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State Agencies & Institutions of Higher Education v. Railroad Comm'n of Texas

Court of Appeals of Texas, Third District, Austin

January 17, 2014

The State of Texas Agencies and Institutions of Higher Education, Atmos Texas Municipalities, City of Dallas, and Atmos Cities Steering Committee, Appellants
v.
Railroad Commission of Texas and Atmos Pipeline-Texas, Appellees

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[Copyrighted Material Omitted]

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FROM THE DISTRICT COURT OF TRAVIS COUNTY, 53RD JUDICIAL DISTRICT. NO. D-1-GV-11-001240, HONORABLE STEPHEN YELENOSKY, JUDGE PRESIDING.

For appellee: Mr. Douglas Fraser, Ms. Kellie E. Billings-Ray, Assistant Attorneys General, Environmental Protection Division, Austin, TX; Ms. Ann Marie Coffin, Mr. S. Scott Shepherd, Ms. Julie C. Parsley, Parsley Coffin Renner LLP, Austin, TX.

For appellant: Ms. Eileen McPhee, Ms. Georgia N. Crump, Mr. Geoffrey M. Gay, Lloyd, Gosselink, Rochelle & Townsend, P.C., Austin, TX; Mr. Don Knight, City of Dallas - City Attorney's Office, Dallas, TX; Mr. Alfred R. Herrera, Mr. Felipe Alonso III, Mr. Sean Farrell, Herrera & Boyle, PLLC, Austin, TX; Mr. Bryan L. Baker, Assistant Attorney General, Consumer Protection & Public Health Division, Austin, TX; Mr. Peter B. Haskel, Assistant City Attorney, Dallas, TX; Mr. Norman J. Gordon, Mr. Steven L. Hughes, Mounce, Green, Myers, Safi, Paxson & Galatzan, PC, El Paso, TX.

Before Chief Justice Jones, Justices Pemberton and Field.

OPINION

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J. Woodfin Jones, Chief Justice.

The State of Texas Agencies and Institutions of Higher Education (" the State Agencies" ), Atmos Texas Municipalities (" the Municipalities" ), the City of Dallas (" the City" ), and Atmos Cities Steering Committee (" the Steering Committee" ) appeal from a district-court judgment in a suit for judicial review of the Texas Railroad Commission's final order in a gas-utility rate case conducted under the Gas Utility Regulatory Act (GURA), Tex. Util. Code § § 101.001-105.051. The district court affirmed the Commission's final order. We will affirm the district court's judgment. See Administrative Procedure Act (APA), Tex. Gov't Code § 2001.174(1).

FACTUAL AND PROCEDURAL BACKGROUND

Atmos Pipeline-Texas (" Atmos Pipeline" ) filed a statement of intent to increase its " Rate CGS" and " Rate PT" rates. " Rate CGS" is the tariffed rate Atmos Pipeline charges for gas transportation and storage services provided to local distribution companies and other city-gate-service customers.[1] " Rate PT" is the tariffed rate Atmos Pipeline charges for interruptible transportation services provided to certain on-system industrial customers whose rates are regulated because they do not have viable competitive transportation alternatives to Atmos Pipeline.[2] Atmos Pipeline provides gas transportation

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services for both regulated and non-regulated customers. After a contested-case hearing, the Commission found that Atmos Pipeline had established that its total revenue requirement was $226,772,532.[3] The Commission also found that Atmos Pipeline established that the amount of revenue received from non-regulated customers (" Other Revenue" ) was $83,723,391.[4] Rather than allocate any costs of service to the Other Revenue customer class, Atmos Pipeline instead proposed to apply the Other Revenue it received as a credit against the total revenue requirement. The Commission found that it was just and reasonable to do so and consequently found that the adjusted revenue requirement was $143,049,141. The Commission then set Rate CGS and Rate PT at levels that would allow for recovery of that amount.

Because it derives from negotiated rates in a competitive market, the amount of Other Revenue received by Atmos Pipeline varies from year to year. In years in which Other Revenue actually received is less than the $83,723,391 received in the test year, the designated credit to the total revenue requirement, if left unchanged, would exceed the amount of Other Revenue actually received. In that event, Other Revenue plus revenue generated from the rates set by the Commission would be less than the $226,772,532 total revenue requirement established in the rate-making proceeding. Conversely, in years in which Other Revenue exceeded $83,723,391, the credit to the total revenue requirement would be less than the amount of Other Revenue actually received. Other Revenue plus revenue generated from the set rates would, in that case, amount to more than the $226,772,532 total revenue requirement. In short, deviations from the $83,723,391 test-year amount of Other Revenue would result in a credit to the total revenue requirement that would not match the actual amount of Other Revenue. Thus, an Other Revenue credit that was a fixed amount would not give ratepayers a larger credit in years in which Other Revenue exceeded the test-year amount and would result in ratepayers receiving a credit greater than the actual amount of Other Revenue in years in which that revenue stream fell below the test-year amount.[5]

To address this phenomenon and ensure that the Other Revenue credit more accurately reflects the amount of Other Revenue

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actually generated in a particular year, Atmos Pipeline proposed an adjustment mechanism that would increase the capacity-charge component of Rate CGS and Rate PT in years when Other Revenue actually received was below $83,723,391 and decrease the capacity-charge component of Rate CGS and Rate PT in years when Other Revenue actually received exceeded $83,723,391. The adjustment mechanism, applied annually, was designed so that Atmos Pipeline would collect through Rate CGS and Rate PT 75% of any downward deviation in Other Revenue from the $83,723,391 credit to the revenue requirement established in the rate-making proceeding. When Other Revenue collected exceeded the $83,723,391 level, the adjustment mechanism would require that Atmos Pipeline return to its customers 75% of any upward deviation in Other Revenue from the $83,723,291 level. The adjustment mechanism has no effect on the targeted total revenue requirement of $226,772,532 established in the rate-making proceeding. Atmos Pipeline referred to this adjustment mechanism as " Rider Rev" and described it as " a new, revenue tracking mechanism that will adjust Rate CGS and Rate PT annually for changes in the level of revenue received from [its] 'Other Revenue' customer class in the prior year." The Commission approved implementation of Rider Rev on a three-year trial basis, finding that it was a reasonable mechanism to provide an annual adjustment to Rate CGS and Rate PT for 75% of the difference between the test-year amount of Other Revenue established in the rate-making proceeding and the actual amount of Other Revenue determined on an annual basis.

After the Commission issued its order and motions for rehearing were filed, the Commission issued an order nunc pro tunc correcting some mathematical errors and denied the motions for rehearing. Subsequent motions for rehearing were overruled by operation of law, and several parties to the rate-making proceeding filed suits for judicial review in Travis County district court. See GURA § § 103.014, 105.001; APA § 2001.171. On the parties' agreed motion, the suits for judicial review were consolidated into one case. The district court affirmed the Commission's order, after which the State Agencies, the Municipalities, the City, and the Steering Committee appealed the judgment. All of the appellants challenge the Commission's approval of Rider Rev. In addition, the Municipalities challenge the Commission's return-on-equity determination; the Steering Committee challenges the Commission's decision to apply Other Revenue as a credit against the total revenue requirement rather than establishing an " Other Revenue" rate class for competitive customers; and the City challenges the Commission's finding that a 2004 merger between TXU Gas Company LP and Atmos Pipeline's parent company, Atmos Energy Corporation, was in the public interest. We will provide additional facts germane to the various points of error throughout this opinion.

DISCUSSION

Treatment of the " Other Revenue" Customer Segment

In its first issue, the Steering Committee complains that the Commission erred by applying Other Revenue generated from competitive customers' use of the system as a credit against the total revenue requirement without requiring an analysis of Atmos Pipeline's specific cost of serving those customers. According to the Steering Committee, the use of a credit--even a fluctuating credit--does not accurately reflect and apportion the cost of providing services to the unregulated customers. In the Steering Committee's view, these customers should be treated

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like the regulated customers and charged on a pure cost-of-service basis, rather than applying revenue generated from their negotiated rates as a credit against the ratepayers' revenue requirement obligation. The Steering Committee argues that the Commission's order in this regard is not supported by substantial evidence and that its conclusion is therefore arbitrary and capricious and results in the regulated customers essentially subsidizing the unregulated customers' use of the system.

We review the Commission's decision in a rate-making proceeding to determine whether it is supported by substantial evidence. CenterPoint Energy Entex v. Railroad Comm'n, 213 S.W.3d 364, 369 (Tex. App.--Austin 2006, no pet.). Under this standard we may not, with respect to questions committed to its discretion, substitute our judgment on the weight of the evidence for that of the Commission. APA § 2001.174. We must, however, reverse the Commission's order if it prejudices substantial rights because its findings, inferences, conclusions, or decisions (1) violate a constitutional or statutory provision; (2) exceed the Commission's statutory authority; (3) were made through unlawful procedure; (4) were affected by other error of law; (5) are not reasonably supported by substantial evidence considering the reliable and probative evidence in the record as a whole; or (6) are arbitrary or capricious or characterized by an abuse of discretion or a clearly unwarranted exercise of discretion. Id.

The Commission's order is presumed to be valid, and it is supported by substantial evidence if the evidence in its entirety is sufficient to allow reasonable minds to have reached the conclusion the agency must have reached to justify the disputed action. Texas State Bd. of Dental Exam'rs v. Sizemore, 759 S.W.2d 114, 116 (Tex. 1988). The evidence in the record may preponderate against the agency's decision yet still provide a reasonable basis for the decision and thereby meet the substantial-evidence standard. Texas Health Facilities Comm'n v. Charter Med.-Dallas, Inc., 665 S.W.2d 446, 452 (Tex. 1984). The party challenging the order has the burden of demonstrating a lack of substantial evidence. CenterPoint Energy Entex, 213 S.W.3d at 369 (citing City of El Paso v. Public Util. Comm'n, 883 S.W.2d 179, 185 (Tex. 1994)).

Rates set by the Commission must be " just and reasonable," " sufficient, equitable, and consistent in application to each class of customer," and not " unreasonably preferential, prejudicial, or discriminatory." GURA § 104.003(a). The supreme court has held that this type of statutory language affords an agency " discretion to determine the method of rate design," i.e., how the utility's revenue requirement is distributed among its various services. See Texas Alarm & Signal Ass'n v. Public Util. Comm'n, 603 S.W.2d 766, 768 n.2, 772 (Tex. 1980). The Commission is afforded considerable discretion regarding the factors to consider when addressing the statutory rate considerations and the weight to be given those factors. See Nucor Steel v. Public Util. Comm'n, 168 S.W.3d 260, 267-68 (Tex. App.--Austin 2005, no pet.). Rate design involves complex technical, economic, and policy decisions that are appropriate for the Commission's " informed judgment and expertise." Id. at 268.

The Steering Committee contends that some portion of the Atmos Pipeline system was constructed for, and continues to be maintained for use by, the competitive customers. It also maintains that the only way to accurately identify the true cost of service to the competitive customers is through a thorough cost-of-service study. The Steering Committee asserts

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that without such a study, it is impossible to know whether applying Other Revenue as a credit to the total revenue requirement results in a fair assessment. According to the Steering Committee, evidence that " throughput" from competitive customers has increased over time indicates that at least part of the Atmos Pipeline system is being constructed and maintained for competitive customers' use while at the same time all the capital costs have been borne by the regulated customers. The Steering Committee contends that, as a consequence, the regulated customers are required to unfairly subsidize the competitive customers.

The Commission, however, made the following findings of fact, among others:

FOF 8: The Atmos Pipeline - Texas system is designed to meet the peak-day demands of human needs [i.e., regulated] customers.
FOF 97: The fixed cost allocation as proposed in this case is just and reasonable: The system is designed to satisfy the capacity requirements of the human needs customers during peak demand; peak demand determines the amount of transmission capacity and costs incurred by the company; and, no marginal or incremental costs of capacity are incurred when additional volumes of gas are transported.

The Commission found that the plant was sized to meet the peak demands of the regulated customers and therefore those customers should be responsible for paying for all of the pipeline system's fixed costs. These findings are supported by substantial evidence. Witnesses testified that no plant capacity had ever been constructed or provided in the system for competitive customers, that the system was sized to accommodate the peak demand of the regulated customer class, and that the competitive customers were permitted to use the system only when there was available excess off-peak capacity not being used by the regulated customers. The Commission heard evidence that nearly all of the costs of the system are fixed and unrelated to the actual amount of throughput on the system and that, as a consequence, an appropriate rate structure " should reflect the primacy of fixed costs in both the cost allocation and rate design." There was evidence presented that the competitive customers' use was interruptible and could be curtailed whenever necessary to meet the capacity needs of the regulated customers. There was testimony that it was reasonable to use revenue obtained from competitive customers' use of the system as a credit to the utility's total revenue requirement to compensate for their temporary use, during off-peak periods, of capacity designed for periods of peak demand.

We conclude that the Commission, in the exercise of its discretion to weigh the factors bearing on the design of Atmos Pipeline's rates, had a reasonable basis in the record for concluding that most costs of the system were related to installing and maintaining facilities sized to meet the peak needs of the regulated, non-interruptible, customers and that it was appropriate to credit revenue received from the competitive customer's use of the system's available excess off-peak capacity against the total revenue requirement assessed to the regulated customers in their ...


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