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Southwestern Public Service Co. v. Public Utility Commission of Texas

Court of Appeals of Texas, Seventh District, Amarillo

April 26, 2018

SOUTHWESTERN PUBLIC SERVICE COMPANY, APPELLANT
v.
PUBLIC UTILITY COMMISSION OF TEXAS, APPELLEE

          On Appeal from the 345th District Court Travis County, Texas [1] Trial Court No. D-1-GN-16-001675, Honorable Scott H. Jenkins, Presiding

          Before QUINN, C.J., and PIRTLE and PARKER, JJ.

          MEMORANDUM OPINION

          Judy C. Parker Justice

         Reviewing courts are to defer to statutory interpretations made by the regulatory agency tasked with a statute's enforcement. This is a case in which the Public Utility Commission of Texas altered the proposal for decision entered by the administrative law judges (ALJs) that initially heard the case. Applicable statutes make clear that the Commission is authorized to alter the ALJs' proposal for decision if such alteration is supported by substantial evidence. Appellant, Southwestern Public Service Company (SPS), contends that the Commission's alteration of the ALJs' proposal was in violation of its statutory authority to make such changes. Given the deference afforded the Commission's statutory interpretation, we conclude that the Commission acted appropriately in altering the ALJs' proposal and we affirm the trial court's judgment.

         Factual and Procedural Background

         SPS is a vertically integrated electric utility that serves retail customers in Texas and New Mexico, and wholesale customers in both states. Because SPS is a government-sanctioned monopoly in its service area, the Commission is tasked with ensuring that its rates are just and reasonable as a substitute for competition.[2]

         SPS requested Commission approval to increase the rate it charged in the Texas retail market. Initially, SPS requested an increase of $64.75 million but, subsequently, lowered its request to $42.07 million. After an evidentiary hearing, three ALJs issued a proposal for decision recommending a $14.4 million annual increase in SPS's Texas retail revenue requirement. The Commission modified the ALJs' proposal for decision, including rejecting use of SPS's actual capital structure, denying recovery of expenses related to SPS's annual incentive compensation program, and disallowing a post-test-year adjustment to the test year jurisdictional allocation based on a decrease in sales in SPS's wholesale market.

          Following the Commission's decision, SPS filed a suit for judicial review. The district court affirmed the Commission's order in all respects. SPS timely appealed. By its appeal, SPS presents three issues. By its first issue, SPS contends that the Commission erred by altering the ALJs' recommendation regarding SPS's capital structure. SPS contends, by its second issue, that the Commission erred in disallowing half of its annual incentive compensation expense based on the program having a financially based "affordability trigger." Finally, SPS contends that the Commission erred by rejecting SPS's proposed "known and measurable" adjustment to its jurisdictional allocation based on a post-test-year decrease in sales in its wholesale market.

         Standard of Review

         In assessing the scope of an agency's authority, we must give serious consideration to the contemporaneous construction of a statute by the administrative agency charged with its enforcement. Sergeant Enters., Inc. v. Strayhorn, 112 S.W.3d 241, 246 (Tex. App.-Austin 2003, no pet.) (citing Tarrant Appraisal Dist. v. Moore, 845 S.W.2d 820, 823 (Tex. 1993)). This is so because the legislature intends that an agency created to centralize expertise in a certain regulatory area be given a great degree of discretion in the methods it uses to accomplish its regulatory function. Id. "If the agency's interpretation is consistent with the language and the purposes of the statute, the court will accept it, even if other more reasonable interpretations exist." Anderson-Clayton Bros. Funeral Home, Inc. v. Strayhorn, 149 S.W.3d 166, 178 (Tex. App.-Austin 2004, pet. denied). However, we do not grant complete discretion to the agency charged with regulating a particular area.

          Any party to a proceeding before the Commission is entitled to judicial review under the substantial evidence rule. Tex. Util. Code Ann. § 15.001 (West 2016). In reviewing a case decided under the substantial evidence rule, "a court may not substitute its judgment for the judgment of the state agency on the weight of the evidence on questions committed to agency discretion . . . ." Tex. Gov't Code Ann. § 2001.174 (West 2016). Under the substantial evidence standard, the reviewing court must determine whether, after considering the totality of the evidence, reasonable minds could have reached the same conclusion that the agency reached in the disputed action. Coal. for Long Point Pres. v. Tex. Comm'n on Envtl. Quality, 106 S.W.3d 363, 366 (Tex. App.- Austin 2003, pet. denied). The reviewing court may not substitute its judgment for that of the agency and must limit its review to the evidence upon which the agency based its decision. Id. The reviewing court is not tasked with determining whether the agency made the right decision, but rather whether there is some reasonable basis in the record for the agency's action. Id. at 367. We begin with the presumption that the agency's findings, inferences, conclusions, and decisions are supported by substantial evidence, and the burden of proving otherwise is on the contestant. Id.

         "An agency's decision is arbitrary or results from an abuse of discretion if the agency: (1) failed to consider a factor the legislature directs it to consider; (2) considers an irrelevant factor; or (3) weighs only relevant factors that the legislature directs it to consider but still reaches a completely unreasonable result." City of El Paso v. Pub. Util. Comm'n of Tex., 883 S.W.2d 179, 184 (Tex. 1994). In addition, if the agency fails to follow the clear, unambiguous language of its own regulation, it acts arbitrarily and capriciously. Pub. Util. Comm'n of Tex. v. Gulf States Utils. Co., 809 S.W.2d 201, 207 (Tex. 1991).

         Capital Structure

         By its first issue, SPS contends that the Commission erred by adopting a hypothetical capital structure rather than SPS's actual capital structure. According to SPS, the Commission committed legal error by adopting a new policy without following proper procedure, and by failing to comply with the statutory requirements for ...


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