R.R. Comm'n of Texas v. Texas Coast Utilities Coal.

• Decision Date: 21 December 2011
• Docket Number: No. 03–10–00242–CV.,03–10–00242–CV.
• Citation: 357 S.W.3d 731
• Parties: The RAILROAD COMMISSION of Texas, CenterPoint Energy Resources Corp. d/b/a CenterPoint Energy Entex and CenterPoint Energy Texas Gas, Appellants, v. TEXAS COAST UTILITIES COALITION and State of Texas Agency Consumers, Appellees.
• Court: Texas Court of Appeals

357 S.W.3d 731

The RAILROAD COMMISSION of Texas, CenterPoint Energy Resources Corp. d/b/a CenterPoint Energy Entex and CenterPoint Energy Texas Gas, Appellants,

v.TEXAS COAST UTILITIES COALITION and State of Texas Agency Consumers, Appellees.

No. 03–10–00242–CV.

Court of Appeals of Texas, Austin.

Oct. 27, 2011.Rehearing Overruled Dec. 21, 2011.

Douglas Fraser, Kellie E. Billings, Assistant Attorney General, Environmental Protection & Administrative Law Division, Marnie A. McCormick, David C. Duggins, Patrick J. Pearsall, Duggins, Wren, Mann & Romero, L.L.P., Austin, TX, for appellants.

Bryan L. Baker, Assistant Attorney General, Consumer Protection & Public Health Division, Jim G. Boyle, Felipe Alfonso, III, Alfred R. Herrera, Sean Farrell, Carrie Tournillon, Herrera & Boyle, P.L.L.C., Larry C. Buch, Office of the Attorney General of Texas, Consumer Protection & Public Health Division, Austin, TX, for appellees.

Before Chief Justice JONES, Justices PURYEAR and PEMBERTON.

OPINION

BOB PEMBERTON, Justice.

The pivotal issue in this administrative appeal is whether the Legislature's statutory delegation of authority to the Railroad Commission to regulate the “rates” of gas utilities empowers the agency to approve or impose a rate schedule that includes a mechanism for annually adjusting customer charges based on the utility's actual operating expenses, return on investment, and franchise tax payments—adjustments that would be made without the need or requirement to initiate a subsequent rate proceeding before either the Commission or any municipalities having original jurisdiction over the rates. In the view that it possesses such power, the Railroad Commission approved a new rate schedule for appellant CenterPoint Energy Resources Corp. d/b/a CenterPoint Energy Entex and CenterPoint Energy Texas Gas (CenterPoint), that contained the adjustment mechanism. Disagreeing with the Commission's view of its authority, the district court reversed the Commission's order approving CenterPoint's rate schedule. CenterPoint and the Railroad Commission appeal. We will reverse the district court's judgment.

BACKGROUND

CenterPoint is a “gas utility” within the meaning of the Gas Utility Regulatory Act (GURA). See Tex. Util.Code Ann. § 101.003(7) (West Supp.2010); see generally id. §§ 101.001–105.051 (West 2007 & Supp.2010). Under GURA, the Railroad Commission and individual municipalities share jurisdiction to regulate gas utilities, including “establish[ing] and regulat [ing] rates of a gas utility” and adopting rules for determining “the classification of customers and services” and “the applicability of rates.” Id. § 104.001(b). Municipal governing bodies are vested in the first instance with “exclusive original jurisdiction over the rates, operations, and services of a gas utility within the municipality, subject to the limitations imposed by [GURA],” though they may opt to cede this jurisdiction to the Railroad Commission. Id. §§ 102.001(a)(1)(B), 103.001, .003. In areas outside of municipal boundaries—termed the “environs”—the Railroad Commission has exclusive original jurisdiction over a gas utility's “rates and services.” See id. § 102.001(a)(1)(A); see also CenterPoint Energy Entex v. Railroad Comm'n, 213 S.W.3d 364, 367 (Tex.App.-Austin 2006, no pet.) (describing environs). GURA contemplates that the relevant “regulatory authority” exercising jurisdiction will conduct proceedings to establish gas-utility rates through application of cost-of-service ratemaking standards and principles. See Tex. Util.Code Ann. §§ 103.021, 104.051–.058; see also Railroad Comm'n v. Entex, Inc., 599 S.W.2d 292, 294 (Tex.1980) (summarizing these principles). Orders or ordinances of a municipality exercising its exclusive, original jurisdiction under GURA may be appealed to the Railroad Commission, see id. §§ 102.001(b), 103.051, and an appeal from “a rate proceeding before a municipality's governing body” is reviewed de novo and “based on the test year presented to the municipality adjusted for known changes and conditions that are measured with reasonable accuracy.” Id. §§ 103.051, .055.

The areas that CenterPoint serves in Texas include its “Texas Coast Division,” which encompasses a region sweeping generally from Montgomery County, northwest of Houston, around Houston's west and south boundaries to Galveston and Freeport. Desiring to increase its rates throughout the Division—the first such increase in more than thirty years—CenterPoint, as GURA requires, filed notices of intent to increase its rates with the governing bodies of each of the forty-seven municipalities whose boundaries lie within the Division and, with respect to the environs, with the Railroad Commission. See id. § 104.102. Thirty-eight of the forty-seven municipalities approved some version of CenterPoint's request. The nine remaining municipalities, which comprise appellee Texas Coast Utilities Coalition (TCUC), denied CenterPoint's request.¹ CenterPoint appealed each of these municipal decisions to the Railroad Commission, see id. §§ 102.001(b), 103.051, which consolidated those appeals with the pending environs proceeding. See 16 Tex. Admin. Code § 1.125 (Railroad Comm'n, Consolidation & Joint Hearings) (providing that Commission may consolidate proceedings that involve common questions of law or fact). A group of Texas state agencies and higher-education institutions that are customers of CenterPoint, appellee State of Texas Agency Consumers (the State Agencies), intervened.

Following a three-day contested-case hearing that the Commission conducted itself, the Commission rendered a final order establishing a new rate schedule for CenterPoint applicable within both the Texas Coast Division environs and the TCUC municipalities. The record reflects that the proceedings addressed the elements of cost-of-service ratemaking, including determining the amount of CenterPoint's reasonable and necessary operating expenses and its rate base, ascertaining a reasonable rate of return, and allocating payment of the required revenues among three customer classes—“Residential,” “General Service–Small,” and “General Service–Large Volume.” The Commission rejected several of CenterPoint's proposed calculations relating to its expenses and revenues and ultimately granted the utility an increase in revenues of approximately $1.2 million out of $2.9 million it had requested.

The rate schedule approved by the Railroad Commission prescribed a “monthly rate” for each of the three classes of CenterPoint customers. The monthly rate was to be the sum of three component figures or calculations. The first component was a “base rate” consisting of a flat “customer charge” plus fixed volumetric charges for each hundred cubic feet of gas consumed. These fixed charges, at least at the time the rate schedule was initially to take effect, were derived from historical test-year data, in the manner customary for cost-of-service ratemaking. The next two components of the monthly rate, unlike the fixed charges that comprised the base rate, were variable charges that provided for ongoing adjustments to reflect changes in certain of CenterPoint's actual costs. The first of these variable components, a “tax adjustment,” served to pass through to the customer the actual amounts of any municipal franchise fees imposed on CenterPoint in a given month and the customer's proportionate share of any revenue-based taxes (i.e., excluding ad valorem and income-based taxes) actually levied upon CenterPoint. The second variable component of the monthly rate was a “gas cost adjustment” that similarly functioned to pass through the utility's actual purchased-gas costs to customers. The amount of the gas-cost adjustment was to be calculated through application of a formula in a “Purchased Gas Adjustment” (PGA) tariff.

CenterPoint's PGA tariff or clause was materially similar to the PGA clause we explored at length in another case involving the utility, CenterPoint Energy Entex v. Railroad Commission, 208 S.W.3d 608, 616–17 (Tex.App.-Austin 2006, pet. dism'd). As we observed there, PGA clauses have long been widely utilized in gas-utility regulation nationwide, and their use and approval in Texas predates GURA's enactment. See id. at 613 (citing San Antonio Indep. Sch. Dist. v. City of San Antonio, 550 S.W.2d 262, 266–67 & n. 2 (Tex.1976); Railroad Comm'n v. High Plains Natural Gas Co., 613 S.W.2d 46, 48 (Tex.Civ.App.-Austin 1981, writ ref'd n.r.e.) (citing City of Chicago v. Illinois Commerce Comm'n, 13 Ill.2d 607, 150 N.E.2d 776 (1958)); Railroad Comm'n v. City of Fort Worth, 576 S.W.2d 899, 902 (Tex.Civ.App.-Austin 1979, writ ref'd n.r.e.)). These mechanisms “operate[ ] to increase or decrease the revenue of the gas company by exactly the amount of its increased or decreased costs of gas charged the gas company by its suppliers,” thereby passing on the utility's actual gas costs to customers on a dollar-for-dollar basis. Id. at 612.

One well-recognized implication of this type of rate structure is that—with the exception of fluctuations in purchased-gas costs and the costs passed through the tax adjustment—CenterPoint (or, alternatively, its customers) would bear the risk, all other things being equal, that the utility's actual revenues, expenses, etc., would prove to depart significantly from the historically-based projections from which the rates were derived, resulting in the utility “over-” or “under-recovering” relative to its actual costs and prescribed reasonable rate of return, unless and until the rates could be changed prospectively through another round of rate proceedings. See, e.g., Railroad Comm'n v. Lone Star Gas Co., 656 S.W.2d 421, 423 (Tex.1983) (describing “regulatory lag” and its effects on utilities); CenterPoint Energy Entex, 208 S.W.3d at 617 (contrasting “bifurcated regulatory treatment” of fuel costs, which are addressed through PGA clauses due to their volatility, and “most [...