Public Utility Com'n of Texas v. GTE-SW
| Decision Date | 01 April 1992 |
| Docket Number | GTE-S,A,No. 3-90-084-CV,3-90-084-CV |
| Citation | 833 S.W.2d 153 |
| Parties | PUBLIC UTILITY COMMISSION OF TEXAS, State Purchasing and General Services Commission, Office of Public Utility Counsel and Cities of Abernathy, et al., Appellants, v.ppellee. |
| Court | Texas Court of Appeals |
Karen Pettigrew, Asst. Atty. Gen., Gracy H. Casstevens, Butler & Casstevens, W. Scott McCollough, Asst. Atty. Gen., C. Kingsberry Ottmers, Public Counsel, John Laakso, Asst. Public Counsel, Office of Public Utility Counsel, Austin, for appellants.
P.M. Schenkkan, Kim E. Brightwell, Patrick F. Thompson, William G. Mundy, Vinson & Elkins, Austin, for appellee.
Before POWERS, ABOUSSIE and KIDD, JJ.
ON MOTION FOR REHEARING
We withdraw our previous opinion of June 19, 1991, and substitute this opinion in order to respond more conveniently to matters raised in the parties' motions for rehearing, which we hereby overrule.
In a suit for judicial review authorized by the Public Utility Regulatory Act (PURA), Tex.Rev.Civ.Stat.Ann. art. 1446c, § 69 (Supp.1992), the district court affirmed in part and reversed in part a final order issued by the Public Utility Commission in a rate proceeding, remanding the cause to the Commission with instructions that it "take such action and enter such orders as are consistent with" the district-court judgment. We affirm that part of the district-court judgment reversing the Commission order. We reverse that judgment to the extent it affirms the Commission's order. We remand the cause to the district court with instructions that the cause be remanded to the Commission for further proceedings not inconsistent with our opinion.
In 1984 General Telephone Company of the Southwest applied to the Commission for an order increasing the rates it is permitted to charge its customers for intrastate telecommunication services. See PURA § 43. Several parties opposed the application. After an intervening lawsuit in district court, and a subsequent appeal involving certain aspects of the controversy, the Commission concluded the contested case by a final order dated April 7, 1989. The Commission order required the Company to reduce its rates to the extent necessary to diminish its annual revenues by about $59 million. The Commission purported to make the new rates retroactive by assigning them an effective date of January 1, 1987. To effectuate that element of the order, the Commission required the Company to refund about $140 million to its customers through credits on future invoices.
After the Commission overruled various motions for rehearing, numerous parties in the contested case sued for judicial review of the order in the statutory cause of action authorized by PURA § 69. The district court consolidated the several causes. After final hearing, the court reversed that The appellants assail, by various points of error, those parts of the Commission order adverse to their respective interests. We will discuss below the several points of error. To assist in understanding our discussion, however, we should set out first the general statutory context in which the Commission arrived at its final order in the contested case.
portion of the agency order which required a refund but affirmed the remainder of the order. Several litigants appeal to this Court: the Commission, the Company, the State Purchasing and General Services Commission, the Office of Public Utility Counsel, and eighty-six municipalities. 1 See Texas Administrative Procedure and Texas Register Act (APTRA), Tex.Rev.Civ.Stat.Ann. art. 6252-13a, §§ 19(e), 20 (Supp.1992)
In PURA, the Legislature directed the Commission to accomplish two objectives: (1) protect the public interest in state-wide availability of an adequate, efficient, safe, and reasonable telecommunications service; and (2) assure that the rates charged and paid for such service are "just and reasonable." See PURA §§ 18(a), 35(a), 38. In PURA § 37, the Legislature empowered the Commission to "fix and regulate" the rates a utility charges for intrastate telecommunication services.
The Legislature placed in the Commission a generous discretion in rate matters, if one looks only to certain broadly worded provisions of PURA. For example, a telecommunications utility must prove that any rates it proposes are "just and reasonable," which is to say that they permit "a reasonable opportunity to earn a reasonable return on ... invested capital ... over and above ... reasonable and necessary operating expenses." PURA §§ 18(a), 39, 40. Notwithstanding such broad criteria, however, the Legislature circumscribed Commission discretion by defining in PURA itself such essential terms as "invested capital," "net income," and "expenses disallowed." PURA § 41. See generally Texas Alarm & Signal Ass'n v. Public Util. Comm'n, 603 S.W.2d 766 (Tex.1980); Southwestern Bell Tel. Co. v. Public Util. Comm'n, 571 S.W.2d 503 (Tex.1978).
In addition, the Legislature directed the Commission to consider specified factors in fixing the rates that a public utility may charge. In PURA § 39(b), for example, the Legislature required the Commission to "consider, in addition to other applicable factors," several aspects of a utility's operations, namely: "[the utility's] efforts to comply with the statewide energy plan, the efforts and achievements of such utility in the conservation of resources, the quality of the utility's services, the efficiency of the utility's operations, and the quality of the utility's management."
Still other factors may become applicable from sources of law outside PURA. The Constitution of the United States precludes, of course, any rate that is "confiscatory" of the utility's property. Public Serv. Comm'n v. Great N. Util. Co., 289 U.S. 130, 135, 53 S.Ct. 546, 548, 77 L.Ed. 1080 (1933). And the Commission has provided by its own regulations for the consideration of such additional factors as inflation, deflation, service-area growth rate, and a utility's need to attract new capital. Tex. Sec'y of State, 16 Tex.Admin.Code § 23.21(c)(1)(C) (Supp.1992).
We believe our observations in reference to a similar statutory scheme apply to the rate-setting provisions of PURA. The applicable law and facts may require Morgan Express v. Railroad Comm'n, 749 S.W.2d 134, 137 (Tex.App.1987, writ denied). In view of the complexity inherent in the subject-matter, "[w]asteful and fruitless attempts at perfection are neither expected
nor required" of the Commission. Id.
The terms of PURA § 39(a) require the Commission to calculate and fix the Company's charges to its customers according to the Commission's determination of the level of "overall revenues" necessary to permit the Company "a reasonable opportunity to earn a reasonable return on" its rate base, or the "invested capital used and useful in rendering service to the public over and above its reasonable and necessary operating expenses." 2 See generally Don R. Butler, The Rate of Return in Texas--The Neglected Issue, 28 Baylor L.Rev. 937, 938 (1976).
The Commission concluded that a rate of 11.05% would yield a "reasonable return" within the meaning of PURA § 39(a). The Company challenges on appeal the Commission findings on which the conclusion rests. These relate to only one criterion of what constitutes a "reasonable return": whether the rate is sufficient to yield a level of earnings that is high enough to attract new capital from external sources. The Company's complaint pertains even more narrowly to a single technique or method by which the Commission might estimate a rate that is sufficient to attract new capital: the "double leverage" method sometimes employed when the capital stock of a utility is owned wholly by another corporation. See generally J. Rhoads Foster, Fair Return Criteria and Estimation, 28 Baylor L.Rev. 883, 886-90 (1976).
The evidence may be summarized by the following table displaying the Company's capital structure and the 11.05% "cost of capital" upon which the Commission's findings rest. The table, which we have altered somewhat, is taken from the examiner's proposal for decision, incorporated in the Commission's final order:
COST OF CAPITAL--GTE SOUTHWEST CORPORATION
(After the Subsidiary Risk Adjustment)
Amount Weighted
Component 000's Ratio Cost Cost
Long"Term Debt $ 779,910 41.56% 10.01% 4.16%
Short"Term Debt 15,500 .83 7.54 .06
Preferred Stock 31,530 1.68 7.13 .12
Common Equity 1,049,517 55.93 11.99 6.71
Total 11.05%
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While all other figures in the table appear to be actual costs, the 11.99% "cost" for "common equity" 3 or common stock is artificial, rendering artificial as well the 6.71% "weighted cost" of that element and the resulting total of 11.05%, or the rate of The artificial figure of 11.99% was derived from the testimony of witnesses who explained their various expert opinions of what a "reasonable return" would be. According to their opinions, a "reasonable return" ranged from 10.54% to 15.0%. Three witnesses buttressed or explained their opinions by referring to the "double leverage" method of estimating the "cost of capital" for a utility corporation when, as here, its common stock is owned entirely by another corporation. That method simply imputes to the utility a cost of "common equity" equal to the parent corporation's total weighted cost of capital, based on an assumption...
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