Cities of Austin v. Southwestern Bell
| Decision Date | 06 June 2002 |
| Docket Number | No. 01-0086.,01-0086. |
| Citation | 92 S.W.3d 434 |
| Parties | CITIES OF AUSTIN, DALLAS, FT. WORTH, AND HEREFORD, Petitioners, v. SOUTHWESTERN BELL TELEPHONE COMPANY, Respondent. |
| Court | Texas Supreme Court |
Ricardo Guzman, James G. Boyle, Law Office of Jim Boyle, Roger B. Borgelt, Assistant Attorney General, Sara Joy Ferris, Office of Public Utility Counsel, Amanda Atkinson, Office of the Attorney General, Austin, for Petitioners.
Robert J. Hearon, Jr., Michael Diehl, Ron H. Moss, Graves Dougherty Hearon & Moody, Jose Varela, Jr., Southwestern Bell Telephone Company, Ann Effinger Austin, James D. Ellis, SBC Communications, Inc., San Antonio, for Respondent.
In 1995, the Texas Legislature amended the Public Utility Regulatory Act (PURA) to introduce incentive regulation as an alternative to the traditional rate-of-return scheme for setting telephone rates.1 Under incentive regulation, a telephone company must cap its rates for basic network services, set according to previously-established rate groups2 The rate cap is subject to certain statutory exceptions, including one providing that the Public Utility Commission of Texas (PUC) "shall allow a rate group reclassification that results from access line growth."3
Under that exception, Southwestern Bell Telephone Company sought to reclassify several exchanges into higher rate groups. The PUC, instead of reclassifying some of those exchanges, raised the upper boundaries of the respective rate groups, thus leaving the exchanges in the original rate groups and effectively negating much of Southwestern Bell's anticipated revenue growth. The court of appeals held that the PUC was required to reclassify Southwestern Bell's exchanges into higher rate groups if Southwestern Bell established appropriate access line growth, and the PUC could not circumvent that requirement by adjusting rate-group boundaries.4
We agree with the court of appeals and affirm its judgment.
Traditionally, the PUC set telephone company rates for basic network services in ratemaking proceedings using rate-of-return principles.5 The PUC determined what revenue the telephone company needed to recover a reasonable return on its investment, in addition to its reasonable and necessary expenses.6 This process involved "rate design" in which the PUC distributed the company's revenue requirements among the various services it offered.7 The PUC set rates by allocating a company's costs among ratepayer classes.8
In a 1976 proceeding using these principles, the PUC adopted a system of rategroup classifications for Southwestern Bell. The PUC divided Southwestern Bell's exchanges into ten rate groups. The PUC classified Southwestern Bell's rate groups according to the number of working telephone lines in each exchange. Rates progressively increased from smaller to larger rate groups, so that customers in exchanges with fewer telephone lines paid less than customers in exchanges with more telephone lines. This pricing structure recognized the value-of-service concept: callers in an exchange with a larger number of phone lines could reach more telephones without paying long distance charges than callers in a smaller exchange.
Over the years, as a part of its rate-setting process, the PUC periodically adjusted the number and boundaries of Southwestern Bell's rate groups to prevent exchanges with significantly different numbers of telephone lines from being placed in the same rate group. The PUC last made boundary adjustments to Southwestern Bell's rate groups in 1983, assigning Southwestern Bell eight rate groups instead of ten. The PUC also periodically moved Southwestern Bell's exchanges into different rate groups based on access line growth. The PUC last reclassified Southwestern Bell exchanges into different rate groups based on access line growth in 1990.
On September 1, 1995, Southwestern Bell elected to participate in the Legislature's newly created incentive regulation. At that time, PURA section 3.352(d) provided that an electing company was "not under any circumstances ... subject to any complaint, hearing, or determination as to the reasonableness of its rates, its overall revenues, its return on invested capital, or its net income."9 In return, section 3.352(a) required that an electing company commit to making certain infrastructure improvements and to capping its rates for basic network services for a specified time period.10
Section 3.353 provided exceptions to section 3.352(a)'s rate cap for: (1) certain changes in Federal Communications Commission (FCC) separations affecting intrastate net income;11 (2) having less than five million access lines in the state;12 and (3) rate group reclassification based on access line growth.13 The exception for rate-group reclassification, contained in section 3.353(c)(4), stated:
Notwithstanding the commitments made under Section 3.352 of this Act, a rate group reclassification occurring as a result of access lines growth shall be allowed by the commission on request of the electing company.14
Section 3.354(c) required the PUC to review any rates adjusted based on access line growth "to ensure that the proposed adjustment conforms to the requirements of Section 3.353(c) of this Act."15 Section 3.354(e) allowed the PUC, after review, to "issue an order approving, modifying, or rejecting the rate adjustment," depending on whether it was "in compliance with the applicable provisions."16
Section 3.353(d)(1) discussed generally "the regulation of basic network services of an electing company."17 It directed that, "to the extent not inconsistent with this subtitle," such regulation be governed by sections 3.202 and 3.215, among other general rate-making provisions.18 Section 3.202 required the PUC to ensure that all public utility rates were just and reasonable:
It shall be the duty of the commission to insure that every rate made, demanded, or received by any public utility ... shall be just and reasonable. Rates may not be unreasonably preferential, prejudicial, or discriminatory, but shall be sufficient, equitable, and consistent in application to each class of consumers.19
Section 3.215 similarly prohibited a public utility from establishing any unreasonable differences as to service rates between localities:
A public utility may not, as to rates or services, make or grant any unreasonable preference or advantage to any corporation or person within any classification or subject any corporation or person within any classification to any unreasonable prejudice or disadvantage. A public utility may not establish and maintain any unreasonable differences as to rates of service either as between localities or as between classes of service.20
In 1997, the Legislature codified the incentive regulation provisions in Texas Utilities Code Chapter 58.21 The Legislature stated that this codification, which became effective on September 1, 1997, intended no substantive changes from the original language enacted in 1995.22 The Legislature placed the exception allowing an electing company to seek rate group reclassification based on access line growth in section 58.058. Section 58.058 states:
Notwithstanding Subchapter B, the commission, on request of the electing company, shall allow a rate group reclassification that results from access line growth.
Subchapter B contains section 58.021, which requires an electing company to cap its basic network services rates and make certain infrastructure improvements. It also contains section 58.025, which provides that an electing company "is not, under any circumstances, subject to any complaint, hearing, or determination regarding the reasonableness of the company's: (1) rates; (2) overall revenues; (3) return on invested capital; or (4) net income."
Under section 58.055, placed in Subchapter C, an electing company "may increase a rate for a basic service network" during the rate cap only with PUC approval that the proposed change is included in section 58.058. Section 58.059 similarly requires PUC authorization for any section 58.058 "rate adjustment." Section 58.059(a) states: the PUC "may authorize a rate adjustment" under section 58.058. Section 58.059(g) similarly provides that the PUC "may issue an order approving the adjustment, or if it finds that the adjustment is not authorized" under section 58.058, it may "issue an order modifying or rejecting the adjustment."
The Legislature also provided in section 58.052(a)(2) that an electing company's basic network services are regulated "to the extent not inconsistent with this chapter," in accordance with sections 53.003 and 55.005, among other general rate-making statutes. Sections 53.003 and 55.005, not contained within the incentive regulation chapter (Chapter 58), prohibit a public utility from subjecting a person to an unreasonable disadvantage in providing services and in charging rates. For example, section 55.005 states, "[i]n providing a service to persons in a classification, a public utility may not: (1) grant an unreasonable preference or advantage to a person in the classification; or (2) subject a person in the classification to an unreasonable prejudice or disadvantage." Section 53.003(c) likewise provides:
A public utility may not: (1) grant an unreasonable preference or advantage concerning rates to a person in a classification; (2) subject a person in a classification to an unreasonable prejudice or disadvantage concerning rates; or (3) establish or maintain an unreasonable difference concerning rates between localities or between classes of service.
In December 1997, Southwestern Bell requested a rate-group reclassification from the PUC under section 58.058. Predicated...
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