Cities of Corpus Christi v. Puc of Texas

• Decision Date: 23 September 2005
• Docket Number: Nos. 03-03-00428-CV.,s. 03-03-00428-CV.
• Citation: 188 S.W.3d 681
• Court: Texas Court of Appeals
• Parties: CITIES OF CORPUS CHRISTI, et al.,<SMALL><SUP>1</SUP></SMALL> Appellants, AEP Texas Central Company; Public Utility Commission of Texas; and Constellation New Energy, Inc., Cross-Appellants, v. PUBLIC UTILITY COMMISSION OF TEXAS and AEP Texas Central Company, Appellees, Public Utility Commission of Texas; Cities of Corpus Christi, et al.; Office of Public Utility Counsel; and Constellation New Energy, Inc., Cross-Appellees.

188 S.W.3d 681

CITIES OF CORPUS CHRISTI, et al.,¹ Appellants, AEP Texas Central Company; Public Utility Commission of Texas; and Constellation New Energy, Inc., Cross-Appellants, v. PUBLIC UTILITY COMMISSION OF TEXAS and AEP Texas Central Company, Appellees Public Utility Commission of Texas; Cities of Corpus Christi, et al.; Office of Public Utility Counsel; and Constellation New Energy, Inc., Cross-Appellees.

Nos. 03-03-00428-CV.

Court of Appeals of Texas, Austin.

September 23, 2005.

Steven A. Porter, Kristen Pauling Doyle, LLoyd, Gosselink, Blevins, Rochelle, Baldwin & Townsend, PC, Austin, for Cities of Corpus Christi, et al.

Chris Reeder, Brown McCarroll, L.L.P, Austin, for Constellation New Energy, Inc.

James K. Rourke, Jr., Office of Public Utility Counsel, Austin, for Office of Public Utility Counsel.

Larry W. Brewer, Rhonda Colbert Ryan, Philip F. Ricketts, Bracewell & Patterson, L.L.P., David C. Duggins, John F. Williams, Clark, Thomas & Winters PC, Austin, March E. Lewis, Assistant General Counsel, American Electric Power Company Service Corp., Fort Wayne, IN, for AEP Texas Central Company.

Douglas Fraser, Asst. Atty. Gen., Natural Resources Div., Austin, for Public Utility Commission of Texas.

Rex D. Vanmiddlesworth, Karen D. Whitt, Andrews Kurth, LLP, Austin, for Texas Industrial Energy Consumers.

Before Justices B.A. SMITH, PATTERSON and PEMBERTON.

OPINION

Opinion by Justice PEMBERTON.

This case presents three sets of issues arising from Texas's transition from a wholly regulated retail electricity market. First, we will consider the extent to which the Public Utility Commission had power to order electric utilities to refund alleged "over-mitigation" of their stranded costs, as determined from interim computer models, before the final 2004 true-up proceedings. Second, we will determine whether substantial evidence supports the Commission's characterization of Nuclear Electric Insurance Limited (NEIL) account balances as generation-related rather than transmission-related. Third, we will address whether the Commission may set demand charges for large commercial customers greater than those it set before deregulation. Because we determine that the Commission exceeded its statutory authority in ordering refunds of "over-mitigated" stranded costs determined before the 2004 true-ups, we will reverse the portion of the district court's judgment compelling such refunds and remand to the Commission for further proceedings. However, we will affirm the district court's judgment affirming the Commission's disposition of the issues concerning NEIL member accounts and demand charges.

GENERAL BACKGROUND

Finding that "the production and sale of electricity is not a monopoly warranting regulation of rates, operations, and services and that the public interest in competitive electric markets requires that, except for transmission and distribution services and for the recovery of stranded costs, electric services and their prices should be determined by customer choices and the normal forces of competition," in 1999 the legislature enacted comprehensive legislation—commonly known by its bill number, S.B. 7—providing for an ordered transition from Texas's former wholly regulated electricity market to a more competitive retail electricity market. See Act of May 27, 1999, 76th Leg., R.S., ch. 405, 1999 Tex. Gen. Laws 2543, 2543-2625 (codified at Tex. Util.Code Ann. §§ 39.001-.910 (West Supp.2004-05)); Tex. Util.Code Ann. § 39.001(a); In re TXU Elec. Co., 67 S.W.3d 130, 132 (Tex. 2001) (Phillips, C.J., concurring). In several of our prior opinions, we have described the basic steps in this transition. See, e.g., Reliant Energy, Inc. v. Public Util. Comm'n, 101 S.W.3d 129, 133-36 (Tex.App.-Austin 2003), rev'd in part sub nom CenterPoint Energy, Inc. v. Public Util. Comm'n, 143 S.W.3d 81 (Tex.2004); Reliant Energy, Inc. v. Public Util. Comm'n, 62 S.W.3d 833, 835-36 (Tex. App.-Austin 2001, no pet.). Under the former regulatory regime, each region of the state was served by a single vertically integrated utility that generated electricity, built and maintained the electricity distribution "wires" or grid, and sold the electricity to consumers at retail, all under the comprehensive regulation of the Public Utility Commission (Commission). Under S.B. 7, these utilities were required to "unbundle" themselves into three separate entities—a power generation company, a transmission and distribution utility, and a retail electric provider. Tex. Util.Code Ann. § 39.051(b). Power generation companies provide wholesale generation services in competition with other generators entering the market. In re TXU, 67 S.W.3d at 132 (Phillips, C.J., concurring). Retail electric providers (REPs) provide retail electric service to end-use customers in competition with other REPs. Id. Transmission and distribution utilities (TDUs) own and maintain the "wires" used to transport electricity from the power generation companies to all REPs and retail consumers in the utility's geographic service area. Id. Because the legislature continued to regard TDU's as monopolies within their respective service areas, their rates continued to be regulated by the Commission. See Tex. Util.Code Ann. § 39.001(a), (b). A utility could "unbundle" through the creation either of separate unaffiliated companies or of separate affiliated companies owned by a common holding company ("affiliated companies" or "unbundled" companies), or through the sale of assets. Id. § 39.051(c).

Other aspects of the legislatively-mandated transition to a more competitive electricity market gave rise to the issues in this appeal. We explore each of these aspects below with its corresponding issues.

STRANDED COSTS

AEP Texas Central Company (AEP) brings three issues on appeal concerning the Commission's order regarding stranded costs. We will first review the nature of stranded costs and the Commission's decision to order credits to refund "over-mitigation" before the 2004 true-up. We will then turn to the specifics of AEP's issues.

Nature of stranded costs

Although "stranded costs" have a precise, technical definition under chapter 39 of the utilities code, id. § 39.251(7), the supreme court has generally described them "as the portion of the book value of a utility's generation assets that is projected to be unrecovered through rates that are based on market prices." In re TXU, 67 S.W.3d at 132 (Phillips, C.J., concurring) (quoting City of Corpus Christi v. Public Util. Comm'n of Tex., 51 S.W.3d 231, 238-39 (Tex.2001)). The largest part of stranded costs are attributable to investments in nuclear power plants. See id.

Stranded costs are a potential byproduct of Texas's transition from the former rate-regulated electricity system to competition. Under the former system, the Commission could set rates that would enable utilities to recover from consumers the costs of their generation-related assets. Utilities accordingly made considerable investments in generation-related assets with the expectation of being able to recover the costs of these investments and a reasonable return. See CenterPoint Energy, Inc. v. Public Util. Comm'n of Tex., 143 S.W.3d 81, 82 (Tex.2004). Theoretically, the existence of these costs would, upon the beginning of competition, create significant competitive disadvantages for incumbent utilities relative to new market entrants. Because the new market entrants would not have these embedded generation-related costs and opportunity cost reflected in the rate of return, their pricing structure would tend to be lower than those of incumbent utilities. This, in turn, would enable new market entrants to price electricity below a level at which incumbent utilities could recover their investments. See id. Hence, incumbent utilities would either have to charge uncompetitive higher rates or simply absorb these "stranded costs." See id. at 82-83.²

The legislature thus gave careful attention to the issue of stranded costs when considering deregulation of the electricity market. The April 1998 Report to the Texas Senate Interim Committee on Electric Utility Restructuring contained an estimate of projected potential stranded costs, described as "excess cost over market," or "ECOM," for nine Texas incumbent utilities as of December 31, 2001, the last day before retail competition would begin. These "1998 ECOM Report" estimates were derived from computer models that took account of factors, such as the cost of fuel used to power generating plants, that would impact the market value of generating assets.

The legislature determined that, among its other foundational findings regarding electricity deregulation, it is in the public interest to "allow utilities with uneconomic generation-related assets and purchased power contracts to recover the reasonable excess costs over market of those assets and purchase power contracts." Tex. Util. Code Ann. § 39.001(b)(2). It established a three-phase regulatory program intended to assist incumbent utilities in recovering or eliminating what otherwise would have been stranded costs in the competitive market. In re TXU, 67 S.W.3d at 132 (Phillips, C.J., concurring).

Under the first phase, which ended on December 31, 2001, the Commission froze retail electric rates ("freeze period"). Tex. Util.Code Ann. § 39.052; In re TXU, 67 S.W.3d at 133 (Phillips, C.J., concurring). Utilities that had been identified as having potential stranded costs in the 1998 ECOM Report were allowed to "mitigate" them by (1) shifting depreciation from the transmission and delivery assets to the generating assets, Tex. Util.Code Ann. § 39.256 (West Supp.2004-05), and (2) accelerating the cost recovery of stranded costs each year through the use of legislatively-approved "tools." Id. § 39.254 (West Supp.2004-05); see also id. §§ 39.251-.265. Among the tools offered, the legislature set means for computing during the rate-freeze period positive...