Centerpoint Energy v. Public Util. Com'n

• Decision Date: 03 September 2004
• Docket Number: No. 03-0396.,03-0396.
• Citation: 143 S.W.3d 81
• Parties: CENTERPOINT ENERGY, INC. f/k/a Reliant Energy, Incorporated and American Electric Power Company, Inc., Petitioners, v. PUBLIC UTILITY COMMISSION OF TEXAS, Respondent.
• Court: Texas Supreme Court

143 S.W.3d 81

CENTERPOINT ENERGY, INC. f/k/a Reliant Energy, Incorporated and American Electric Power Company, Inc., Petitioners, v. PUBLIC UTILITY COMMISSION OF TEXAS, Respondent.

No. 03-0396.

Supreme Court of Texas.

Argued February 18, 2004.

Decided September 3, 2004.

Appeal from the Austin Court of Appeals, Bea Ann Smith, J Marianne Carroll and Christopher Don Reeder, Carroll, Gross, Reeder & Drews, L.L.P., Kristen Pauling Doyle, Lloyd Gosselink Blevins Rochelle Baldwin & Townsend, Jonathan Day, Andrews & Kurth, L.L.P., Houston, Lino Mendiola, Phillip Glynn Oldham, Stephanie Anne Kroger, Karen Denise Whitt, Andrews & Kurth, Mayor, Day, Caldwell & Keeton, LLP, Austin, TX, for Party In Interest.

David C. Duggins, John F. Williams, Michael Dane McKaughan, Clark Thomas & Winters, P.C., Austin, TX, and Marc Lewis, Fort Wayne, IN, for other interested party.

Robert J. Hearon Jr., Ron H. Moss, Graves Dougherty Hearon & Moody, PC, Austin, TX, Harris S. Leven, and Scott E. Rozzell, Houston, TX, for Petitioner.

Thomas Lane Brocato, Office of Public Utility Counsel, Steven Baron, Karen Watson Kornell, Bryan L. Baker, Amalija J. Hodgins, Office of Attorney General, Greg Abbott, Attorney General of TX, Edward D. Burbach, Paul D. Carmona, Barry Ross McBee, and Marion Taylor-Drew, Office of Attorney General, Austin, for Respondent.

Alton J. Hall Jr., Epstein Becker Green Wickliff & Hall, P.C., Houston, TX, for Amicus Curiae City of Houston.

Justice OWEN delivered the opinion of the Court, in which Justice HECHT, Justice O'NEILL, Justice JEFFERSON and Justice WAINWRIGHT joined.

We deny the motion for rehearing. We withdraw our opinion of June 18, 2004 and substitute the following in its place.

In a regulated environment, electric utility companies made very large expenditures to build generation plants, some of which were nuclear power plants. Under regulation, those utilities and their shareholders were entitled to, and had, a reasonable opportunity to recover through rates not only their reasonable and prudent investments of capital in those plants, but also a reasonable, regulated return on those investments.¹ In 1999, the Texas Legislature decided that it was in the public interest to partially deregulate the electric power industry.² The Legislature recognized that in fundamentally changing the industry, it was altering the assumptions that had led utilities to invest large sums in power generation assets. The Legislature understood that the cost of these assets likely would be recovered in a regulated environment, but might well become uneconomic and thus unrecoverable in a competitive, deregulated electric power market. The Legislature called such uneconomic assets stranded costs.³ The term "stranded costs" has a specific definition in the Public Utility Regulatory Act ("PURA" or "the Act"),⁴ but generally speaking, it is the extent to which the book value of generation-related assets and purchased power contracts exceeds their market value.⁵

The Legislature concluded that if generating plants became uneconomic as a result of legislatively mandated deregulation, it was in the public interest for utilities to be made whole by recovering their full investment in those generation plants, although the utilities would no longer receive a return on those investments.⁶ The Legislature determined that utilities should not be required to forfeit their investments in generating plants with the advent of deregulation. The Legislature thus said in the PURA that if there are stranded costs, an electric utility "is allowed to recover all of its net, verifiable, nonmitigable stranded costs incurred in purchasing power and providing electric generation service."⁷ The Legislature set forth a comprehensive scheme for estimating, finalizing, and recovering those costs.⁸ Stranded cost recovery, if any, will occur over a period of years rather than in a lump sum.⁹ No one disputes that the Legislature intended electric utilities to recover carrying costs on stranded costs to compensate for the financing costs incurred during the stranded cost recovery period. Nor does anyone dispute that prior to deregulation, carrying costs on investments in generation plants were included in rates. The only issue before us is the date from which carrying costs may be recovered once deregulation commenced: January 1, 2002, which was the first day of deregulation, or two or more years later, at the end of final true-up proceedings.

In a rulemaking proceeding, the Texas Public Utility Commission determined that carrying costs on a true-up balance must be calculated from the later date, the date of a true-up final order (sometime after January 10, 2004).¹⁰ CenterPoint Energy, Inc. (formerly known as Reliant Energy, Inc.) and American Electric Power Company, Inc. ("AEP," a public utility holding company whose Texas operating company was formerly known as Central Power and Light Company) contend that this rule is invalid, arguing that carrying costs should be recovered from the date that regulated rates ended and competition commenced, which was January 1, 2002. The court of appeals rejected the generation companies' arguments and upheld Rule 25.263(l)(3).¹¹

The court of appeals also rejected a related challenge to Rule 25.263(l)(3). In separate proceedings not before us, the Commission directed CenterPoint and AEP to reverse early efforts to mitigate potential stranded costs.¹² If it is ultimately determined in an appeal from those proceedings that the generation companies have stranded costs and the Commission erred by reversing early mitigation efforts, the generation companies argue that Rule 25.263(l)(3) does not permit them to recover interest for the period of time that amounts associated with early mitigation efforts were incorrectly refunded to customers.¹³ The court of appeals in this case held that "a utility's right to fully recover its stranded costs does not encompass a right to early mitigation."¹⁴ The generation companies take issue with this determination, but advise us that the matter would be moot if this Court concludes that they are entitled to carrying costs on stranded costs from January 1, 2002.

We hold that Rule 25.263(l)(3) is inconsistent with the Legislature's intent, expressed in Chapter 39 of the PURA, that utilities fully recover their "net, verifiable, nonmitigable stranded costs incurred in purchasing power and providing electric generation service,"¹⁵ that "exist on the last day of the freeze period [December 31, 2001]."¹⁶ A two- or three-year gap in recovery of carrying costs would not permit generation companies full recovery of their stranded costs as the Legislature envisioned. However, the capacity auction true-up procedure set forth in the Act¹⁷ may include a component for return of or on stranded costs in 2002 and 2003, a determination that cannot be made from the record in this rulemaking proceeding. The amount of stranded cost recovery, if any, through capacity auction true-ups will have to be considered in determining the amount of carrying costs on stranded costs from January 1, 2002 to ensure that there is no overrecovery of stranded costs.¹⁸ We accordingly remand this issue to the Commission for further consideration of whether to address carrying costs in a rule or in contested case hearings applicable to each electric utility and its affiliates.

Because Rule 25.263(l)(3) is invalid and we are remanding this matter to the Commission, we do not address whether or under what circumstances generation companies might be entitled to interest on refunds of early mitigation credits if those refunds were to be reversed.

I

We first consider the standard of review. The Commission's order adopting Rule 25.263¹⁹ reflects that the rule was promulgated under section 14.002 of the Act, which provides: "The Commission shall adopt and enforce rules reasonably required in the exercise of its powers and jurisdiction."²⁰ The order also cites sections 39.252 and 39.262 of the PURA, which the Commission said "address[ ] a utility's right to recover stranded costs" and "require the commission to conduct a true-up proceeding for each ... utility after the introduction of customer choice."²¹

Section 39.001 of the PURA has separate provisions governing review of the validity of a competition rule. Section 39.001 provides that "[j]udicial review of competition rules adopted by the commission shall be conducted under Chapter 2001, Government Code, except as otherwise provided by this chapter [39]."²² Section 39.001 provides for a direct appeal to the Third Court of Appeals for "[j]udicial review of the validity of competition rules,"²³ and for expedited procedures in such an appeal.²⁴ The Commission's order does not contain a reference to section 39.001.

CenterPoint and AEP nevertheless filed a direct appeal in the Third Court of Appeals, and the court of appeals' opinion recites that the court had before it a direct appeal under subsections 39.001(e) and (f) of the Act.²⁵ No one has taken issue with the characterization of Rule 25.263 as a "competition rule" or the applicability of subsections 39.001(e) and (f). Regardless of whether those subsections apply, the validity of Rule 25.263(l)(3) is at issue, and under our case law,²⁶ the rule is invalid if, among other things, it violates a statutory provision. We turn to an analysis of Rule 25.263(l)(3) with these considerations in mind.

II

This is the fourth case in which we have addressed issues arising out of the partial deregulation of the electric power industry, including issues concerning stranded costs.²⁷ Stranded costs include regulatory assets,²⁸ which are essentially bookkeeping entries that reflect a charge that was to be included in a utility's future rates in a regulated environment.²⁹ Stranded costs also include the reasonable excess cost above the market value of assets such as generating plants, including nuclear power plants.³⁰ As we have...