Reliant Energy v. Public Utility Com'n

• Decision Date: 06 February 2003
• Docket Number: No. 03-02-00001-CV.,03-02-00001-CV.
• Citation: 101 S.W.3d 129
• Parties: RELIANT ENERGY, INCORPORATED and American Electric Power Company, Appellants, v. PUBLIC UTILITY COMMISSION OF TEXAS, Appellee.
• Court: Texas Court of Appeals

101 S.W.3d 129

RELIANT ENERGY, INCORPORATED and American Electric Power Company, Appellants, v. PUBLIC UTILITY COMMISSION OF TEXAS, Appellee.

No. 03-02-00001-CV.

Court of Appeals of Texas, Austin.

February 6, 2003.

As Modified on Grant of Rehearing in part March 20, 2003.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Ron Moss, Robert J. Hearon, Jr., Graves, Dougherty, Hearon & Moody, Austin, for Reliant Energy, Incorporated.

Chris Reeder, Carroll & Gross, LLP, Austin, for Alliance for Retail Markets.

Thomas Brocato, Office of Public Utility Counsel, and Kristen Pauling Doyle, Lloyd, Gosselink, Blevins, Rochelle, Baldwin & Townsend, PC, Austin, for Office of Public Utility Counsel.

John F. Williams, Dane McKaughan, Clark, Thomas & Winters, P.C., Austin, for American Electric Power Company.

Steven Baron, Asst. Atty. Gen., Austin, for Public Utility Commission of Texas.

Jonathan S. Day, Lino Mendiola, III, Karen P. Whitt, Andrews & Kurth, Mayor, Day, Caldwell & Keeton, L.L.P., Houston, for Texas Industrial Energy Consumers.

Amalija J. Hodgins, Bryan L. Baker, Asst. Attys. Gen., Austin, for The State of Texas.

Before Justices KIDD, B.A. SMITH and YEAKE L.

OPINION

BEA ANN SMITH, Justice.

In this direct appeal, we must determine whether the Public Utility Commission erred in promulgating a rule governing stranded-cost recovery for formerly regulated electric utilities. See Tex. Util. Code Ann. § 39.001(e), (f) (West Supp. 2003). Stranded costs represent prudently incurred expenditures made by the utilities during regulation — previously recoverable over time through regulated rates — that have become unrecoverable in a deregulated market. Utilities are permitted to recover their stranded costs as part of the transition to competition in Texas. Reliant Energy, Incorporated and American Electric Power Company ("AEP") argue that the Public Utility Commission¹ exceeded its authority by promulgating portions of substantive rule 25.263, which governs the proceeding where the Commission is to determine whether a utility actually has stranded costs and to reconcile a utility's actual stranded costs with amounts already recovered based on previous estimates. We hold that the Commission exceeded its authority in promulgating some of the challenged portions of its rule and reverse and remand those portions to the Commission for further proceedings in accordance with this opinion. See Tex. Util.Code Ann. § 39.001(f). We affirm the remaining portions of the rule as enacted. See id.

BACKGROUND

In 1975, the legislature enacted the Public Utility Regulatory Act (PURA) creating the Public Utility Commission and establishing a comprehensive regulatory regime for electric utilities. At that time, it was thought that electric utilities were natural monopolies, immune from the normal forces of competition. Under the regulatory regime created by PURA, each utility was allowed to operate as a monopoly in the area it served but was prohibited from charging monopoly prices. The Commission was authorized to set rates for each utility at a level that would allow it to recoup its prudently incurred costs and to earn a reasonable return on its investments.² See 16 Tex. Admin. Code §§ 25.231, .235(a) (2002); see also Central Power & Light Co. v. Public Util. Comm'n, 36 S.W.3d 547, 553 (Tex.App.-Austin 2000, pet. denied) (describing utility ratemaking procedure under regulation).

When the legislature enacted PURA most electric utilities were large vertically integrated companies that produced, transported, and retailed electricity. In truth, only one component of a vertically integrated electric utility immunizes it from the normal forces of competition — its transmission and distribution infrastructure. Recognizing this, the legislature amended PURA in 1999 and partially deregulated the industry. Among its "policies and purposes," the legislature found that:

[T]he 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.

Tex. Util.Code Ann. § 39.001(a) (West Supp.2003).

Chapter thirty-nine of PURA governs the restructuring of the electric-utility industry. As of January 1, 2000, each privately owned electric utility was required to "unbundle" or separate into the following entities: a power generation company, a retail electric provider, and a transmission and distribution utility. See id. § 39.051(b) (West Supp.2003). The former vertically integrated utilities can now operate as holding companies that own affiliated unbundled entities. See id. § 39.051(c) (West Supp.2003). Under deregulation, the power generation and retail markets are to be governed by "customer choices and the normal forces of competition," while the Commission is to continue to regulate transmission and distribution utilities. See id. § 39.001(a). The Commission is also charged with facilitating stranded-cost recovery for the formerly regulated utilities. See id.

Chapter thirty-nine defines stranded costs as "the positive excess of the net book value of generation assets over the market value of those assets...." See id. § 39.251(7) (West Supp.2003). The basic concept of stranded costs is straightforward. Under regulation, a utility could recover over time its prudently incurred costs of acquiring power-generation assets through rates approved by the Commission and paid by captive customers. See Central Power & Light Co., 36 S.W.3d at 552-53. The Commission facilitated this cost recovery by incorporating depreciation expenses into approved rates. See id. at 553. But in a deregulated environment, it was thought that competition might drive rates to levels so low that a formerly regulated utility would be unable to recoup its investments. Stranded costs represent that portion of the net book value of a utility's generation assets not yet recovered through depreciation that has become unrecoverable in a deregulated environment. See City of Corpus Christi v. Public Util. Comm'n, 51 S.W.3d 231, 237-38 (Tex.2001); Tex. Util.Code Ann. § 39.251(7).

Chapter thirty-nine sets out a three-stage program for the recovery of stranded costs. In the first stage, from September 1999 to December 2001, the Commission froze retail electric rates. See Tex. Util.Code Ann. §§ 39.052(a), .254-.256 (West Supp.2003). During this stage, utilities identified as having probable stranded costs³ were required to "mitigate" them through various measures intended to reduce the book value of their generation assets. See id. They could shift depreciation from transmission and distribution assets to generation assets, id. § 39.256; they could keep earnings in excess of the allowed rate of return, id. § 39.254. These utilities were also allowed to "securitize" a portion of their estimated stranded costs by selling transition bonds and using the proceeds to reduce the book value of their generation assets. See id. §§ 39.301-.313 (West Supp.2003). The costs of issuing and servicing transition bonds are borne by all retail customers in a utility's service area through a nonbypassable "transition charge." See id. §§ 39.302(7), .303(b), (c); City of Corpus Christi, 51 S.W.3d at 239. Because the Commission estimated in 1998 that the appellant utilities would have significant stranded costs in a deregulated environment, each utility used the available mitigation procedures and securitization to reduce the book value of their generation assets during this stage of PURA's stranded-cost recovery program⁴ The second stage began on January 1, 2002, the first day of competition. See Tex. Util.Code Ann. §§ 39.001(b)(1), .201 (West Supp.2003). During this stage, the Commission was authorized to set a nonbypassable "competition transition charge" to allow utilities to recover any stranded costs remaining after the mitigation procedures and securitization utilized in stage one. See generally id. § 39.201. Any competition transition charge was to be included in the tariffs of a utility's affiliated unbundled transmission and distribution utility. See id. § 39.201(b)(3). In determining whether to set such a charge, the Commission was required to revise its previous stranded-cost estimates using "updated company-specific inputs." See id. § 39.201(h).

In preparation for the rate hearings for the transmission and distribution utilities to be held in 2001, the stranded cost estimates were updated. The Commission's updated estimates unexpectedly reflected that the utilities would have no stranded costs.⁵ A substantial increase in natural gas prices in 2000 had driven the market value of the utilities' generation assets well above their book value. These new estimates therefore indicated that some utilities had been overcompensated by their earlier mitigation procedures and securitization.

In light of these revised estimates, the Commission issued orders requiring the utilities to discontinue all mitigation efforts, to reassign the depreciation transferred from transmission and distribution assets back to those assets, and to return monthly "excess mitigation credits" to retail providers and their ratepayers. The Commission did not, however, require the utilities to refund the amounts they had received from selling transition bonds, and by statute it could not alter the transition charge that had been imposed on ratepayers to service the bonds. See id. § 39.303(d) (Transition charge authorized in financing order is "irrevocable and not subject to reduction, impairment, or adjustment by further action of the commission...."). Utilities that had sold transition bonds to recover stranded costs no longer anticipated would seem to have received a windfall at the ratepayers'...