.

The principal issue presented in this appeal is whether the Public Utility Commission (PUC or Commission) reasonably construed chapter 39 of the Utilities Code and its own rules in determining that the proposed sharing of a common “name, trademark, brand, or logo” by an electric transmission and distribution utility and its competitive retail affiliate would amount to prohibited preferential “joint promotion” or “joint advertising” by those entities.¹On this record, we conclude that it did. We also reject constitutional free-speech challenges to that prohibition, so construed.

BACKGROUND

Statutory and regulatory context

This appeal arises against the backdrop of Texas's implementation of customer choice in its electric industry (a/k/a retail “deregulation”), so it is helpful to begin by recalling some of the history surrounding that sea change in market structure and regulatory policy. Before the advent of customer choice, electricity was produced, delivered, and sold to most Texas consumers by one of a handful of vertically integrated utilities that was each permitted to operate as the exclusive provider within a particular certificated area.² This market structure reflected the perception that the electricity generation and sale should be considered a natural monopoly in light of the enormous capital investment required to build the transmission and distribution system (i.e., the “wires” or “grid”) necessary to transport the product,³ not to mention the tremendous inefficiencies that would result if new market entrants duplicated those facilities.⁴ It followed, in the views of policymakers, that electric utilities should be made subject to comprehensive regulation of prices and services as a substitute for market competition, and this regime was imposed first by individual municipalities and then on a statewide basis by the PUC pursuant to the 1975 Public Utility Regulatory Act (PURA).⁵

But by the 1990s, the Texas Legislature had become persuaded that the public interest would be better served by allowing competitive market forces to determine electricity prices and services to a much greater extent than previously allowed or thought feasible. In 1995, the Legislature amended PURA to create a competitive wholesale power market in which non-utility generators and marketers could sell electricity for purchase by regulated utilities.⁶ A key component of this new regime was a requirement that the electric utilities provide the new market entrants non-discriminatory access to the utilities' transmission networks for a fee. ⁷ And, during its 1999 regular session, the Legislature went further with S.B. 7—codified chiefly in chapter 39 of the Utilities Code—which opened much of the Texas retail electric market to competition and left transmission and distribution as the sole industry component that could be operated as regulated monopolies in those areas.⁸ Under the new regime, simply described, competing electric retailers are able to purchase power in the wholesale market and resell it to consumers, with prices and service offerings determined by market dynamics, as with other consumer products, and are entitled to use the monopoly utilities' transmission and distribution networks to deliver the product in exchange for the retailer's payment of a still-regulated rate.⁹ Retail consumers, in turn, are no longer relegated to purchasing their electricity from whichever monopoly happens to serve their geographic area, but are empowered to choose among alternative providers. ¹⁰ Affording consumers this freedom to choose and the resultant competition for their business, the theory goes, tends to reduce prices, improve the quality and range of services offered, and otherwise advance consumer welfare and the public interest to a greater extent than achieved under the former comprehensive regulatory regime.¹¹

The Legislature prescribed that customer choice under this new regime would begin on January 1, 2002, and would apply in the certificated service areas of all utilities operating within the Electric Reliability Council of Texas (ERCOT) ¹² that are owned by private investors.¹³ To that end, the Legislature mandated a fundamentalrestructuring of the electric industry in those areas. By January 1, 2002, each incumbent electric utility subject to customer choice was required to separate (a/k/a “unbundle”) their formerly integrated business activities into the following distinct units: (1) a power generation company, which would own and operate the formerly integrated utility's generation assets; (2) a “retail electric provider” (REP), which would succeed to the retail component of the utility's business, including its customers, and compete to retain them once customer choice began; and (3) one or more electric transmission and distribution utilities (TDUs), which would own the former utility's wires and deliver power over them for others as a rate-regulated monopoly, but were restricted from owning generation assets or buying or selling electricity themselves. ¹⁴ Importantly for this case, however, the Legislature did not require a complete legal separation between these units, but permitted a utility to unbundle by creating separate affiliated companies that are owned by a common holding company.¹⁵

In addition to requiring this restructuring of the electric market in the regions being opened to competition, the Legislature imposed further measures calculated to curtail the market dominance that otherwise might be carried over by the unbundled units of the formerly integrated utilities so as to allow competition to take root. To encourage new entrants into the nascent retail market, the Legislature required an REP affiliated with a TDU to charge an above-market “price to beat” to its residential and small commercial customers within the TDU's service area until the earlier of 36 months after customer choice began (January 1, 2005) or the REP lost at least 40 percent of its market share in the customer class to competing REPs.¹⁶ It likewise imposed limits on the percentage of generation capacity that any one power-generation company could own in a given region after the start of retail competition.¹⁷ Additionally, the Legislature authorized the Commission, during both the transition to competition and thereafter, to “monitor market power associated with the generation, transmission, distribution, and sale of electricity in this state” and take actions to curtail “market power abuses.” ¹⁸ Such “abuses,” the Legislature elaborated, consist of “practices by persons possessing market power that are unreasonably discriminatory or tend to unreasonably restrict, impair, or reduce the level of competition, including practices that tie unregulated products or services to regulated products or services[,] unreasonably discriminate in the provision of regulated services[,] ... predatory pricing, withholding of production, precluding entry, and collusion.” ¹⁹ On the other hand, the Legislature emphasized, “[t]he possession of a high market share in a market open to competition may not, of itself, be deemed to be an abuse of market power.” ²⁰

A related concern of the Legislature was the potential for “market power abuses” that were potentially invited by its decision to allow the formerly integrated utilities to unbundle into affiliated business units, ²¹ a relationship that tended to provide incentives for leveraging the assets and monopoly position of the TDUs to aid the affiliates operating in competitive markets. In addition to requiring the above-described functional separation between a TDU and any affiliated REP or power generation company, ²² the Legislature directed the Commission, in subsection (d) of PURA Section 39.157, to “adopt rules and enforcement procedures to govern transactions or activities between a [TDU] and its competitive affiliates to avoid potential market power abuses and cross-subsidizations between regulated and competitive activities both during the transition to and after the introduction of competition.” ²³ These rules and procedures—termed the “Code of Conduct”—were to include seventeen categories of safeguards and prohibitions that were enumerated within subsection (d) of Section 39.157. ²⁴ To summarize, the seventeen enumerated categories require structural separation and arm's-length dealing between TDUs and their competitive affiliates; prohibit discrimination or favoritism in the TDU's provision of its products and services to aid competitive affiliates, harm the affiliates' rivals, or both; and greatly curtail the ability of TDUs to share facilities, personnel, information, or other assets with, or to make expenditures to benefit, their competitive affiliates.²⁵ A Code of Conduct violation that “materially impairs the ability of a person to compete in a competitive market,” the Legislature further provided, would be “deemed to be an abuse of market power.” ²⁶ To comply with these statutory directives, the Commission promulgated Rule 25.272, titled “Code of Conduct for Electric Utilities and Their Affiliates.” ²⁷

Although imposing these limitations...