Cities of Dickinson v. Public Utility Com.

• Decision Date: 01 May 2009
• Docket Number: No. 03-08-00492-CV.,03-08-00492-CV.
• Citation: 284 S.W.3d 449
• Parties: CITIES OF DICKINSON, FRIENDSWOOD, LA MARQUE, LEAGUE CITY, LEWISVILLE AND TEXAS CITY, Appellants v. PUBLIC UTILITY COMMISSION OF TEXAS and Texas-New Mexico Power Company, Appellees.
• Court: Texas Court of Appeals

284 S.W.3d 449

CITIES OF DICKINSON, FRIENDSWOOD, LA MARQUE, LEAGUE CITY, LEWISVILLE AND TEXAS CITY, Appellants v. PUBLIC UTILITY COMMISSION OF TEXAS and Texas-New Mexico Power Company, Appellees.

No. 03-08-00492-CV.

Court of Appeals of Texas, Austin.

May 1, 2009.

Thomas L. Brocato, Lloyd, Gosselink, Rochelle & Townsend, PC, Austin, TX, for Appellant.

Jeffee L. Palmer, Asst. Atty. Gen., Austin, Scott Seamster, Corporate Counsel, Irving, TX, for Appellee.

Before Justices PURYEAR, WALDROP and HENSON.

OPINION

DIANE M. HENSON, Justice.

Cities of Dickinson, Friendswood, La Marque, League City, Lewisville, and Texas City (collectively, "the Cities"), appeal from the trial court's judgment affirming an order on rehearing of the Public Utility Commission of Texas ("the Commission") entered in an administrative docket in which Texas-New Mexico Power Company (TNMP) filed an application to adjust carrying charges on its competition-transition-charge balance. The Cities argue that the trial court erred in affirming the Commission's adoption of a 7.08% cost of debt in calculating the carrying charges on TNMP's CTC. Because we hold that the trial court did not err in affirming the Commission's use of a 7.08% cost of debt, we affirm the judgment of the trial court.

BACKGROUND

The administrative decision for which the Cities sought judicial review was issued by the Commission in Docket No. 33106, Application of Texas-New Mexico Power Company to Adjust Carrying Charges Pursuant to P.U.C. Subst. R. 25.263. In order to address the sole issue on appeal, a brief explanation of the deregulation of the electricity market, as well as the history of TNMP's participation in Commission proceedings, is necessary.

Deregulation involved the transition of the electricity market from a regulated industry to a competitive, deregulated market. See Tex. Util.Code Ann. §§ 39.001-.910 (West 2007 & Supp.2008). This transition involved changes to the provision of electricity, requiring formerly integrated utilities to "unbundle" and divide into three separate entities, each described by its separate function: (1) retail electric providers, (2) power-generation companies, and (3) transmission-and-distribution utilities (TDUs). Id. § 39.051(a)-(b); see also CenterPoint Energy Houston Elec., LLC v. Gulf Coast Coal. of Cities, 252 S.W.3d 1, 7 (Tex.App.-Austin 2008, pet. filed). TNMP now operates as a TDU. Under deregulation, each utility filed proposed rates for their affiliated TDU through administrative proceedings referred to as unbundled cost-of-service (UCOS) cases. See 16 Tex. Admin. Code § 25.344 (2008) (Pub. Util. Comm'n, Cost Separation Proceedings). In TNMP's UCOS case, it agreed to a "black box" settlement in lieu of undergoing a full proceeding. In reaching this settlement, TNMP and the Commission agreed to a total amount that TNMP could recover through its rates without specifying any of the individual numbers used to calculate that amount, including TNMP's cost of debt.

Deregulation also allowed formerly regulated utilities to recover investments made in generation assets, such as nuclear power plants, that would generally not be recoverable in a competitive market. See CenterPoint, 252 S.W.3d at 8-9. Each utility was allowed to recover these "stranded costs" through a competition transition charge (CTC) passed through to rate payers by its affiliated TDU. See 16 Tex. Admin. Code § 25.345 (2008) (Pub. Util. Comm'n, Recovery of Stranded Costs Through Competition Transition Charge (CTC)); see also CenterPoint, 252 S.W.3d at 10. Two years after deregulation was introduced, the Commission began conducting "true-up proceedings" to reconcile the CTC for each TDU with its remaining stranded costs. Tex. Util.Code Ann. §§ 39.201(l), .262(c). In these true-up proceedings, the TDUs were authorized to seek interest, or carrying charges, on their CTC balance. See 16 Tex. Admin. Code § 25.263(l)(3) (2008) (Pub. Util. Comm'n, True-up Proceeding). At the time the Commission issued its final order in TNMP's true-up proceeding in 2005, Rule 25.263(l)(3) provided:

The TDU shall be allowed to recover, or shall be liable for, carrying costs on the true-up balance. Carrying costs shall be calculated using the utility's cost of capital established in the utility's UCOS proceeding, and shall be calculated for the period of time from the date of the true-up final order until fully recovered.¹

28 Tex. Reg. 5993 (2003), amended 31 Tex. Reg. 5603 (2006).²

This calculation was problematic in TNMP's true-up proceeding, Docket No. 29206, because its UCOS proceeding had ended in settlement, and therefore no cost of capital had been "established in the utility's UCOS proceeding." See id. The administrative law judge (ALJ) handling TNMP's true-up proceeding calculated a replacement for the UCOS cost of capital using the cost of debt proposed by TNMP in its UCOS application. The Commission, however, rejected the ALJ's approach, stating that TNMP's proposed cost of debt in its UCOS application "was neither evaluated by the Commission nor adopted by the Commission in its order in that proceeding." The Commission chose instead to use a 6.67% cost of debt based on data reported in TNMP's 2001 annual report. Using this cost of debt and other data obtained from a generic UCOS proceeding that had been held to resolve threshold issues applicable to all utilities, the Commission determined in Docket No. 29206 that the appropriate rate for TNMP's CTC carrying charge was 10.93%.

After the Commission issued its final order in Docket No. 29206, Rule 25.263(l)(3) was amended to allow TDUs to seek revised carrying charges and amended CTCs. See 31 Tex. Reg. 5603 (2006). The relevant portions of Rule 25.263(l)(3), as amended, are as follows:

The TDU shall be allowed to recover, or shall be liable for, carrying costs on the true-up balance. . . . The TDU shall file an application to adjust the carrying costs and amend its CTC tariff on a prospective basis in conformance with this paragraph within 30 days of the effective date of an amendment to this paragraph. The establishment of the interest rate used to calculate carrying charges shall be based upon the following:

(i) The weighted average of the TDU's unadjusted historical cost of debt (HC) and an adjusted form of the TDU's marginal cost of debt (MC), with the weightings based on the utility's most recently authorized capital structure. The HC component shall be the cost of debt as determined in a final commission order, provided that the order was entered within three years of the effective date of this rule, for a rate proceeding in which the TDU's cost of debt was explicitly addressed or can be determined based upon the order's authorized weighted-average cost of capital (overall rate of return on invested capital), proportions of debt and equity, and allowed return on equity. . . .

(ii) If the commission, within three years prior to the effective date of this rule, did not enter a final order in a rate proceeding that addresses the TDU's cost of debt, the HC component used in the interest rate determination described in the preceding clause shall be based upon the cost of debt reported in the utility's most recent Earnings Monitoring Report filed pursuant to § 25.73 of this title (relating to Financial and Operating Reports), adjusted for known and measurable changes.

16 Tex. Admin. Code § 25.263(l)(3).

In Docket No. 33106, the proceeding giving rise to this appeal, TNMP sought to revise its carrying charges pursuant to the amendment to Rule 25.263(l)(3). In its application, TNMP proposed an 8.31% carrying charge on its CTC balance based on a historical cost of debt of 6.67%, reflecting the cost of debt used in Docket No. 29206. This calculation was based on the assumption that 6.67% was "the cost of debt as determined in a final commission order" in Docket No. 29206, which "was entered within three years of the effective date of this rule, for a rate proceeding in which the TDU's cost of debt was explicitly addressed." Id. The Commission disagreed, finding that it did not explicitly address TNMP's cost of debt in Docket No. 29206, but merely used a "proxy formula." The Commission instead calculated TNMP's carrying charges using the cost of debt of 7.08% reported by TNMP in its 2005 earnings monitoring report, resulting in a revised CTC carrying charge of 8.31%.

The Cities sought judicial review of the Commission's final order, claiming that the appropriate rate for TNMP's CTC carrying charge is 8.04%, using the cost of debt found in Docket No. 29206.³ The trial court affirmed the Commission's order and this appeal followed.

STANDARD OF REVIEW

This case turns solely on a question of administrative rule interpretation. Administrative rules are construed in the same manner as statutes. Rodriguez v. Service Lloyds Ins. Co., 997 S.W.2d 248, 254 (Tex.1999). Statutory construction is a matter of law, subject to de novo review. City of Rockwall v. Hughes, 246 S.W.3d 621, 625 (Tex.2008). When construing administrative rules, "[a]n administrative agency's interpretation of its own rules is entitled to great weight and deference; it controls unless plainly erroneous or inconsistent with the agency's enabling statute." Ackerson v. Clarendon Nat'l Ins. Co., 168 S.W.3d 273, 275 (Tex.App.-Austin 2005, pet. denied).

DISCUSSION

In a single issue on appeal, the Cities argue that the trial court erred in affirming the Commission's calculation of carrying charges pursuant to Rule 25.263(l)(3). While the Commission applied the calculation method described in Rule 25.263(l)(3)(ii), in which cost of debt is adopted from the utility's most recent earnings monitoring report, the Cities maintain that the proper calculation method in this case is found in Rule 25.263(l)(3)(i), in which cost of debt is adopted from a final Commission order in a rate proceeding in which TNMP's cost of debt was explicitly addressed, provided the order...