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Texas Coast Utilities Coalition v. Railroad Commission of Texas

Supreme Court of Texas

January 17, 2014

Texas Coast Utilities Coalition, Petitioner,
Railroad Commission of Texas and Centerpoint Energy Resources Corp. D/B/A Centerpoint Energy Entex and Centerpoint Energy Texas Gas, Respondents

Argued September 10, 2013.

On Petition for Review from the Court of Appeals for the third District of Texas.



The sole issue in this appeal is whether the Railroad Commission of Texas had authority to adopt a gas utility rate schedule that provided for automatic annual adjustments based on increases or decreases in the utility's cost of service. We agree with the court of appeals that the Commission acted within its authority, and affirm.

I. Background

CenterPoint Energy Resources Corporation is a gas utility[1] that distributes natural gas to customers located within the Texas Coast Division.[2] In 2008, CenterPoint filed a "statement of intent" to raise its rates with each of the Division's forty-seven municipalities, which have original jurisdiction to set rates within their respective boundaries, and with the Commission, which has original jurisdiction to set rates in the Division's areas that are not within any municipal boundaries.[3]Thirty-eight of the municipalities approved the proposed rate schedule, but the remaining nine cities[4]denied it. CenterPoint appealed the denials to the Commission, which consolidated the appeals with its own related case covering the areas outside of municipal boundaries. The nine cities formed the Texas Coast Utilities Coalition, through which they jointly appeared in the consolidated rate case. A group of state agencies that are CenterPoint customers also intervened, joining the Coalition's opposition to the proposed rate increase. After a three-day contested case hearing, the Commission rejected some aspects of the proposed rate schedule and accepted others, ultimately approving a rate increase to allow CenterPoint to generate $1.2 million in additional annual revenue, but not the $2.9 million that CenterPoint had proposed.

CenterPoint's proposed rate schedule included a "cost of service adjustment" (COSA) clause, which permitted the rate to increase or decrease annually without the necessity of an additional full rate case. The Commission concluded that CenterPoint's original proposed COSA clause was "not reasonable, " but accepted a revised COSA clause as part of the final rate schedule. Under the revised COSA clause, the amount of the annual adjustment is calculated by adding the amounts of CenterPoint's operating expenses, return on investment, and Texas franchise tax liability from the preceding calendar year, subtracting the amount of CenterPoint's non-gas and other revenues, and then dividing the result by the Texas franchise tax statutory rate.[5] The quotient is then converted to a per-customer adjustment by dividing it by the average number of customers in each customer class (residential customers, general service-small volume customers, and general service-large volume customers). CenterPoint then divides the amount of the per-customer adjustment by twelve and either adds the result to or subtracts it from each customer's monthly gas bill. Any resulting increase or decrease, however, is capped at 5% of the customer charge that was in effect at the end of the preceding calendar year.

To effectuate the annual adjustment, the COSA clause requires CenterPoint to file with the Commission and each affected municipality, by May 1 of each year, sworn statements and schedules containing the information necessary to calculate the adjustments to be applied to customer bills on or after August 1 of that year. The Commission and municipalities would thus have at least ninety days to review and object to the schedules and proposed adjustments, and CenterPoint must reimburse "their reasonable expenses for such review in an aggregate amount not to exceed $100, 000." Meanwhile, within forty-five days after filing the schedules, CenterPoint is required to publish a notice of the proposed adjustments in the Houston Chronicle describing the proposed rate revision, the effect that the revision is expected to have on each customer class and on average customer bills within that class, the service areas where the adjustments will apply, and the means by which customers can obtain additional information.

The COSA clause includes several provisions intended to ensure that the Commission and municipalities retain the ability to review and object to the automatic adjustments. First, the clause provides that the Commission and any municipality that objects to the adjustment by the end of the ninety-day review period can "take action to deny such adjustment, and [CenterPoint] shall have the right to appeal" the denial. Second, the clause provided that the COSA is effective only for an initial implementation period of three years, after which CenterPoint, the Commission, or an affected municipality can object to its renewal.[6] Third, the clause provides that it "does not limit the legal rights and duties" of the Commission or any municipality, and "[n]othing herein shall abrogate the jurisdiction of [the Commission or a municipality] to initiate a proceeding at any time to review whether rates charged are just and reasonable." Finally, the clause provides that its provisions "are to be implemented in harmony with the Gas Utility Regulatory Act."

In its final order approving the new rate schedule, the Commission expressly found that "it is reasonable to allow CenterPoint to implement the revised cost of service adjustment clause." In support of this finding, the Commission found that, under the COSA clause, the Commission and municipalities can "examine the prudence of additions made to rate base as part of the annual COSA filing, " will "ultimately determine[] the reasonableness and necessity of expenses to be recovered in the COSA, " are permitted to "conduct a hearing on the COSA filing, " and can "grant in part and deny in part the utility's request to implement a COSA adjustment." In its conclusions of law, the Commission determined that approval of a COSA tariff "lies within the Commission's jurisdiction, . . does not conflict with the rate-setting provisions of [the Gas Utility Regulatory Act], . . . [and] does not prevent a utility or a regulatory authority from exercising the statutory right to initiate a rate case."

The Coalition and the state agencies that had intervened filed this action for judicial review of the Commission's order, challenging the Commission's authority to adopt the COSA clause as part of CenterPoint's rate schedule.[7] The district court held that the Commission "did not have statutory authority" to adopt the COSA clause and remanded the matter to the Commission. The Commission and CenterPoint appealed, and the Austin Court of Appeals reversed, concluding that the Commission did not exceed its statutory authority. See R.R. Comm'n of Tex. v. Tex. Coast Utils. Coal., 357 S.W.3d 731 (Tex. App.—Austin 2011, pet. granted). The Coalition and the state agencies petitioned this Court for review, which we granted.

II. Statutory and Regulatory Framework

The Coalition and state agencies raise both procedural and jurisdictional challenges to the Commission's authority to adopt the COSA clause. Before addressing their specific arguments, we will provide context to the issues by briefly addressing the source of the Commission's authority, the purpose of the Gas Utility Regulatory Act, the jurisdiction that Act grants to the Commission and to municipalities, the procedures that they must follow when approving rates, the substantive requirements that those rates must meet, and the Commission's historical practices and rules relating to COSA clauses.

A. The Source of Commission Authority

Although the Texas Constitution specifically mentions the Railroad Commission, see Tex. Const. art. XVI sec. 30(b), it does not create the agency but instead merely authorizes the Legislature to do so. City of Denison v. Mun. Gas Co., 3 S.W.2d 794, 798 (Tex. 1928). Based on this constitutional authority, the Legislature has established the Commission through chapter 81 of the Natural Resources Code. Tex. Nat. Res. Code §§ 81.001–.156. As a statutorily created body, the Commission has no inherent authority, and instead has only the authority that the Legislature confers upon it. Pub. Util. Comm'n of Tex. v. City Pub. Serv. Bd. of San Antonio, 53 S.W.3d 310, 315 (Tex. 2001). Its authority includes the powers that a statute expressly grants (express authority) and also the powers "reasonably necessary to carry out the express responsibilities given to it by the Legislature" (implied authority). Id. But "reasonably necessary" does not mean merely "expedient." The Commission "may not . . . exercise what is effectively a new power, or a power contradictory to the statute, " even if it "is expedient for administrative purposes." Id. at 316; see also Pub. Util. Comm'n of Tex. v. GTE-SW., Inc., 901 S.W.2d 401, 407 (Tex. 1995).

B. The Express Purpose of GURA

One statute through which the Legislature has granted authority to the Commission is the Gas Utility Regulation Act (GURA). Tex. Util. Code §§ 101.001–105.051. Through GURA, Texas "to date has continued to impose a comprehensive regime of traditional rate regulation on gas utilities." CenterPoint Energy Entex v. R.R. Comm'n of Tex., 208 S.W.3d 608, 616 (Tex. App.—Austin 2006, pet. dism'd). As a result, gas utilities in Texas "are by definition monopolies in the areas they serve" and are thus immune from "the normal forces of competition that regulate prices" in the open market. Tex. Util. Code § 101.002(b). To protect the public from harms often associated with monopolies, the Legislature enacted GURA to authorize governmental entities to act "as a substitute for competition." Id. The express purpose of GURA is to "establish a comprehensive and adequate regulatory system for gas utilities to assure rates, operations, and services that are just and reasonable to the consumers and to the utilities." Id. § 101.002(a). The Legislature has instructed courts to construe GURA "liberally to promote the effectiveness and efficiency of regulation of gas utilities, " except to the extent a liberal construction would render the statute invalid. Id. § 101.007.

C. Regulatory Jurisdiction Under GURA

In GURA, the Legislature broadly granted the Commission "all the authority and power of this state to ensure compliance with the obligations of gas utilities in this subtitle." Id. § 104.001(a). Regarding the utilities' "rates and services, " however, GURA grants authority to municipalities as well as to the Commission. Specifically, municipalities have exclusive original jurisdiction over the rates and services of gas utilities that distribute gas within their municipal boundaries, id. § 103.001, while the Commission has exclusive original jurisdiction over rates and services in areas that are near municipalities but outside of municipal boundaries, commonly referred to as the "environs." Id. § 102.001(a)(1).[8] GURA expressly authorizes municipalities and the Commission (which it refers to collectively as "regulatory authorities, " see id. § 101.003(13)) to "establish and regulate" rates within their respective jurisdictions. Id. § 104.001(b). The municipalities' original jurisdiction, however, is subject to the Commission's jurisdiction over appeals from the municipalities' rate orders. Id. &s ...

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