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Data Foundry, Inc. v. City of Austin

Court of Appeals of Texas, Fourteenth District

April 23, 2019

DATA FOUNDRY, INC., Appellant
v.
CITY OF AUSTIN, TEXAS, Appellee

          On Appeal from the 419th District Court Travis County, Texas Trial Court Cause No. D-1-GN-17-000937

          Panel consists of Chief Justice Frost and Justices Christopher and Jewell.

          OPINION

          TRACY CHRISTOPHER JUSTICE

         The City of Austin's municipally owned utility provides retail electricity to two Austin data centers owned by appellant Data Foundry, Inc. Data Foundry sued the City over its pricing of electricity, and the trial court dismissed the suit on the ground that Data Foundry lacked standing. We conclude that Data Foundry has standing to complain that the City's retail electricity rates are excessive in that the City's alleged 12% rate of return and its 2.36 debt-service coverage ratio are claimed to be unreasonably high, and the trial court has jurisdiction to determine whether the resulting rates are unreasonable. However, the district court lacks jurisdiction over the remainder of Data Foundry's claims, as discussed below. We accordingly reverse the trial court's dismissal in part and remand the case for further proceedings consistent with this opinion.

         I. Background

         Until 2002, investor-owned utilities ("IOUs") were permitted to operate monopolies, selling the power they generated directly to municipal retail customers at rates set by the municipality. Effective January 1, 2002, however, the state legislature determined that, with certain exceptions discussed further infra, "electric services and their prices should be determined by customer choices and the normal forces of competition." Tex. Util. Code Ann. § 39.001(a). IOUs were required to "structurally unbundle" by separating their business activities-including personnel, information flow, functions, and operations-into (a) a power-generation company, (b) a retail electric provider, and (c) a transmission and distribution utility. Id. § 39.051(b), (d). Power-generation companies set the rates at which they sell power to their wholesale customers (such as retail electric providers), and retail electric providers set the rates at which they sell power to retail customers (such as residences and businesses). Wholesale transmission services continue to be regulated by the Public Utility Commission ("the Commission").

         Most of the state falls within an area known as the Electric Reliability Council of Texas, or ERCOT, that is, "the area in Texas . . . that is not synchronously interconnected with electric utilities outside the state" and in which ERCOT acts as the system operator. See id. § 31.002(5). All power-generation companies within this area-including the City's municipally owned utility-are required to sell wholesale energy only through ERCOT's wholesale "nodal" market, and all retail electric providers are required to purchase from that same wholesale market all of the energy they use in providing retail service.

         Municipally owned utilities ("MOUs") differ from IOUs in at least two important respects. Unlike IOUs, MOUs retain the right to operate as monopolies in providing retail electric service to customers within the municipality. And, unlike IOUS, MOUs are not required to "unbundle," structurally or functionally. An MOU has discretion to choose if and when it will offer customer choice, id. § 40.051(a), but that decision lies within its exclusive jurisdiction. Id. § 40.055(a)(2). Only the MOU can determine "whether to unbundle any energy-related activities," and if so, whether to unbundle structurally or functionally. Id. The City of Austin has not chosen to offer customer choice; it remains an integrated utility, selling both wholesale and retail energy service using the same employees and books.

         The City provides retail electricity to two Austin data centers owned by appellant Data Foundry. Data Foundry's data center on Smith School Road is in the City's "Primary Service 2" (PS2) commercial rate class, which serves high-consumption customers who take electricity at high-voltage or "primary" levels and use between 3 and 20 megawatts of electricity. Data Foundry's data center on East Ben White Boulevard is in a different rate class; it takes electricity at low-voltage or "secondary" levels and uses more than 300 kilowatts of electricity.

         Data Foundry sued the City, alleging that the City's retail rates are illegal, unenforceable, excessive, and discriminatory. Data Foundry's primary complaint is that the City includes in the rates it charges retail customers some of the costs of generating the electricity the City sells on the wholesale market. Data Foundry seeks declaratory and injunctive relief to end this practice. In addition, Data Foundry contends that the rates it must pay on its two accounts are excessive or discriminatory for a variety of reasons.

         The City moved to dismiss the suit pursuant to Texas Rule of Civil Procedure 91a on the ground, among others, that Data Foundry lacks standing. Data Foundry now appeals the trial court's order granting the motion on that basis.

         II. Standard of Review

         Standing is a component of subject-matter jurisdiction, [1] and Rule 91a[2] may be used, as it was here, to challenge the trial court's subject-matter jurisdiction. See City of Dallas v. Sanchez, 494 S.W.3d 722, 724-25 (Tex. 2016) (per curiam). We review de novo the trial court's ruling on the motion, construing Data Foundry's pleadings liberally and accepting as true Data Foundry's factual allegations and the inferences reasonably drawn from them to determine if Data Foundry alleged facts affirmatively demonstrating the trial court's subject-matter jurisdiction. See id. at 725.

         Texas's standing requirements are derived from the state constitution's separation-of-powers provision, [3] "which denies the judiciary authority to decide issues in the abstract," and from its open-courts provision, "which provides court access only to a 'person for an injury done him.'" Meyers v. JDC/Firethorne, Ltd., 548 S.W.3d 477, 484 (Tex. 2018) (quoting Tex. Const. art. I, § 13).[4] The standing doctrine requires a concrete injury to the plaintiff and a real controversy between the parties that will be resolved by the court. Id. Under Texas law, the standing inquiry begins by determining whether the plaintiff has personally been injured, that is, the plaintiff must plead facts demonstrating that the plaintiff, rather than a third party or the public at large, suffered the injury. Id. at 485. The second element requires that the plaintiff's alleged injury be "fairly traceable" to the defendant's conduct because courts can act to redress only those injuries that can be fairly traced to the challenged conduct of the defendant, and not injury resulting from the independent action of some third party not before the court. Id. This required showing of a causal connection between the plaintiff's injury and the defendant's conduct serves as a means of identifying the proper defendant. Id. To establish the third standing requirement-often referred to as "redressability"-a plaintiff must show there is a substantial likelihood that the requested relief will remedy the alleged injury. Id. If the trial court lacks jurisdiction to render the requested relief, then a judgment purporting to do so will not remedy the injury because such a judgment is void and of no effect. See Mapco, Inc. v. Forrest, 795 S.W.2d 700, 703 (Tex. 1990) (orig. proceeding) (per curiam).

         "[A] plaintiff must demonstrate standing for each claim he seeks to press and for each form of relief that is sought." Andrade v. NAACP of Austin, 345 S.W.3d 1, 14 (Tex. 2011) (quoting Davis v. FEC, 554 U.S. 724, 734, 128 S.Ct. 2759, 171 L.Ed.2d 737 (2008)). Data Foundry's claims and requests for relief are based on its allegations that the rates it is required to pay are either excessive or discriminatory. See State v. Sw. Bell Tel. Co., 526 S.W.2d 526, 529-30 (Tex. 1975) (explaining that a utility enjoying a monopoly is legally obligated to offer its services at reasonable rates and without undue discrimination). We treat each of these broad categories separately.

         III. Allegedly Excessive Rates

         Among Data Foundry's excessive-rate claims are its allegations that the City charges retail rates that are unreasonable and confiscatory. Data Foundry claims the City seeks an excessive rate of return[5] and that the rates constitute an illegal tax.

         A. Claims to Exclude Wholesale Power-Generation Costs and a Return on Wholesale Power-Generation Assets from the Calculation of Retail Rates

         In what it describes as "the heart of this lawsuit," Data Foundry contends that the City unlawfully includes recovery of wholesale power-generation costs and a return on power-generation assets in its calculation of retail electricity rates. Because the City is required to sell the power it generates only on the wholesale ERCOT nodal market and similarly is required to buy all of the power it provides to its retail customers from the same ERCOT market, the City cannot bypass ERCOT and sell the power it generates directly to its retail customers. According to Data Foundry, the City's power-generation services are unprofitable, and because the revenue from the City's wholesale power-generation sales is insufficient to cover the costs of generating the power, the City includes recovery of those costs in its retail rates. Data Foundry contends that charging retail customers for the City's wholesale services is illegal, unjust, excessive, constitutes a taking, is confiscatory, and does not reflect a reasonable measure of use by, or benefit to, retail ratepayers. Data Foundry pleaded for declaratory and injunctive relief to prevent the City ...


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