City of Corpus Christi v. Public Utility Comm'n

• Decision Date: 06 June 2001
• Docket Number: No. 00-0816,No. 00-0821,00-0816,00-0821
• Citation: City of Corpus Christi v. Public Utility Comm'n, 51 S.W.3d 231 (Tex. 2001)
• Parties: (Tex. 2001) City of Corpus Christi, et al., Appellants v. Public Utility Commission of Texas, et al., Appellees Power Choice, Inc., Appellant v. Public Utility Commission of Texas and Central Power and Light Company, Appellees
• Court: Texas Supreme Court

Page 231

51 S.W.3d 231 (Tex. 2001)

City of Corpus Christi, et al., Appellants v. Public Utility Commission of Texas, et al., Appellees Power Choice, Inc., Appellant v. Public Utility Commission of Texas and Central Power and Light Company, Appellees

No. 00-0816

No. 00-0821

SUPREME COURT OF TEXAS

Argued on November 29, 2000

June 6, 2001

On Direct Appeals from the 250th District Court of Travis County, Texas

[Copyrighted Material Omitted]

[Copyrighted Material Omitted]

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PER CURIAM

In 1999, the Legislature substantially revised the Public Utility Regulatory Act (PURA) to bring about a major restructuring of the electric power industry in Texas to allow retail electric rates to be determined by competition. As part of that restructuring, the PURA permits existing utilities to recover "regulatory assets" and "stranded costs" through securitization financing. Securitization is accomplished through a financing order issued by the Public Utility Commission that authorizes a utility to issue a transition bond. The transition bond is repaid or secured by transition charges to electric power consumers in a utility's service area. Central Power and Light Company, an existing utility, applied for and the Commission approved a financing order that assures that CPL will recover certain of its regulatory assets through securitization. Two separate proceedings were brought in a Travis County district court seeking review of that order on different grounds. Final judgments were rendered in both proceedings affirming the Commission's order. We granted direct appeals from those judgments pursuant to section 39.303(f) of the PURA and consolidated the two proceedings.

Power Choice, Inc., the appellant in one of the appeals, contends that the securitization provisions of the PURA are facially unconstitutional under the Texas Constitution because they impose a tax that is not for a public purpose, constitute a taking without adequate compensation, or are an appropriation or grant for private purposes. We affirm the trial court's judgment that the securitization provisions are not unconstitutional on any of those grounds.

In the appeal by numerous cities including the City of Corpus Christi, and by Texas Industrial Energy Consumers and the Office of Public Utility Counsel, we also affirm the trial court's judgment. We hold that: 1) regulatory assets known as "SFAS 109 assets" may be securitized even though they currently earn no return and have no carrying costs; 2) the Commission properly treated investment tax credits; 3) the Commission did not err in securitizing regulatory assets reflected in CPL's SEC Form 10-K rather than the balance of those assets as of December 31, 2001; 4) the PURA authorizes the Commission to prescribe what it calls a "non-standard true-up"; 5) the Commission did not err in declining to adjust the allocation factors for industrial customer classes to reflect load loss; 6) the Commission did not err in its allocation of transition charges to non-firm industrial customer classes; and 7) the Cities were not denied due process in the proceedings before the Commission. Accordingly, we affirm the trial court's judgment. Justice Owen's concurring opinion is the opinion of the Court with respect to the issues that it addresses, and Justice Hecht's concurring opinion is the opinion of the Court with respect to the issue that it addresses.

JUSTICE OWEN filed a concurring opinion, in which CHIEF JUSTICE PHILLIPS, JUSTICE HECHT, JUSTICE ENOCH, JUSTICE BAKER, JUSTICE ABBOTT, JUSTICE HANKINSON, and JUSTICE JEFFERSON joined.

JUSTICE HECHT filed a concurring opinion, in which CHIEF JUSTICE PHILLIPS, JUSTICE ABBOTT, JUSTICE HANKINSON, and JUSTICE JEFFERSON joined.

JUSTICE OWEN filed a dissenting opinion, in which JUSTICE ENOCH and JUSTICE BAKER joined.

JUSTICE O'NEILL did not participate in the decision.

Justice Owen, joined by Chief Justice Phillips, Justice Hecht, Justice Enoch, Justice Baker, Justice Abbott, Justice Hankinson, and Justice Jefferson, concurring.

Priscilla R. Owen, Justice

I

The Public Utility Regulatory Act (PURA) first came into being in 1975. At that time, the Legislature established a comprehensive regulatory system for electric utilities.¹ The Legislature had concluded that these utilities were "by definition monopolies in the areas they serve," and that as a result "normal forces of competition which regulate prices in a free enterprise society do not operate."² Regulation was intended to be a substitute for competition.³ Although there were changes over the years in the manner in which the PURA regulated the electric power industry, and although by 1997 the Legislature had recognized that the wholesale electric industry was becoming more competitive,⁴ regulation under the PURA remained "comprehensive."⁵

In 1999, the Legislature decided to chart a new course for the provision of electric service in Texas. In the years intervening since 1975, partial deregulation at the federal level and deregulation in other states had wrought significant changes in the electric industry on a national level. The Legislature concluded that it was in the public interest to establish a "fully competitive electric power industry" in Texas.⁶ It enacted chapter 39 of the PURA and other amendments to accomplish that goal and "to protect the public interest during the transition."⁷

In order to achieve competition in the retail market for electricity, the amendments to the PURA require existing utilities to "unbundle" the services that they provide.⁸ Each electric utility must separate its business activities into distinct units: 1) a power generation company; 2) a retail electric provider; and 3) a transmission and distribution utility.⁹ This is to be accomplished through the creation of separate nonaffiliated companies, the creation of separate affiliated companies owned by a common holding company, or the sale of assets to a third party.¹⁰

Underpinning the Legislature's decision to restructure the electric power industry was its finding that regulation was no longer warranted, except for regulation of transmission and distribution services and regulation of the recovery of stranded costs:

The legislature finds 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.¹¹

Stranded costs have a precise, technical definition under chapter 39 of the PURA:

"Stranded cost" means the positive excess of the net book value of generation assets over the market value of the assets, taking into account all of the electric utility's generation assets, any above market purchased power costs, and any deferred debit related to a utility's discontinuance of the application of Statement of Financial Accounting Standards No. 71 ("Accounting for the Effects of Certain Types of Regulation") for generation-related assets if required by the provisions of this chapter. For purposes of Section 39.262 [true-up proceeding], book value shall be established as of December 31, 2001, or the date a market value is established through a market valuation method under Section 39.262(h), whichever is earlier, and shall include stranded costs incurred under Section 39.263 [stranded cost recovery of environmental cleanup costs].¹²

Stranded costs can more generally be described as the difference between the market value of a utility's generation assets and the portion of the book value of those assets that is projected to be unrecovered through rates that are based on market prices. Under the regulatory scheme that existed prior to 1999, a utility would have had an opportunity to recover prudent capital investments in its rates through depreciation. The Legislature concluded, after intensive study by the Public Utility Commission and others, that those investments are unlikely to be recovered once a competitive retail market based on the market price of electricity is established. That is because for years to come, existing utilities would have costs associated with historical costs of service or investments in facilities while new sellers of electricity would not. Accordingly, new marketers should be able to sell electricity at prices that are lower than prices that would permit incumbent utilities to recover all their existing, embedded costs and capital investments. In order to compete, existing utilities, or more precisely their shareholders, would have to absorb those costs and losses on investments because market prices would not provide a sufficient return. The largest part of stranded costs for utilities in Texas, including CPL, is attributable to investments in nuclear power plants that the Commission previously found in rate proceedings were prudently incurred.

The Legislature determined that it is in the public interest for existing utilities to recover certain stranded costs in charges that are "nonbypassable."¹³ That means that with limited exceptions, all retail electric customers in an existing utility's service area will pay charges to allow that utility to recover stranded costs regardless of whether those customers purchase their electricity from that utility, switch to one of its competitors, or generate their own electricity.¹⁴

The Legislature similarly concluded that "regulatory assets" should be recoverable through nonbypassable charges.¹⁵ The definition of "regulatory assets" is, like the definition of stranded costs, technical:

"Regulatory assets" means the generation-related portion of the Texas jurisdictional portion of the amount reported by the electric utility in its 1998 annual report on Securities and Exchange Commission Form 10-K as...