Txu Generation Co. v. Public Utility Com'n

• Decision Date: 19 May 2005
• Docket Number: No. 03-04-00148-CV.,03-04-00148-CV.
• Citation: 165 S.W.3d 821
• Parties: TXU GENERATION COMPANY, L.P.; TXU Portfolio Management Company, L.P.; Oncor Electric Delivery Company; Coalition of Wholesale Electric Market Participants; Occidental Chemical Corporation; Occidental Permian, Ltd.; Occidental Power Marketing, L.P.; Occidental Power Services, Inc.; Oxy Vinyls, L.P.; Ingleside Cogeneration, L.P.; and Coral Power, L.L.C., Appellants, v. PUBLIC UTILITY COMMISSION OF TEXAS, Appellee.
• Court: Texas Supreme Court

165 S.W.3d 821

TXU GENERATION COMPANY, L.P.; TXU Portfolio Management Company, L.P.; Oncor Electric Delivery Company; Coalition of Wholesale Electric Market Participants; Occidental Chemical Corporation; Occidental Permian, Ltd.; Occidental Power Marketing, L.P.; Occidental Power Services, Inc.; Oxy Vinyls, L.P.; Ingleside Cogeneration, L.P.; and Coral Power, L.L.C., Appellants, v.PUBLIC UTILITY COMMISSION OF TEXAS, Appellee.

No. 03-04-00148-CV.

Court of Appeals of Texas, Austin.

May 19, 2005.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Chris Reeder, Carroll, Gross, Reeder and Drews, L.L.P., Austin, for Coaltion.

Richard P. Noland, James M. Bushee, Sutherland, Asbill & Brennan, LLP, Austin, for Occidental, Oxy & Ingleside.

Robert M. Fillmore, W. Stephen Cockerham, William Moore, Hunton & Williams, Dallas, David C. Duggins, Clark, Thomas & Winters, PC, Austin, for TXU.

Nathan M. Bigbee, Steven Baron, John R. Hulme, Elizabeth R. B. Sterling, Asst. Atty's, Gen., Nat. Res. Div., Austin, for P.U.C.

Robert A. Rima, Law Office of Robert A. Rima, Austin, for Coral Power.

Robert J. Hearon Jr., Ron H. Moss, Mary A. Keeney, Graves, Dougherty, Hearon & Moody, PC, Austin, Scott E. Rozzell, George Schalles, CenterPoint Energy, Inc., Houston, for Int.

Before Chief Justice LAW, Justices B.A. SMITH and PEMBERTON.

OPINION

BEA ANN SMITH, Justice.

In this direct appeal, we consider a challenge to the validity of the Public Utility Commission's rule, 29 Tex. Reg. 1899(2004)(to be codified at 16 Tex. Admin. Code § 25.503(Pub.Util.Comm'n)),¹ governing its oversight of the competitive wholesale electricity market.Appellants and intervenor(collectively, "market participants")² contend that the WMO Rule (1) exceeds the Commission's statutory authority, (2) is unconstitutionally vague, (3) represents an unconstitutional TAKING, AND (4) WAS PASSED IN VIOLATION OF PROVISIONS OF THE Administrative Procedure Act (APA).We affirm the Commission's order adopting the rule.

BACKGROUND

An understanding of the structure of the electricity market in Texas is important to a proper determination of the validity of the challenged rule.The electricity market is unlike an ordinary market for goods or services because of the unique attributes of electricity.Electricity cannot be easily stored once it is generated and it relies on a complex infrastructure to deliver electric power from generators to the consumer.Because of constraints in the transmission system, electric power generated in some areas of the market may not be available for use in other locations.As we will discuss throughout this opinion, these attributes create problems that do not arise in other competitive markets.

There are three principal components to the electricity industry: "generation of power; transmission of that power on high-voltage lines over long distances; and distribution of power over shorter distances to the ultimate consumer."City Pub. Serv. Bd. of San Antonio v. Public Util. Comm'n,9 S.W.3d 868, 870(Tex.App.-Austin2000), aff'd,53 S.W.3d 310, 312(Tex.2001).The entire industry has historically been considered a natural monopoly.Reliant Energy, Inc. v. Public Util. Comm'n,101 S.W.3d 129, 133(Tex.App.-Austin2003), rev'd and remandedCenterPoint Energy, Inc. v. Public Util. Comm'n,143 S.W.3d 81(Tex.2004).More recently, in recognition that the power generation and power distribution components of the electricity industry are not monopolies warranting strict regulation, the legislature has opened the wholesale electricity markets and retail electricity market to competition and market forces.SeeTex. Util.Code Ann. § 39.001(a)(WestSupp.2004-05)(production and sale of electricity not monopoly warranting regulation of rates, operation and services).The transmission component of the industry remains closely regulated by the Commission.SeeTex. Util.Code Ann. § 35.004(West.Supp.2004-05).This aspect of the industry is administered by the independent organization Electric Reliability Council of Texas(ERCOT).³

The WMO Rule at issue applies primarily to participants in the wholesale electricity market.Both electric power and capacity are available in the wholesale market through (1) bilateral agreements and (2) the balancing energy services (BES) or ancillary services market.⁴SeeTex. Com. Energy v. TXU Energy, Inc.,2004 WL 1777597, at 2, 2004 U.S. Dist. LEXIS 13908, at *11(S.D. Tex.June 24, 2004).The unique nature of electricity presents challenges to the industry.The transmission of electric power relies on a complex transmission grid which itself needs to be balanced by either adding power or removing power from the grid.The transmission grid is kept in balance with power and capacity purchased through the BES market.Although the majority of electric power is bought and sold through bilateral contracts, retailers may purchase short term power through the BES market as well.Seeid. at 1, at *7.

In restructuring electricity markets in favor of competition, the legislature was aware that the unique nature of electricity and the industry was not wholly consistent with a fully deregulated market and the application of established antitrust principles.In recognition of this fact, the legislature decided to retain a regulatory scheme with regard to transmission services.SeeTex. Util.Code Ann. § 35.004.It allowed utilities to recover the costs of prudently incurred expenditures that were rendered unrecoverable as a result of the deregulated market.Seeid.§§ 39.251-.265(WestSupp.2004-05);Reliant Energy,101 S.W.3d at 132.Specific consumer protection provisions were added to ensure that deregulation, in fact, achieves a benefit to the consumer.Seeid.§ 39.101(WestSupp.2004-05).

Furthermore, the legislature directed the Commission to monitor and address market power abuses associated with the generation, transmission, distribution, and sale of electricity.Seeid.§ 39.157(WestSupp.2004-05).A review of the record reflects that the legislature's concerns about anticompetitive practices and manipulation in the wholesale market were well founded.

One instance of market manipulation involved power generators overscheduling the amount of power they anticipated adding to the transmission grid.This overscheduling created congestion in the grid which those same generators were then paid to relieve.The Commission became aware of this practice and eventually required participants to refund $30,000,000 obtained as a result of these improper practices.SeeTex. Com. Energy,2004 WL 1777597, at 3, 2004 U.S. Dist. LEXIS 13908, at *13.The Commission has identified the practice of "hockey stick bidding" as another example of anticompetitive manipulation of the wholesale market.This bidding process involved a pricing strategy that created short term artificial price spikes in the BES market.Seeid. at 3, at *14-15(describing February 2003 price spike in BES market).A Commission report states that this bidding practice added at least $17 million in additional cost to power used over the course of two days in February 2003.

The Commission has also given considerable attention to the conduct of market participants in the California electricity market where abusive practices resulted in power shortages and soaring prices.SeeEnron Corp. v. California ex rel. Lockyear(In re Enron Corp.), 314 B.R. 524(D.N.Y.Sept. 29, 2004)(describing manipulation of California wholesale electricity market).Against the backdrop of these abusive practices, the Commission established the WMO Rule to articulate standards that the Commission will apply in monitoring the activities of those participating in the wholesale electricity markets.See16 Tex. Admin. Code.§ 25.503(a).

The WMO Rule addresses the Commission's oversight of the wholesale market by enumerating the duties of market participants and defining prohibited activities.Seeid.§ 25.503(f), (g).The rule provides a defense to a market participant who engages in a prohibited activity if the participant demonstrates that the otherwise prohibited activity served a legitimate business purpose and that its adverse effects were not foreseeable.Seeid. at § 25.503(h).The rule defines the role of ERCOT in enforcing operating standards for market participants and establishes a process for market participants to clarify ERCOT protocols to ensure compliance.Seeid. at § 25.503(i), (j).Finally, the rule establishes record-keeping requirements for market participants and ERCOT, and details the Commission's investigation process.Seeid. at § 25.503(k), (l).The challenges raised in this direct appeal apply almost exclusively to those portions of the rule that define the duties of market participants and those activities which are prohibited.

DIRECT APPEAL

In a direct appeal of a Commission rule pursuant to section 39.001(e) of the Public Utilities RegulationAct (PURA), we are limited to reviewing the rule's validity.SeeTex. Util.Code. Ann. § 39.001(f)(WestSupp.2004-05);Office of Pub. Util. Counsel v. Public Util. Comm'n,104 S.W.3d 225, 232-33(Tex.App.-Austin 2003, no pet.), City Pub. Serv. Bd. v. Public Util. Comm'n,96 S.W.3d 355, 359(Tex.App.-Austin 2002, no pet.).A validity challenge tests a rule on procedural and constitutional grounds.City of Alvin v. Public Util. Comm'n,143 S.W.3d 872, 878(Tex.App.-Austin 2004, no pet.).A validity challenge may also question the agency's statutory authority to promulgate the rule.Id.An agency rule is presumed valid, and the challenging party bears the burden to demonstrate its invalidity.Office of Pub. Util. Counsel,104 S.W.3d at 232.In this case, the market participants raise issues concerning the statutory authority of the Commission to promulgate the WMO Rule, the constitutionality of the rule, and the procedures through which the rule was enacted.

...