Public Utility Com'n of Texas v. Houston Lighting and Power Co.

• Decision Date: 02 July 1986
• Docket Number: No. 14,354,14,354
• Citation: 715 S.W.2d 98
• Parties: PUBLIC UTILITY COMMISSION OF TEXAS, Appellant, v. HOUSTON LIGHTING AND POWER COMPANY, et al., Appellees.
• Court: Texas Court of Appeals

Page 98

715 S.W.2d 98

PUBLIC UTILITY COMMISSION OF TEXAS, Appellant, v. HOUSTON LIGHTING AND POWER COMPANY, et al., Appellees.

No. 14,354.

Court of Appeals of Texas,

Austin.

July 2, 1986.

Rehearing Denied Aug. 13, 1986.

Jim Mattox, Atty. Gen., Fernando Rodriguez, Asst. Atty. Gen., Austin, for appellant.

Robert J. Hearon, Jr., Austin, for Houston Lighting and Power Co.

Jefferson D. Giller, Houston, for Dow Chemical Co.

Before SHANNON, C.J., and GAMMAGE and CARROLL, JJ.

ON MOTION FOR REHEARING

CARROLL, Justice.

The prior opinion of this Court is withdrawn and the following is substituted therefore.

The Public Utility Commission appeals from a district court judgment reversing and remanding portions of a Commission rate order. The Commission also appeals from an order of the district court remanding a portion of the rate order as it pertains to Dow Chemical Company's assertions of rate discrimination. Houston Lighting & Power and Dow are appellees. We will modify and affirm the judgment of the district court.

THE CONTROVERSY

This cause is an administrative appeal of the Commission's order in response to an application by HL & P for a rate increase in 1982. After a two month hearing, the Commission concluded that a 16.85% return on equity was reasonable for HL & P. As set forth in the Commission's final order, this return was reasonable only under circumstances of efficient management. Because the Commission found that HL & P management acted imprudently on numerous occasions, it penalized HL & P by lowering its return on equity from 16.85% to 16.35%. Most of the testimony in the rate hearing focused on HL & P's participation in two nuclear power ventures: the Allen's Creek Nuclear Project (ACNP) and the South Texas Nuclear Project (STNP). Broadly summarized, the Commission found that HL & P was responsible for numerous delays and cost overruns in the construction of the STNP venture, and was imprudent in not cancelling the ACNP venture by January 1, 1980. These conclusions form the basis for imposing the rate penalty.

The district court concluded that the Commission had no statutory authority to impose a penalty on a utility's rate of return. The district court also rendered judgment overruling portions of the Commission's order as it related to the recovery of ACNP cancellation costs, the treatment of tax benefits associated with $166 million in disallowed ACNP expenditures, and the allocation of the Brown & Root litigation expenses and any potential recovery by HL & P in that lawsuit. Finally, the district court remanded a portion of the cause to the Commission for specific findings as to rate discrimination against Dow. In all other respects, the Commission's final order was affirmed.

The Commission contends that the district court erred: (1) in holding that the Commission could not reduce a public utility's return on equity as a penalty for mismanagement; (2) in remanding the cause to the Commission so that HL & P could develop and potentially recover ACNP cancellation costs; (3) in its allocation of tax benefits arising from the cancellation of the ACNP; (4) in its allocation of Brown & Root litigation expenses and any potential recovery; and (5) in remanding the Dow portion of the appeal to the Commission for specific findings on rate discrimination.

THE RATE PENALTY

In its first point of error, the Commission attacks the district court's conclusion that no statutory authority exists for penalizing a utility for mismanagement by reducing its rate of return on equity. The Commission argues that the Public Utility Regulatory Act (PURA) impliedly authorizes the Commission to impose rate penalties for poor management. See generally 1975 A district court may overturn a Commission order that exceeds the Commission's statutory authority and prejudices substantial rights of the utility. Gage v. Railroad Com'n of Texas, 582 S.W.2d 410 (Tex.1979). Moreover, Texas courts are reluctant to imply authority in administrative agencies. Railroad Com'n of Texas v. Atchison, Topeka and Santa Fe Railroad, 609 S.W.2d 641 (Tex.Civ.App.1980, writ ref'd n.r.e.). To determine whether agency action exceeds its statutory authority, we must compare the claimed excessive action with the pertinent statutory authority. Railroad Com'n of Texas v. Graford Oil Corp., 557 S.W.2d 946 (Tex.1977). Pertinent to our inquiry are §§ 39 and 40(a) of PURA which in 1982 provided:

                Tex.  Gen. Laws, ch. 721, §§ 1-92, at 2327, as amended to 1982. 1  PURA §§ 39 and 40 provide the Commission with a set of guidelines for computing a reasonable rate of return for a utility.  These provisions direct the Commission to function as a substitute for competitive market forces.  The Commission stresses that in a competitive market, a poorly managed company typically realizes a lower profit.  The Commission contends that it must have the authority to create this result artificially by imposing rate penalties
                

Sec. 39. In fixing the rates of a public utility the regulatory authority shall fix its overall revenues at a level which will permit such utility to recover its operating expenses together with a reasonable return on its investment. (Emphasis added).

Sec. 40(a). The regulatory authority shall not prescribe any rate which will yield more than a fair return upon the adjusted value of the invested capital used and useful and rendering service to the public.

At the outset, we agree that managerial competence and efficiency may be valid factors in the computation of a rate of return. A recent amendment to § 39 of PURA expressly provides that the Commission may now consider efficiency and competence in its computations. Nonetheless, the question remains whether §§ 39 and 40(a) grant the Commission authority to lower a rate of return it expressly finds to be reasonable, as a penalty for mismanagement.

The Commission argues that its authority is not limited by the express language in PURA. Indeed, as a general rule, administrative agencies are creatures of the Legislature and possess those powers expressly granted to them by statute, together with those necessarily implied from the authority conferred. Stauffer v. City of San Antonio, 162 Tex. 13, 344 S.W.2d 158 (1961).

In support of this proposition for the instant appeal, the Commission relies on City of El Paso v. P.U.C. of Texas, 609 S.W.2d 574 (Tex.Civ.App.1980, no writ). In that case, the City of El Paso challenged the Commission's grant of a "Capital Transition Allowance" to a utility because PURA did not expressly provide for such an allowance. The Court determined that the "Commission clearly had the power to grant the Capital Transition Allowance as it merely provides a return on certain construction work in progress...." City of El Paso, 609 S.W.2d at 577.

The holding in City of El Paso provides no authority for assessing a rate of return penalty. The "Capital Transition Allowance" was in effect a part of the reasonable rate of return, separately calculated by the Commission. Although §§ 39 and 40 do not provide for such an allowance, the court had no difficulty in concluding that the Commission had the power to express a part of a reasonable rate of return Moreover, we can not reasonably equate the situation presented in City of El Paso with the instant cause. The power to permit an allowance differs vastly from the immense penalty power the Commission now claims. Although the amended PURA now provides that managerial competence and efficiency may be valid factors in computing a reasonable rate of return, there is no language in § 39, § 40 or any other section in PURA which would provide support for levying a rate penalty. As a result, we cannot necessarily imply from §§ 39 and 40(a) authority to impose a rate penalty for utility mismanagement.

                in this fashion.  Indeed, this power is necessarily implied from the Commission's general rate making authority.   See Southern Pacific Transportation Co. v. Railroad Com'n of Texas, 592 S.W.2d 74 (Tex.Civ.App.1979, writ ref'd n.r.e.)
                

The Commission also argues that Railroad Commission v. Entex, Inc., 599 S.W.2d 292 (Tex.1980) offers support for imposing a rate penalty. In that case, the court noted many factors that might be properly considered when setting a reasonable rate of return. The Commission particularly directs our attention to "the need to provide an incentive for exploration or increased reserves." Id. at 295. This language represents nothing more than one factor the Railroad Commission might consider in determining a rate of return. We cannot fairly and reasonably treat the recognition of one factor that might be considered in determining a rate of return as authority for implying a power to impose a penalty.

Admittedly, some jurisdictions allow the imposition of a rate penalty on a public utility. See State of North Carolina ex. rel. Utilities Commission v. General Telephone of the Southeast, 208 S.E.2d 681, 285 N.C. 671 (1974); Re General Telephone of California, 37 Pub.Util.Rep.4th 127 (Cal. PUC, 1980). These and other cases cited by the Commission are readily distinguishable. They focus on a utility's failure to provide adequate service to ratepayers over an extended period, which is used to justify the imposition of a rate penalty. In the instant appeal, there are no findings of poor service to ratepayers.

The violations and enforcement provisions of PURA further illustrate that no implied authorization exists for imposing a rate penalty. See Tex.Rev.Civ.Stat.Ann. art. 1446c, §§ 71-77 (1980 and as amended to 1982). These sections provide for the imposition of fines for violations of PURA, Commission rules, regulations or orders. The Commission must first petition the Attorney General to invoke these measures. The Attorney General then brings an action on behalf of the Commission in district court against the utility. The fines imposed range from $1,000 to $5,000 for a violation. After review of the detailed...