CenterPoint Energy Houston Electric, LLC v. Gulf Coast Coalition of Cities, No. 03-05-00557-CV (Tex. App. 12/20/2007)

Decision Date20 December 2007
Docket NumberNo. 03-05-00557-CV.,03-05-00557-CV.
PartiesCENTERPOINT ENERGY HOUSTON ELECTRIC, LLC AND TEXAS GENCO, LP, Appellants, GULF COAST COALITION OF CITIES, HOUSTON COUNCIL FOR HEALTH AND EDUCATION, CITY OF HOUSTON, COALITION OF CITIES, STATE OF TEXAS, OFFICE OF PUBLIC UTILITY COUNSEL, PUBLIC UTILITY COUNSEL, AND TEXAS INDUSTRIAL ENERGY CONSUMERS, Cross Appellants, v. GULF COAST COALITION OF CITIES, HOUSTON COUNCIL FOR HEALTH AND EDUCATION, CITY OF HOUSTON, COALITION oF CITIES, STATE OF TEXAS, OFFICE OF PUBLIC UTILITY COUNSEL, PUBLIC UTILITY COUNSEL, TEXAS INDUSTRIAL ENERGY CONSUMERS, OCCIDENTAL POWER MARKETING, LP, AND COALITION OF COMMERCIAL RATEPAYERS, Appellees, OFFICE OF PUBLIC UTILITY COUNSEL, PUBLIC UTILITY COUNSEL, CENTERPOINT ENERGY HOUSTON ELECTRIC, LLC, TEXAS GENCO, LP, AND RELIANT ENERGY SERVICES, LLC, Cross-appellees,
CourtTexas Court of Appeals

Appeal from the District Court of Travis County, 250th Judicial District, No. GN500439, Honorable John K. Dietz, Judge Presiding.

Affirmed in part; Reversed and Remanded in part.

Before Chief Justice LAW, Justices PURYEAR and HENSON

OPINION

DAVID PURYEAR, Justice.

This appeal concerns the transition of Texas's energy industry from a regulated market to a competitive one. When it approved the switch to a competitive market, the legislature contemplated the possibility that the switch might saddle formerly regulated utilities with costs that they would have recovered under regulation but would be unable to recover in a competitive market. As a result, the legislature enacted statutes authorizing utilities to recover these costs in proceedings called true-up proceedings held before the Public Utility Commission (the "Commission").

The utilities involved in this case estimated the costs that they would not be able to recover due to deregulation and filed an application with the Commission seeking recovery for those costs. However, the Commission determined that not all of the relevant requirements had been satisfied when the utilities made their calculations and, therefore, performed its own estimate of the utilities' unrecovered costs. The total amount determined by the Commission was less than the amount that the utilities originally requested. In addition to producing its own estimation, the Commission also made several reductions to the utilities' recovery. Although the Commission allowed the utilities to recover for various construction projects that they had started, it deducted the value of certain tax benefits given to the utilities. The Commission also reduced the utilities' recovery because it concluded that the utilities had recovered some of their costs through other means. Finally, although the Commission allowed the utilities to recover the requested amount for credits that the Commission had previously ordered them to give to their customers, it denied recovery for interest on the credits.

The district court affirmed the majority of the Commission's order but reversed the order and increased the utilities' recovery in two respects. First, the district court concluded that the utilities should recover for the interest on the credits that they were ordered to give. Second, the district court concluded that the Commission's decision to undertake its own estimate of one of the utilities' costs was inappropriate and further concluded that the utilities should recover the amount originally requested.

We will affirm the judgment of the district court in part and reverse and remand in part.

STATUTORY FRAMEWORK

To give context to the merits of this case, we will describe the statutory framework governing this case. This appeal concerns the utility market's transition from a regulated industry to a competitive, deregulated market. See Tex. Util. Code Ann. §§ 39.001-.910 (West 2007). Prior to deregulation, utilities operated as monopolies but were regulated by the Commission and were "prohibited from charging monopoly prices." Reliant Energy, Inc. v. Public Util. Comm'n, 101 S.W.3d 129, 133 (Tex. App.-Austin 2003) ("Reliant I"), rev'd in part sub nom., CenterPoint Energy, Inc. v. Public Util. Comm'n, 143 S.W.3d 81 (Tex. 2004); see Reliant Energy, Inc. v. Public Util. Comm'n, 153 S.W.3d 174, 182 (Tex. App.-Austin 2004, pet. denied) ("Reliant II"). "[E]ach region of the state was served by a single vertically integrated utility," Cities of Corpus Christi v. Public Util. Comm'n, 188 S.W.3d 681, 684 (Tex. App.-Austin 2005, pet. filed), which meant that the utility "produced, transported, and retailed electricity" for the region, Reliant I, 101 S.W.3d at 133.

In 1999, the legislature enacted statutes that initiated the transition to a competitive retail-service industry. See Act of May 27, 1999, 76th Leg., R.S., ch. 405, 1999 Tex. Gen. Laws 2543 (current version at Tex. Util. Code Ann. §§ 39.001-.910). The legislature concluded that the "production and sale of electricity" was not an undertaking necessitating the utilization of monopolies or the "regulation of rates, operations, and services" and that it was in the public interest to allow customer choice and competition to determine the prices for these services. Tex. Util. Code Ann. § 39.001(a); see also In re TXU Elec. Co., 67 S.W.3d 130, 132 (Tex. 2001) (Phillips, C.J., concurring). Accordingly, the utilities code was amended to allow for retail competition starting January 1, 2002, and to protect the interests of the citizens of Texas during the transition. Tex. Util. Code Ann. § 39.001(a); see also In re TXU Elec. Co., 67 S.W.3d at 132 (Phillips, C.J., concurring).

The transition to a competitive retail market involved several changes to how utilities provided electricity. Significantly, the formerly integrated utilities were required to "unbundle" and divide into three separate entities: (1) retail electric providers, (2) power-generation companies, and (3) transmission-and-distribution utilities. Tex. Util. Code Ann. § 39.051(a)-(b); see also In re TXU Elec. Co., 67 S.W.3d at 132 (Phillips, C.J., concurring); Reliant II, 153 S.W.3d at 182. Starting in 2002, the unbundled power-generation companies owned and operated "the generating plants," In re TXU Elec. Co., 67 S.W.3d at 132 (Phillips, C.J., concurring), and provided "wholesale generation services in competition with other generators entering the market," Cities of Corpus Christi, 188 S.W.3d at 684. The transmission-and-distribution utilities owned and maintained "the 'wires' used to transport electricity from the power generation companies to all [retail electric providers] and retail consumers in the utility's geographic area." Id. at 685. The retail electric provider sold "electricity to end-use customers" and provided "customer service." In re TXU Elec. Co., 67 S.W.3d at 132 (Phillips, C.J., concurring). In addition, new electricity providers were allowed to begin competing with the retail electric providers associated with the former integrated utilities. See Tex. Util. Code Ann. § 39.102(a)-(b).

After the deregulation process was completed, the power-generation and retail electric markets would be subject to the "normal forces of competition" and "customer choices," but the transmission-and-distribution utilities would remain regulated by the Commission. Id. § 39.001(a); see Cities of Corpus Christi, 188 S.W.3d at 685. However, the deregulation process is lengthy, and the Commission retained partial regulatory powers over power generation and the sale of electricity after January 2002. See, e.g., Tex. Util. Code Ann. § 39.202 (allowing Commission some control over prices charged by utilities). During the transition, affiliated retail electric providers were required to charge a "price to beat" rate to their residential and small-business customers.1 Id.

Prior to deregulation, utilities were allowed to recover from their customers the prudent costs they incurred when acquiring power-generation assets. Reliant II, 153 S.W.3d at 183 n.5; Reliant I, 101 S.W.3d at 134. The Commission allowed the utilities to recover these costs over time by incorporating the costs into the rates that it approved. Reliant II, 153 S.W.3d at 183 n.5; Reliant I, 101 S.W.3d at 134. As a result, utilities made significant investments in generation-related assets with the expectation of eventually recovering their costs. See Cities of Corpus Christi, 188 S.W.3d at 685.

Recognizing that this type of reimbursement would not occur under deregulation, utilities expressed their concern that under deregulation they would be unable to recover the costs for their investments because competition would drive the rates too low. Reliant II, 153 S.W.3d at 183 n.5; Reliant I, 101 S.W.3d at 134.2 Because new utilities entering the market would not have "embedded generation-related costs," they could set prices below the "level at which incumbent utilities could recover their investments." Cities of Corpus Christi, 188 S.W.3d at 685.3 Therefore, the incumbent utilities would either have to charge rates that were not competitive or absorb the added expense. Id.

To prevent the possibility that utilities would have to absorb the costs, the legislature provided a method by which a utility could recover its "stranded costs" or those costs representing the "portion of the net book value of [the] utility's generation assets not yet recovered through depreciation that has become unrecoverable in a deregulated market." Reliant I, 101 S.W.3d at 134; see also Tex. Util. Code Ann. §§ 39.001(b)(2) (finding that it is in public interest to "allow utilities with uneconomic generation-related assets . . . to recover these reasonable excess costs over market of those assets"), .251(3) (defining generation assets as "all assets associated with the production of electricity, including generation plants"), .251(4) (defining market value as "the value the assets would have if bought and sold in a bona fide third-party transaction or transactions on the open...

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