state-v-public-utility-commission-of-texas-represented-by-the-office-of ( 2008 )

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN
NO. 03-06-00503-CV
The State of Texas, appearing by and through the Office of the Attorney General,
Consumer Protection and Public Health Division, Public Agency Representation
Section; Cities of Dickinson, Friendswood, La Marque, League City, Lewisville
and Texas City; Texas-New Mexico Power Company; First Choice Power, Inc.;
and Texas Generating Co., L.P., Appellants
v.
Public Utility Commission of Texas, represented by the Office of the Attorney General,
Natural Resources Division; and Texas Industrial Energy Consumers, Appellees
FROM THE DISTRICT COURT OF TRAVIS COUNTY, 53RD JUDICIAL DISTRICT
NO. D-1-GN-05-003499, HONORABLE SCOTT H. JENKINS, JUDGE PRESIDING
OPINION
This appeal arises from the district court’s judgment affirming the final order of the
Public Utility Commission in the true-up proceeding to finalize “stranded costs” for Texas-New
Mexico Power Company, First Choice Power, Inc., and Texas Generating Company, L.P.
(collectively “TNMP”) under section 39.262 of the Public Utility Regulatory Act (“PURA”)1 and
PUC Substantive Rule 25.263. Because we conclude the Commission’s final order was consistent
with the plain language of the relevant statutes and was supported by substantial evidence, we affirm
the judgment of the district court affirming the Commission’s final order.
1
Tex. Util. Code Ann. §§ 11.001-64.158 (West 2007).
FACTUAL AND PROCEDURAL BACKGROUND
In 1999, the legislature enacted Senate Bill 7 (“SB 7”), which amended the PURA
to restructure and partially deregulate the Texas retail electric power industry. See Act of May 27,
1999, 76th Leg., R.S., ch. 405, 1999 Tex. Gen. Laws 2543; see also CenterPoint Energy Houston
Electric, LLC v. Gulf Coast Coalition of Cities, No. 03-05-00557-CV, 2007 Tex. App. LEXIS 9919,
at *3-*18 (Tex. App.—Austin Dec. 20, 2007, no pet. h.) (describing statutory framework for
transition to competitive retail electric market) (hereafter “CenterPoint”). As part of the transition
from regulation to retail competition, the legislature authorized each electric utility to recover “all
of its net, verifiable, nonmitigable stranded costs incurred in purchasing power and providing electric
generation service.” Tex. Util. Code Ann. § 39.252(a) (West 2007). The term “stranded costs” is
defined in section 39.251 of the PURA2 but, generally speaking, stranded costs represent prudently
incurred expenditures made by the utilities in a regulated environment—previously recoverable over
time through regulated rates paid by consumers—that have become unrecoverable in a competitive
2
Section 39.251(7) defines the term “stranded costs” as:
the positive excess of the net book value of generation assets over the market value
of the assets, taking into account all of the electric utility’s generation assets, any
above market purchased power costs, and any deferred debit related to a utility’s
discontinuance of the application of Statement of Financial Accounting Standards
No. 71 (“Accounting for the Effects of Certain Types of Regulation”) for
generation-related assets if required by the provisions of this chapter. For purposes
of Section 39.262, book value shall be established as of December 31, 2001, or the
date a market value is established through a market valuation method under Section
39.262(h), whichever is earlier, and shall include stranded costs incurred under
Section 39.263.
Id. § 39.251(7).
2
market. See Reliant Energy, Inc. v. Public Util. Comm’n, 101 S.W.3d 129, 132 (Tex. App.—Austin
2003), rev’d on other grounds, CenterPoint Energy, Inc. v. Public Util. Comm’n, 143 S.W.3d 81
(Tex. 2004) (op. on reh’g). Recovery of stranded costs is one of the final steps in the transition from
traditional cost-of-service regulation to retail competition.
TNMP filed an application with the Commission seeking to recover $266,487,442
in total stranded costs. TNMP also sought recovery of $106,573,973 for the capacity auction true-up.
See Tex. Util. Code Ann. §§ 39.153, .262(d) (West 2007). As a preliminary matter, the Commission
determined that TNMP was not entitled to a capacity auction true-up as a matter of law. See id.
§ 39.153; PUC Subst. R. 25.381(d).3 Thereafter, the Commission referred TNMP’s application to
the State Office of Administrative Hearings for a contested case hearing.
After conducting a hearing and reviewing the evidence submitted by the parties, the
administrative law judges issued a proposal for decision on May 28, 2004, including findings of fact
and conclusions of law. The Commission adopted the PFD in part and modified the ALJs’ findings
with respect to the following issues: 1) whether the sale of TNP One—TNMP’s sole generating
plant—was a bona fide, third-party transaction under a competitive offering;4 2) whether TNMP
pursued commercially reasonable efforts to mitigate stranded costs; 3) the gross-up of stranded-cost
disallowances; and 4) the interest rate for calculating carrying costs on TNMP’s final fuel balance.
3
See also Supplemental Preliminary Order, PUC Docket No. 29206 (Public Util. Comm’n
Mar. 3, 2004), available at http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/
29206_156_429330.PDF.
4
TNMP sold TNP One to Twin Oaks Power, LLP, an affiliate of Sempra Energy Resources.
3
The Commission rejected the ALJs’ recommendation and determined that TNMP’s
sale of its TNP One generating plant was not a bona fide, third-party transaction under a competitive
offering within the meaning of section 39.262(h) of the PURA. The Commission concluded that
TNMP failed to comply with section 39.262(h) and failed to carry its burden of proving the market
value of TNP One. Based on the evidence in the record, the Commission determined that the market
value of TNP One was $180 million. The Commission used this market value to determine what
it referred to as TNMP’s primary stranded cost balance.
Alternatively, the Commission found that, even if it accepted the ALJs’
recommendation that TNMP’s sale of TNP One was a bona fide, third-party transaction under a
competitive offering within the meaning of section 39.262(h), TNMP failed to use commercially
reasonable means to mitigate its stranded costs as required under section 39.252(d). Under this
alternative finding, the Commission adopted the ALJs’ proposed market valuation of TNP One and
the ALJs’ proposed adjustments, with modifications, to TNMP’s book value to reflect the lack of
commercial reasonableness. Using this approach, the Commission determined what it referred to
as TNMP’s alternative stranded cost balance.
Less than two months after the Commission rendered its final order, the Texas
Supreme Court issued its opinion in CenterPoint Energy, Inc. v. Public Utility Commission,
143 S.W.3d 81 (Tex. 2004) (hereafter “CenterPoint Energy”). In its opinion, the supreme court held
that interest on stranded costs must accrue from January 1, 2002, not from the date of the utility’s
final true-up case as provided in PUC Substantive Rule 25.263(l)(3). Id. at 84. Accordingly, the
4
Commission granted rehearing and remanded the case to SOAH for the ALJs to recalculate and
quantify the interest due TNMP in light of the supreme court’s opinion.
The ALJs issued a Remand PFD on March 11, 2005, and recommended interest in
the amount of $41,736,027 on the Commission’s primary stranded cost balance and $45,304,441 on
the Commission’s alternative stranded cost balance. In its final order, entitled “Second Order on
Rehearing,” the Commission adopted the Remand PFD in part, modified the ALJs’ findings with
respect to the appropriate interest rate to be applied to TNMP’s stranded cost balance, and
recalculated the total interest due TNMP.
After recalculating the interest amount due, the Commission approved a primary
stranded cost balance of $128,820,365. This amount was further offset by TNMP’s final fuel
balance of $41,504,474 and carrying costs on the additional TNP One depreciation, plus interest due
on stranded costs of $39,166,214. The net amount of stranded cost recovery authorized by the
Commission was $110,603,855.5
Several parties sought judicial review in the Travis County District Court of the
Commission’s Second Order on Rehearing as permitted under section 2001.171 of the
Administrative Procedure Act. See Tex. Gov’t Code Ann. § 2001.171 (West 2000). The district
court consolidated all of these appeals into one proceeding and rendered judgment affirming the
5
Based on its finding that TNMP failed to take commercially reasonable steps to mitigate
stranded costs, the Commission approved an alternative stranded cost balance of $139,834,457.
Like the primary stranded cost balance, this amount was further offset by TNMP’s final fuel balance
of $41,504,474 and carrying costs on the additional TNP One depreciation, plus interest due on
stranded costs of $42,514,910. The net amount of stranded cost recovery authorized by the
Commission under this alternative approach was $124,966,643.
5
Commission’s order in all respects on July 24, 2006. TNMP, as well as the Cities of Dickinson,
Friendswood, La Marque, League City, and Lewisville (collectively “Cities”), and the State of Texas,
on behalf of all state entities and institutions that are electricity consumers (“State Agencies”), appeal
from the district court’s judgment.
DISCUSSION
On appeal, the parties raise various issues challenging the Commission’s final order.
The Cities and State Agencies argue that the Commission erred in determining the market value
of TNMP’s assets when TNMP failed to carry its burden of proof on this issue.6 In two additional
issues, the Cities argue that the Commission erred in failing to effectuate TNMP’s prior agreement
to reduce stranded costs and in calculating the interest owed on TNMP’s final true-up balance. For
its part, TNMP raises three issues on appeal, arguing that the Commission erred in denying TNMP’s
capacity auction true-up, in “grossing up” disallowances for alleged federal income tax benefits,
and in reducing the net book value of TNMP’s assets for investment tax credits. The Commission
responds that there was no error in its final order and the order was supported by substantial
evidence.
Standard of Review
In their challenges to the Commission’s final order, the parties have raised a variety
of issues, which we review under different standards of review. We briefly summarize these
6
The Texas Industrial Energy Consumers (TIEC) support the Cities and State Agencies in
this issue, but TIEC did not file a separate appeal.
6
different standards. As a general matter, we review the Commission’s final order under the
substantial evidence rule. See Tex. Util. Code Ann. § 15.001 (West 2007); Tex. Gov’t Code Ann.
§ 2001.174 (West 2000). Under the substantial evidence rule, we give significant deference to the
agency in its field of expertise. Railroad Comm’n v. Torch Operating Co., 912 S.W.2d 790, 792
(Tex. 1995); Texas Health Facilities Comm’n v. Charter Med.-Dallas, Inc., 665 S.W.2d 446, 452
(Tex. 1984). We presume that the agency’s order is valid and that its findings, inferences,
conclusions, and decisions are supported by substantial evidence. City of El Paso v. Public Util.
Comm’n, 883 S.W.2d 179, 185 (Tex. 1994); Charter Med., 665 S.W.2d at 452. The complaining
party has the burden to overcome this presumption. City of El Paso, 883 S.W.2d at 185; Hammack
v. Public Util. Comm’n, 131 S.W.3d 713, 725 (Tex. App.—Austin 2004, pet. denied). In conducting
a substantial evidence review, we evaluate the entire record to determine whether the evidence as
a whole is such that reasonable minds could have reached the conclusion the agency must
have reached in order to take the disputed action. Texas State Bd. of Dental Exam’rs v. Sizemore,
759 S.W.2d 114, 116 (Tex. 1988); Suburban Util. Corp. v. Public Util. Comm’n, 652 S.W.2d 358,
364 (Tex. 1983). We may not substitute our judgment for that of the agency on the weight of the
evidence on questions committed to the agency’s discretion. Tex. Gov’t Code Ann. § 2001.174;
Charter Med., 665 S.W.2d at 452; H.G. Sledge, Inc. v. Prospective Inv. & Trading Co., 36 S.W.3d
597, 602 (Tex. App.—Austin 2000, pet. denied).
Under a substantial evidence review, the issue for the reviewing court is not whether
the agency’s decision was correct, but whether the record demonstrates some reasonable basis for
the agency’s action. Charter Med., 665 S.W.2d at 452; Central Power & Light Co. v. Public Util.
7
Comm’n, 36 S.W.3d 547, 561 (Tex. App.—Austin 2000, pet. denied). The evidence in the record
may preponderate against the decision of the agency and nevertheless amount to substantial
evidence. Charter Med., 665 S.W.2d at 452; Meier Infinity v. Motor Vehicle Bd., 918 S.W.2d 95,
98 (Tex. App.—Austin 1996, writ denied). We will sustain the agency’s order if the evidence is
such that reasonable minds could have reached the conclusion that the agency must have reached in
order to justify its action. Charter Medical, 665 S.W.2d at 453; Suburban Util. Corp., 652 S.W.2d
at 364. We will reverse the agency’s order if the decision is not reasonably supported by substantial
evidence, in violation of a constitutional or statutory provision, in excess of the agency’s statutory
authority, made through unlawful procedure, affected by other error of law, arbitrary or capricious,
or characterized by an abuse of discretion. See Tex. Gov’t Code Ann. § 2001.174(2)(A)-(F).
Several issues raised by the parties involve questions of statutory construction, which
we review de novo. When construing a statute, our primary goal is to determine and give effect to
the legislature’s intent. City of San Antonio v. City of Boerne, 111 S.W.3d 22, 25 (Tex. 2003). To
determine legislative intent, we look to the statute as a whole, as opposed to isolated provisions.
State v. Gonzalez, 82 S.W.3d 322, 327 (Tex. 2002). We begin with the plain language of the statute
at issue and apply its common meaning. City of San Antonio, 111 S.W.3d at 25. Where the statutory
text is unambiguous, we adopt a construction supported by the statute’s plain language, unless that
construction would lead to an absurd result. Fleming Foods of Tex., Inc. v. Rylander, 6 S.W.3d 278,
284 (Tex. 1999). We give serious consideration to an agency’s interpretation of the statutes it is
charged with enforcing, so long as that interpretation is reasonable and consistent with the statutory
language. Tarrant Appraisal Dist. v. Moore, 845 S.W.2d 820, 823 (Tex. 1993); Steering Comms.
8
for the Cities Served by TXU Elec. v. PUC, 42 S.W.3d 296, 300 (Tex. App.—Austin 2001, no pet.).
This is particularly true when the statute involves a complex subject matter. Steering Comms.
for Cities, 42 S.W.3d at 300. Courts, however, “do not defer to administrative interpretation in
regard to questions which do not lie within administrative expertise, or deal with a nontechnical
question of law.” Rylander v. Fisher Controls Int’l, Inc., 45 S.W.3d 291, 302 (Tex. App.—Austin
2001, no pet.).
Additionally, several issues raised by the parties challenge the Commission’s
authority. The Public Utility Commission “is a creature of the Legislature and has no inherent
authority.” Public Util. Comm’n v. GTE-SW Corp., 901 S.W.2d 401, 407 (Tex. 1995). Like other
state administrative agencies, the Commission “has only those powers that the Legislature expressly
confers upon it” and “any implied powers that are necessary to carry out the express responsibilities
given to it by the Legislature.” Public Util. Comm’n v. City Pub. Serv. Bd., 53 S.W.3d 310, 316
(Tex. 2001). It is not enough that the power claimed by the Commission be reasonably useful to the
Commission in discharging its duties; the power must be either expressly conferred or necessarily
implied by statute. The agency may not “exercise what is effectively a new power, or a power
contradictory to the statute, on the theory that such a power is expedient for administrative
purposes.” Id.
The statutory scheme
Before addressing the issues raised by the parties, we provide a brief overview of the
statutory scheme allowing for recovery of stranded costs. See also CenterPoint, 2007 Tex. App.
LEXIS 9919, at *3-*18 (for discussion of statutory framework). In 1999, the legislature determined
9
it was in the public interest to partially deregulate the electric power industry. See generally
Tex. Util. Code Ann. §§ 39.001-.910 (West 2007). When the legislature mandated the transition
from traditional cost-of-service regulation to retail competition, it recognized that many utility
companies had made very large investments to build power generation plants and that while the
costs of these power plants might be recoverable from ratepayers in a regulated environment, these
same costs “might well become uneconomic and thus unrecoverable in a competitive, deregulated
power market.” CenterPoint Energy, 143 S.W.3d at 82; see also City of Corpus Christi v. Public
Util. Comm’n, 51 S.W.3d 231, 237-38 (Tex. 2001). The legislature called these uneconomic
assets “stranded costs.” CenterPoint Energy, 143 S.W.3d at 82; see also Tex. Util. Code Ann.
§§ 39.001(b)(2), .251(7). As part of the transition to retail competition, the legislature made an
express finding that it was in the public interest to allow utility companies to recover their stranded
costs. See Tex. Util. Code Ann. § 39.001(b)(2). The legislature thus “set forth a comprehensive
scheme for estimating, finalizing, and recovering those costs.” CenterPoint Energy, 143 S.W.3d at
83; see Tex. Util. Code Ann. §§ 39.201, .251-.254, .256-.265, .301-.313 (West 2007).
The legislature provided a mechanism in section 39.262 of the PURA for each utility
to recover its stranded costs. See Tex. Util. Code Ann. § 39.262. This mechanism requires each
transmission and distribution utility, its affiliated retail electric provider, and its affiliated power
generation company to jointly file an application with the Commission to finalize stranded costs.7
7
As part of the transition to retail competition, each existing utility was required to
“unbundle” the services it provided and separate its business activities into three distinct units: a
power generation company, a transmission and distribution utility, and a retail electric provider.
Tex. Util. Code Ann. § 39.051; see City of Corpus Christi v. Public Util. Comm’n, 51 S.W.3d 231,
237 (Tex. 2001).
10
Id. § 39.262(c). The legislature provided a formula to calculate the utility’s stranded costs. Id.
§ 39.251(7). Under this formula, a utility’s stranded costs equal the excess amount of the net book
value of generation assets minus the market value of those assets—i.e., SC = NBV – MV. Id.
Each utility has the burden of quantifying its stranded costs using one of four statutory
methods. Id. § 39.262(h). These methods are sale-of-assets, stock valuation, partial stock valuation,
or exchange of assets. Id. § 39.262(h)(1)-(4). TNMP chose to establish its stranded costs using
the sale-of-assets method. Under this method, TNMP was required to demonstrate that it sold
its generating assets in a “bona fide third-party transaction under a competitive offering.” Id.
§ 39.262(h)(1). Once this showing has been made, the total net value realized from the sale will
establish the market value of the generation assets sold. Id.
The legislature recognized, however, that during the transition from regulation to
retail competition, utilities would not have a business incentive to reduce their potential stranded
costs. Accordingly, the legislature provided a statutory incentive—the legislature required each
utility to “pursue commercially reasonable means to reduce its potential stranded costs, including
good faith attempts to renegotiate above-cost fuel and purchased power contracts or the exercise of
normal business practices to protect the value of its assets.” Id. § 39.252(d). The legislature also
required the Commission to consider each utility’s efforts to mitigate potential stranded costs when
determining the utility’s final stranded cost balance. Id. In addition, the legislature required the
Commission to ensure that each utility does not overrecover stranded costs. Id. § 39.262(a); see also
CenterPoint Energy, 143 S.W.3d at 98-99. With this statutory scheme in mind, we turn to the
parties’ complaints regarding the Commission’s determination of TNMP’s stranded costs.
11
The Commission’s determination of TNMP’s stranded costs
Through various issues asserted on appeal, the parties raise two general challenges
to the Commission’s final order. First, the Cities and State Agencies attack the Commission’s
determinations regarding the market value of TNMP’s generation assets. Second, the Cities and
TNMP challenge certain calculations and adjustments to the book value of TNMP’s generation
assets. In addition to these general challenges, the Cities argue that the Commission erred in its
calculation of interest on TNMP’s stranded cost balance. TNMP also complains that the
Commission erroneously denied its capacity auction true-up and that the Commission erred in
“grossing up” disallowances to capture alleged federal income tax benefits.
1. Market value of TNMP’s generation assets
We turn first to the Cities’ and State Agencies’ arguments that the Commission erred
in awarding stranded costs to TNMP because TNMP failed to prove the market value of TNP One.
Specifically, the Cities and State Agencies argue that the Commission erred in devising its own
valuation method to quantify TNMP’s stranded costs. The State Agencies further argue that because
TNMP failed to prove the market value of TNP One in a “bona fide third-party transaction under a
competitive offering” as required under section 39.262(h)(1) of the PURA, the Commission was not
permitted to devise an extra-statutory method of stranded cost recovery and, in doing so, the
Commission violated the parties’ due process rights. Because we conclude the Commission acted
within its statutory authority in determining the market value of TNMP’s generation assets, we reject
the Cities’ and State Agencies’ contentions.
Chapter 39 provides four specific methods that a utility may choose from to establish
12
the market value of its generation assets. See Tex. Util. Code Ann. § 39.262(h). TNMP chose to
use the “sale-of-assets” method under section 39.262(h)(1). See id. § 39.262(h)(1). Under the sale-
of-assets method, the market value is defined as the total value realized from a sale if, any time after
December 31, 1999, the utility sells some or all of its generation assets in a “bona fide third-party
transaction under a competitive offering.” Id. Having sold its only generation asset, TNP One, to
Sempra Energy Resources, TNMP asserted that the $120 million sales price of TNP One established
the market value of its generation assets as required in section 39.262(h)(1). The ALJs agreed with
TNMP that the sales price of TNP One established the market value of that asset as required under
the statute, but the Commission disagreed. The Commission concluded that TNMP failed to
establish market value through the sale of TNP One because TNMP failed to prove that the sale was
a “bona fide third-party transaction under a competitive offering” as required in section
39.262(h)(1).8
TNMP’s failure to establish market value through an asset sale left the Commission
with the difficult task of quantifying TNMP’s stranded costs without a demonstrated, bona fide asset
sale to a third party. As TNP One had been sold, it was impossible for TNMP to use another method
in section 39.262(h) to value the plant. The Commission concluded, however, that denying all
recovery to TNMP would be contrary to the legislature’s deregulation transition plan—of which
stranded cost recovery is an integral part. See Tex. Util. Code Ann. § 39.252(a) (allowing utilities
to recover net verifiable, nonmitigable stranded costs). The Cities and State Agencies argue that the
8
None of the parties dispute this conclusion on appeal.
13
Commission lacked statutory authority to determine the market value of TNP One when the method
selected by the utility fails to produce a proper market value. We disagree.
To determine the scope of the Commission’s authority, we must read the PURA as
a whole to determine the legislature’s intent. State v. Public Util. Comm’n, 883 S.W.3d 190, 196
(Tex. 1994). The contemporaneous construction of a statute by the administrative agency charged
with enforcing it is entitled to great weight. Id.; see also Dodd v. Meno, 870 S.W.2d 4, 7
(Tex. 1994); Tarrant Appraisal Dist., 845 S.W.2d at 823. The legislature set forth a comprehensive
scheme through which it has charged the Commission with authority to determine each utility’s final
stranded cost balance. See generally Tex. Util. Code Ann. §§ 39.001-.910. The legislature provided
that each utility “is allowed to recover all of its net, verifiable, nonmitigable stranded costs.”
Tex. Util. Code Ann. § 39.252(a).
In this Court’s recent CenterPoint decision, we considered a similar situation. See
CenterPoint, 2007 Tex. App. LEXIS 9919, at *35-*52 (discussing CenterPoint’s failure to satisfy
requirements of partial stock valuation method). In that case, CenterPoint attempted to establish the
market value of its generation assets using the partial stock valuation method in section 39.262(h)(3).
Id. The Commission determined that CenterPoint did not comply with the statutory requirements
because it failed to demonstrate that at least 19% of the transferred stock had been “spun off and sold
to public investors through a national stock exchange” as required in section 39.262(h)(3). Id. The
Commission concluded that none of the other statutory methods could be used to determine the
market value of CenterPoint’s generation assets because CenterPoint did not meet the statutory
requirements for any of those methods. Id. at *52-*60. Accordingly, the Commission chose to use
14
the utilities code definition of “market value” to develop a substitute valuation method. Id. at *62-
*63 (citing Tex. Util. Code Ann. § 39.251(4)). In the absence of a market valuation established
under one of the prescribed methods in section 39.262(h), we upheld the Commission’s implied
authority to consider and use alternative methods for determining market value in order to carry out
the “strong legislative mandate” of stranded cost recovery. Id. at *63-*67. In addition, we rejected
claims by OPC and the customers of CenterPoint that, having failed to meet its burden of proof,
CenterPoint was not entitled to any stranded cost recovery at all. Id. at *60-*62.
In this case, as in CenterPoint, the Commission determined—and none of the parties
dispute—that TNMP failed to establish the market value of TNP One because it failed to meet the
statutory requirements of section 39.2629(h)(1). In light of TNMP’s failure to satisfy the statutory
requirements, the Commission turned to the utilities code definition of “market value” in section
39.251(4) to determine the appropriate valuation of TNMP’s generation assets. Section 39.251(4)
defines “market value” as “the value the assets would have if bought and sold in a bona fide third-
party transaction on the open market.” Tex. Util. Code Ann. § 39.251(4). Based on this definition,
the Commission concluded that it was proper to determine the market value TNP One would have
if TNMP had initially conducted a bona fide transaction in compliance with section 39.262(h)(1).
Consistent with our decision in CenterPoint, we hold that the Commission properly
considered an alternative valuation method based on the definition of market value in section
39.251(4) when TNMP failed to establish the market value of its generation assets in compliance
with one of the four methods in section 39.262(h). See CenterPoint, 2007 Tex. App. LEXIS 9919,
at *52-67. Likewise, we conclude that, given TNMP’s failure to establish market value of TNP One
15
using one of the four methods in section 39.262(h), the Commission did not exceed its statutory
authority when it developed an alternative valuation method based on the statutory definition of
market value in section 39.251(4). See id. at *62-*63.
We next consider whether the Commission’s determination of market value was
reasonable and supported by substantial evidence. In conducting a substantial evidence review, we
must determine whether the evidence as a whole is such that reasonable minds could have reached
the conclusion reached by the Commission—namely, that the market value of TNP One was $180
million. City of El Paso, 883 S.W.2d at 186; Sizemore, 759 S.W.2d at 116. The true test is not
whether the agency reached the correct conclusion, but whether some reasonable basis exists in the
record for the action taken by the agency. Charter Med., 665 S.W.2d at 452. When weighing the
testimony, the Commission may accept or reject part or all of each witness’s conclusions; it is
the final judge regarding the credibility and validity of such testimony. Central Power & Light Co.,
36 S.W.3d at 561; Southern Union Gas Co. v. Railroad Comm’n, 692 S.W.2d 137, 141-42
(Tex. App.—Austin 1985, writ ref’d n.r.e.).
The Commission determined that if TNMP’s flawed auction process produced a sales
price of $120 million, then a bona fide sale would have produced a higher price for TNP One. The
record reflects that several parties presented evidence on the value of TNP One and the sales price
TNMP would have received if it had conducted a proper sale. See Tex. Util. Code Ann. § 39.251(4).
In the analysis prepared by TNMP witness Patrick Bridges, and relied on by the ALJs, a recent run-
up in the prices of natural gas showed an increasing value for TNP One and a potential value to
bidders of approximately $174 million. The ALJs also referenced notes made by a TNMP witness,
16
Rhonda Lenard, during the sales negotiations with Sempra where TNMP again referred to a value
of $180 million for TNP One—a value that TNMP repeatedly stated it held as a reasonable value for
TNP One. The record also showed that Austpro, another potential buyer for TNP One, indicated a
possible bid of $188 million. Although Austpro never submitted a written bid, the Commission
considered this amount to be in the upper range of prices that a bona fide sale would have produced.
Several parties also suggested alternative values for TNP One. TIEC witness, Steve
Weyel, performed numerous calculations using “spark spread” discounted cash flow analysis and
testified that these calculations suggested a range of $255 to $316 million. Cities witness, Lane
Kollen, also provided testimony on the market value of TNP One. But these analyses also presumed
a delayed sale of TNP One. The Commission rejected the testimony of Weyel and Kollen because
it concluded that TNMP should not be penalized for its failure to delay the sale of TNP One. Based
on the record evidence, the Commission concluded that a bona fide competitive offering would have
captured the recent run-up in natural gas prices and would have produced a sales price of $180
million, net of expenses. Accordingly, the Commission determined that the appropriate market value
for TNP One was $180 million.
The record before the Commission was extensive, and the Commission had ample
evidence on which to base its determination of market value. The evidence regarding the market
value of TNP One suggested a valuation between $174 million and $316 million. We conclude that
the record contains substantial evidence to support a market value for TNP One within the range of
evidence before the Commission. Given the admitted complexity of determining the market value
of TNP One and the deference owed to the Commission in its area of expertise, we hold that there
17
is a reasonable basis for the Commission, in its discretion, to select a market value for TNP One
within the range of evidence presented by the parties. See City of El Paso, 883 S.W.2d at 186
(affirming agency decision to select value within range of evidence in the record). We conclude that
the Commission’s market valuation of TNP One is supported by substantial evidence. We further
conclude that the Commission’s determination of market value was consistent with its statutory
authority under the PURA and that the Commission did not create an extra-statutory method of
stranded cost recovery. We overrule the Cities’ first issue and the State Agencies’ issues 1A and 1B.
2. Due Process
The State Agencies further allege that the Commission’s creation of an extra-statutory
method of stranded cost recovery violates Due Process. Having determined that the Commission
did not exceed its statutory authority or create an extra-statutory method of stranded cost recovery,
we reject the State Agencies claim that the Commission violated Due Process. We overrule the State
Agencies’ issue 1C.
3. Adjustments to Book Value
A) Accelerated depreciation
In their second issue, the Cities argue that the Commission failed to effectuate
TNMP’s prior agreement to reduce stranded costs. This issue arises from TNMP’s agreement in a
previous proceeding before the Commission to apply accelerated depreciation to the book value of
TNP One as a means to reduce stranded costs. See Application of Texas-New Mexico Power
Company for Approval of a Transition Plan and Statement of Intent to Decrease Rates, Docket
18
No. 17751 (Tex. Pub. Util. Comm’n Nov. 4, 1998) (order on reh’g). Because we conclude the
Commission’s reduction to the net book value of TNP One by $19,340,031 for accelerated
depreciation was reasonable and supported by substantial evidence, we reject the Cities’ argument.
To understand the Cities’ argument on this issue, it is necessary to examine the
Commission’s prior order and the stipulation agreed to by TNMP. In 1997, in anticipation of
deregulation, TNMP filed an application with the Commission in Docket No. 17751 seeking
approval of TNMP’s plan to transition to a deregulated electric market. See id. The parties in that
proceeding reached a stipulated agreement on TNMP’s transition plan and submitted that stipulation
to the Commission for approval. The Commission incorporated the stipulation as part of the
transition plan approved in its final order. See id. Under the transition plan approved by the
Commission in Docket No. 17751, TNMP was to apply a total of $75 million in accelerated
depreciation to the book value of TNP One—$15 million per year from 1999 through 2002, plus an
additional $15 million—to reduce stranded costs:
In addition to normal depreciation, TNMP shall recover additional depreciation on
TNP One in the amount of $15,000,000 each year for the years 1999-2002. In
addition, TNMP shall record additional depreciation on TNP One of up to a total
cumulative amount of $15,000,000 over the years 1998-2002, based on the amount
available and calculated pursuant to the earnings sharing mechanism approved in this
Order.
Id.
After the Commission approved TNMP’s transition plan in Docket No. 17751, the
legislature passed SB 7, which deregulated the retail electric market. Chapter 39 of the utilities code
differed from the stipulation agreed to by TNMP in Docket No. 17751. One of the primary
19
differences was that retail competition began in 2002, not 2003 as contemplated by the stipulation.
See Tex. Util. Code Ann. § 39.001(b)(1) (implementing customer choice on January 1, 2002). Over
the ensuing years, the Commission dealt with several proceedings trying to reconcile the promises
made by TNMP in Docket No. 17751 with Chapter 39.9 In this final stranded cost true-up
proceeding, the Commission again faced the need to reconcile the stipulation and transition plan
approved in Docket No. 17751 with the requirements in Chapter 39.
The issue for the Commission in this case was how to reconcile TNMP’s promises
to apply accelerated depreciation in the transition plan with the requirement in section 39.261(c)(2)
of the PURA to apply excess earnings from 1999-2001 to reduce the net book value of generation
assets. See id. § 39.261(c)(2). The record reflects that TNMP had excess earnings of $40,659,969
for 1999-2001 and did not book the accelerated depreciation required under the stipulation and
transition plan for these years. Based on TNMP’s stipulation in Docket No. 17751, the Commission
determined that TNMP should apply a total of $60 million in accelerated depreciation to reduce the
net book value of TNP One, thereby reducing its stranded costs.10 The Commission observed that
if TNMP had actually booked the accelerated depreciation as required under the stipulation and
transition plan approved in Docket No. 17751, TNMP would not have had $40.6 million in excess
earnings for 1999-2001. Accordingly, the Commission subtracted the $40.6 million in excess
9
The Commission’s final order in Docket No. 17751 expressly states that TNMP’s 1998
transition plan must be reconciled with any later-enacted deregulation legislation. Application of
Texas-New Mexico Power Company for Approval of a Transition Plan and Statement of Intent to
Decrease Rates, Docket No. 17751 (Tex. Pub. Util. Comm’n Nov. 4, 1998) (order on reh’g).
10
The Commission did not require TNMP to apply accelerated depreciation for 2002, since
retail competition began January 1st of that year.
20
earnings that TNMP already applied to reduce its stranded costs from the $60 million total, leaving
$19,340,031 in additional depreciation for TNMP to apply to the net book value of TNP One. This
is the adjustment that the Commission made to the net book value of TNP One.
Section 39.252(a) allows a utility to recover “all of its net, verifiable, nonmitigable
stranded costs.” Tex. Util. Code Ann. § 39.252(a). However, the legislature imposed a statutory
duty on each utility to pursue commercially reasonable means to reduce its potential stranded costs.
Id. § 39.252(d). In addition, for those utilities identified as having positive stranded costs in
the Commission’s 1998 ECOM Report11 to the Texas Senate Interim Committee on Electric
Restructuring, the legislature required those utilities to take additional steps to reduce the net book
value of, or “accelerate” the recovery of, stranded costs by returning excess earnings to their Texas
customers. Id. §§ 39.254, .257. Under section 39.254, these excess earnings “shall be applied to the
net book value of generation assets.” Id. § 39.254. Because TNMP was one of the utilities identified
as having positive stranded costs in the 1998 ECOM Report, TNMP was required to apply its excess
earnings from annual reports to reduce the net book value of its generation assets. Id.
The legislature charged the Commission with enforcing the utilities’ obligations to
mitigate stranded costs. In section 39.252(a), the legislature expressly provided that a utility “may
not be permitted to overrecover stranded costs.” Id. § 39.262(a). Thus, the Commission was
required to ensure that TNMP properly applied its excess earnings to reduce the net book value of
its generation assets.
11
Public Utility Commission of Texas, Report to the Texas Senate Interim Committee on
Electric Restructuring, “Potentially Strandable Investment (ECOM) Report: 1998 Update” (Apr. 30,
1998) (hereafter “1998 ECOM Report”).
21
The Cities complain that the Commission should not have offset TNMP’s obligation
to apply $60 million in accelerated depreciation with TNMP’s excess earnings mitigation because
there is no connection between TNMP’s prior agreement to apply accelerated depreciation in Docket
No. 17751 and the excess earnings mitigation requirement in Chapter 39 of the PURA. See id.
§§ 39.254, .257, .261. Given the Commission’s obligation to ensure that TNMP complies with
its own obligation to apply excess earnings to reduce net book value and does not overrecover
stranded costs, we agree with the Commission that this offset was reasonable and necessary to avoid
“double counting.”
The record reflects that the Commission’s order in Docket No. 17751 required it to
reconcile TNMP’s promise to apply accelerated depreciation as a means to reduce stranded costs
with the legislature’s deregulation plan in Chapter 39 of the PURA. The record further reflects that
if TNMP had booked the accelerated depreciation required under the stipulation and transition plan
approved in Docket No. 17751, TNMP would not have had $40.6 million in excess earnings with
which it could have further mitigated stranded costs as required under section 39.254 of the PURA.
We therefore conclude that the Commission’s decision to offset TNMP’s promise to reduce stranded
costs by $60 million with TNMP’s $40.6 million in excess earnings for 1999-2001 was reasonable
and comports with the Commission’s obligation to ensure that TNMP applies its excess earnings to
reduce net book value and does not overrecover stranded costs. See Tex. Util. Code Ann. §§ 39.254,
.252(a), (d), .262(a); see also In re Entergy, 142 S.W.3d 316, 324 (Tex. 2004) (Commission
has exclusive jurisdiction to adjudicate disputes arising from agreements incorporated into
22
Commission orders); Public Util. Comm’n v. Southwestern Bell Tel. Co., 960 S.W.2d 116, 119-20
(Tex. App.—Austin 1997, no pet.) (Commission has discretion to formulate and award remedy
necessary to effectuate parties’ agreement). We overrule the Cities’ second issue.
B) Investment Tax Credits
In its third issue, TNMP claims that the Commission erred in reducing TNMP’s net
book value by $6,490,000 for investment tax credits. TNMP claims that the Commission lacked
authority to make this reduction because section 39.251(7) of the PURA—the section defining
stranded costs—fails to reference investment tax credits. Because we conclude the Commission’s
treatment of investment tax credits was proper, we reject TNMP’s claim.
Like accelerated depreciation, Congress created investment tax credits to spur
economic development. See, e.g., Central Power & Light Co. v. Bullock, 696 S.W.2d 30, 31
(Tex. App.—Austin 1984, no writ); see generally Application of Normalization Accounting Rules
to Balances of Excess Deferred Income Taxes and Accumulated Deferred Investment Tax Credits
of Public Utilities Whose Generation Assets Cease to be Public Utility Property, 68 Fed. Reg. 10190
(IRS Mar. 4, 2003). Businesses were given tax credits for making certain capital investments.
Bullock, 696 S.W.2d at 31. Such credits were viewed as benefits to the utility that must ultimately
be passed on to ratepayers. See id. at 32. Because Congress wanted to ensure that public utilities
would have those sums to invest, the IRS required each public utility to segregate investment tax
credits into a separate account for regulatory purposes. See Application of Normalization Accounting
23
Rules, 68 Fed. Reg. at 10191. In a process called “normalization,” the IRS further required that the
credit amounts be amortized for return to ratepayers over the life of the asset.12 See id. at 10191-92.
The record reflects, at the time it filed for stranded cost recovery, TNMP held slightly
more than $15 million in its investment tax credit account. The Commission concluded that this
amount represented benefits received by TNMP that had yet to be passed on to ratepayers. Cities
witness, Kollen, testified that TNMP’s stranded costs should be reduced by the entire amount of
TNMP’s investment tax credit account. In contrast, Commission staff witness, Darryl Tietjen,
testified that TNMP’s stranded costs should only be reduced by the present value of TNMP’s
investment tax credit balance, or $6.49 million. The Commission adopted Tietjen’s recommendation
and reduced the book value of TNP One accordingly.
TNMP argues that the Commission lacked authority to make this reduction because
nothing in the definition of stranded costs references “investment tax credits.” See Tex. Util. Code
Ann. § 39.251(7). TNMP further argues that the Commission erred in relying on section 36.059 of
the PURA to support its reduction because that section does not apply to this stranded cost true-up
proceeding. See id. § 36.059. Accordingly, TNMP maintains there is no legal basis in the PURA
to support the Commission’s reduction to book value for investment tax credits. We disagree.
In directing the Commission to finalize and determine each utility’s stranded cost
balance, the legislature provided that the utility shall only recover its “net, verifiable, nonmitigable
stranded costs.” Id. § 39.252(a). The legislature further provided that a utility shall not overrecover
12
None of the parties have raised the issue of a potential normalization violation; therefore,
we do not address it. Cf. CenterPoint, 2007 Tex. App. LEXIS 9919, at *105-18 (remanding
Commission’s final order to consider remedy for normalization violation).
24
its stranded costs. Id. § 39.262(a). Cities witness, Kollen, testified that allowing TNMP to retain
investment tax credits would allow TNMP to overrecover stranded costs.13 Based on this testimony
and the legislative mandate that utilities shall not overrecover stranded costs, we conclude that the
Commission acted within its authority under Chapter 39 of the PURA to reduce the net book value
of TNMP’s generation assets by the present value of TNMP’s investment tax credit account. We
also conclude that the Commission’s decision is supported by substantial evidence.14 See id.
§ 39.262(a); Charter Med., 665 S.W.2d at 452; Central Power & Light, 36 S.W.3d at 561. We
overrule TNMP’s third issue.
4. Interest
In their third issue, the Cities dispute the Commission’s calculation of interest on
TNMP’s final stranded cost balance. The Cities argue that the Commission acted arbitrarily and
capriciously in applying different interest rates to TNMP’s final fuel balance and final stranded cost
balance. As a result of this alleged discrimination, the Cities argue that the Commission has allowed
TNMP to overrecover stranded costs in violation of section 39.262 of the PURA. Because we
conclude that the Commission’s application of different interest rates to TNMP’s final fuel balance
13
The Commission’s reduction to TNMP’s stranded costs is consistent with its previous
decision in Docket 22349 in which the Commission first estimated TNMP’s stranded costs. In that
docket, the Commission also required TNMP to include investment tax credits as a reduction to book
value and, therefore, to stranded costs.
14
In light of our determination that the Commission’s reduction to book value for investment
tax credits was within the Commission’s authority under Chapter 39 of the PURA, we reject
TNMP’s complaint that the Commission erroneously relied on section 36.059.
25
and final stranded cost balance comports with the statute and Commission rules and was supported
by substantial evidence, we reject the Cities’ arguments.
Less than two months after the Commission issued its final order in this case,
the supreme court released its opinion in CenterPoint Energy. The supreme court invalidated part
of PUC Substantive Rule 25.263—the Commission’s rule governing stranded cost true-up
proceedings. 143 S.W.3d at 81; see 16 Tex. Admin. Code § 25.263 (2005). Specifically, the
supreme court invalidated rule 25.263(l)(3), holding that carrying charges on a utility’s final stranded
cost balance should be calculated from January 1, 2002—the date customer choice began—instead
of from the date of the final true-up order, which could be two or more years later, as provided in the
rule. 143 S.W.3d at 84. In accordance with the supreme court’s decision, the Commission granted
rehearing and remanded this case to SOAH for additional proceedings to determine the interest due
on TNMP’s final stranded cost balance.
A) Interest rate for stranded costs
The Commission’s rule requires the interest rate for stranded costs to be calculated
based on TNMP’s weighted average cost of capital (“WACC”). See 16 Tex. Admin. Code
§ 25.263(l)(3)(A)(i). The record reflects that the Commission applied an interest rate of 10.93% to
TNMP’s final stranded cost balance. This interest rate was within the range of evidence submitted
by the parties. TNMP’s expert witness testified that the Commission should apply an interest rate of
11.59% to TNMP’s final stranded cost balance. The Cities’ expert witness, Scott Norwood, testified
that the Commission should apply a rate of 8.31%. The Office of Public Utility Counsel proposed
an interest rate of 9.8%. And the Commission staff recommended an interest rate of 10.93%.
26
Because the Commission’s chosen interest rate of 10.93% falls within the range of evidence
submitted by the parties, we conclude that there is a reasonable basis in the record to support the
Commission’s application of an interest rate of 10.93%. See City of El Paso, 883 S.W.2d at 186.
Thus, we conclude the Commission’s chosen interest rate is supported by substantial evidence.
B) Interest rate for final fuel balance
Section 25.263(h)(4) of the Commission’s true-up rule governs the interest rate to be
applied to a utility’s final fuel balance.15 16 Tex. Admin. Code § 25.263(h)(4) (2005). Section
25.263(h)(4) gives two options for the Commission to use when determining the interest rate for a
utility’s final fuel balance. The first option requires the Commission to use the utility’s WACC
when the period between the issuance of the utility’s final fuel reconciliation order and the date of
the final true-up order is more than one year. Under the second option, the Commission must use
15
Section 25.263(h)(4) provides:
The final fuel balance, as adjusted by paragraphs (2) and (3) of this subsection, shall
include carrying costs on the positive or negative fuel balance equal to:
(A) the weighted-average cost of capital approved in the company’s unbundled
cost of service (UCOS) proceeding, if the period until the date of the final
true-up order is greater than one year; or
(B) the rate approved in § 25.236 of this title (relating to Recovery of Fuel Costs)
if the period until the date of the final true-up order is one year or less.
16 Tex. Admin. Code § 25.263(h)(4) (2005). This portion of the Commission’s rule was not at issue
in the supreme court’s CenterPoint Energy decision. See generally CenterPoint Energy Inc.
v. Public Util. Comm’n, 143 S.W.3d 81 (Tex. 2004) (invalidating PUC Subst. Rule 25.263(l)(3)).
27
the short-term interest rate approved in PUC Substantive Rule 25.236 if the period between the final
fuel reconciliation order and the final true-up order is one year or less.
Because the Commission issued TNMP’s final fuel reconciliation order on February
11, 2004, TNMP’s witness estimated that the Commission’s order in the stranded cost true-up
proceeding would be issued within six months and proposed using the short-term interest rate of
1.17%16 approved in PUC Substantive Rule 25.236. Although the parties disputed the interpretation
of section 25.263(h)(4), the Commission agreed with TNMP and applied the short-term interest
rate of 1.17%.
The Commission’s determination was based upon its interpretation of rule
25.263(h)(4). As the Commission explained in its order on rehearing,
[T]he appropriate period for determining which interest rate applies is measured from
the date the Commission issues its order in the final fuel reconciliation and can
therefore, be different than the actual time period to which the rate applies.
Otherwise, there would have been no reason to include the words “one year or less”
in the rule since the period between the end of the reconciliation period and the
earliest filing of the true-up was known to be two years when the rule was written.
We defer to the Commission’s interpretation of its own rule unless it is plainly
erroneous or inconsistent with the language of the rule. See Public Util. Comm’n v. Gulf States Utils.
Co., 809 S.W.2d 201, 207 (Tex. 1991) (“Our review is limited to determining whether the
administrative interpretation is plainly erroneous or inconsistent with the regulation.” (internal
quotation omitted)); Gulf Coast Coalition of Cities v. Public Util. Comm’n, 161 S.W.3d 706,
16
This was the short-term interest rate as of the date TNMP filed its application to finalize
stranded costs.
28
712 (Tex. App.—Austin 2005, no pet.). We conclude that the Commission’s interpretation of
section 25.263(h)(4) comports with the plain language of the rule. Under this interpretation, the
Commission properly applied the short-term interest rate to TNMP’s final fuel balance. We further
conclude that the Commission’s decision was supported by substantial evidence.
To the extent the Cities complain that the Commission applied different interest rates
to TNMP’s final stranded cost balance and final fuel balance to the disadvantage of TNMP’s
customers, we reject that complaint. The Commission’s application of different interest rates was
reasonable, was supported by the record, and comports with the Commission’s rules. We overrule
the Cities’ third issue.
5. Capacity auction true-up
In TNMP’s first issue, it complains that the Commission erred in summarily denying
TNMP’s capacity auction true-up claim for $106 million. Prior to the evidentiary hearing in this
case, the Commission issued a Supplemental Preliminary Order ruling on the threshold issue of
whether TNMP was entitled to a capacity auction true-up. In this order, the Commission concluded
that TNMP was not entitled to a capacity auction true-up because TNMP did not conduct a capacity
auction. Because we conclude that the Commission’s decision was reasonable and consistent with
the relevant statutes and Commission rules, we reject TNMP’s complaint.
To encourage competition in the newly emerging retail market, the legislature
required utilities with more than 400 megawatts of installed generation capacity to auction off 15%
29
of their capacity prior to January 1, 2002. See Tex. Util. Code Ann. § 39.153(a);17 see also
CenterPoint, 2007 Tex. App. LEXIS 9919, at *126-*132 (describing capacity auction process and
true-up). Because TNMP had less than 400 megawatts of installed generation capacity, TNMP was
exempt from the capacity auction requirement in section 39.153. See Tex. Util. Code Ann.
§ 39.153(a). TNMP was the only utility to fall within the statutory exemption.18 To prevent
any utility from exercising undue market power, the legislature, in section 39.156, also required
certain utilities to reduce their ownership and control of installed generation capacity and file market
mitigation plans with the Commission. See id. § 39.156. One of the options available to those
utilities required to reduce their capacity under section 39.156 was a capacity auction. Id.
§ 39.156(c)(3). As part of the final proceeding to true-up stranded costs, section 39.262(d) of the
17
Section 39.153(a) provides:
Each electric utility subject to this section shall sell at auction, at least 60 days before
the date set for customer choice to begin, entitlements to at least 15 percent of the
electric utility’s Texas jurisdictional installed generation capacity. For the purposes
of this section, the term “electric utility” includes any affiliated power generation
company that is unbundled from the electric utility in accordance with Section
39.051, but does not include any entity owning less than 400 megawatts of installed
generation capacity.
Tex. Util. Code Ann. § 39.153(a) (emphases added).
18
The record reflects that, prior to the passage of SB 7, TNMP sought and obtained from the
legislature an exemption from the capacity auction requirement. See Senate Special Comm. on Elec.
Util. Restructuring, 76th Leg., R.S. 13 (Mar. 13, 1999) (transcript available from Senate Staff
Services Office). This exemption was valuable to TNMP. In light of this exemption, TNMP did not
have to participate in a capacity auction, and it was the only incumbent utility allowed to retain
control of 100% of its capacity.
30
PURA required the Commission to true-up the capacity auction for each utility that auctioned
capacity under section 39.153 or 39.156. Id. § 39.262(d).19
TNMP agrees that it was exempt from the capacity auction requirement in section
39.153 and that it did not conduct a capacity auction pursuant to either section 39.153 or 39.156.
Nevertheless, TNMP argues that the legislature’s use of the word “shall” in section 39.262(d)
is mandatory and requires the Commission to conduct a capacity auction true-up for TNMP. We
disagree.
The plain language of section 39.262(d)(2) requires the Commission to reconcile the
difference between “the price of power obtained through the capacity auctions under Sections
39.153 and 39.156” and the power cost projections that were employed to estimate stranded costs
in the proceeding under section 39.201. See Tex. Util. Code Ann. § 39.262(d)(2) (emphasis added).
The plain language of this statute also presumes that TNMP participated in the required capacity
19
Section 39.262(d) provides:
The affiliated power generation company shall reconcile, and either credit or bill to
the transmission and distribution utility, the net sum of:
(1) the former electric utility’s final fuel balance determined under Section
39.202(c); and
(2) any difference between the price of power obtained through the capacity
auctions under Sections 39.153 and 39.156 and the power cost projections
that were employed for the same time period in the ECOM model to estimate
stranded costs in the proceeding under Section 39.201.
Id. § 39.262(d).
31
auctions. Because TNMP did not conduct a capacity auction pursuant to section 39.153 or 39.156,
the Commission concluded there was nothing to reconcile in a capacity auction true-up for TNMP.
The Commission’s interpretation of section 39.262(d) is reasonable and consistent
with the plain language of the statute. Because the legislature expressly exempted TNMP from the
capacity auction requirement, we are unpersuaded that the legislature intended the Commission to
conduct a capacity auction true-up for TNMP.20 We overrule TNMP’s first issue.
6. “Grossing up” disallowances
In its second issue, TNMP claims that the Commission erred in “grossing up”
disallowances to capture tax benefits resulting from TNMP’s stranded cost recovery.21 Because we
conclude that the Commission acted within its authority under the PURA to “gross up”
disallowances when calculating TNMP’s stranded costs, we reject TNMP’s claim.
Section 39.262(c) expressly requires TNMP to file its application to finalize stranded
costs with the Commission. See Tex. Util. Code Ann. § 39.262(c). TNMP does not dispute the
Commission’s authority to calculate TNMP’s final stranded cost balance. Rather, TNMP argues that
the Commission lacks discretion to make adjustments to the various components that comprise
20
To the extent TNMP relies on PUC Substantive Rule 25.281 to support its argument, we
are likewise unpersuaded by that argument. It is axiomatic that an agency may not enact rules
inconsistent with its statutory authority. See, e.g., Railroad Comm’n v. Lone Star Gas, 844 S.W.2d
679, 685 (Tex. 1992); State Bd. of Ins. v. Deffebach, 631 S.W.2d 794, 798 (Tex. App.—Austin 1982,
writ ref’d n.r.e.). The language of the rule is consistent with the statute. Having thus concluded that
section 39.262(d) of the PURA does not require the Commission to conduct a capacity auction true-
up, we likewise conclude there is no requirement to do so under the Commission’s rules.
21
TNMP does not challenge the disallowances, nor does TNMP challenge the Commission’s
authority to disallow certain costs when finalizing TNMP’s stranded cost balance.
32
TNMP’s stranded cost balance. We disagree. The legislature expressly provided that a utility may
recover all of its net, verifiable, nonmitigable stranded costs, but that a utility may not overrecover
stranded costs. See id. § 39.252(a), .262(a). Thus, the Commission’s authority to adjust the various
components comprising TNMP’s stranded cost balance is grounded in its authority to ensure that
TNMP does not overrecover stranded costs. See id. § 39.262(a).
In this case, as part of its request to recover stranded costs, TNMP sought to retain
its account balance for accumulated deferred federal income tax (ADFIT) to cover its tax liability
on its stranded cost recovery. As the Commission explained in its final order, the ADFIT account
balance reflects the regulatory expectation that TNMP would eventually recover the book value of
TNP One through depreciation. During the early years of accounting for certain assets, like TNP
One, the ADFIT balance grows because the regulatory tax expense paid by ratepayers exceeds the
utility’s actual tax expense. This trend reverses in later years when the utility’s actual tax expense
exceeds its regulatory tax expense, and the ADFIT account balance will ultimately reach zero.
Under continuing regulation, TNMP’s ADFIT account balance related to depreciation would have
ultimately reached zero.
But TNMP will now recover the book value of TNP One as proceeds from the sale
of that asset and as stranded costs. If the entire book value is recovered, the ADFIT account will
satisfy TNMP’s tax burden with respect to its stranded cost recovery and will ultimately reach zero.
Where, as here, the Commission made adjustments to both the book value and market value of TNP
One, TNMP will not recover the entire book value of TNP One. As a result, TNMP will not incur
a tax liability on the amounts not recovered, and the ADFIT account balance will never reach zero.
33
Stated differently, without “grossing up” the disallowances made by the Commission, TNMP will
retain the remaining balance in its ADFIT account and will therefore overrecover stranded costs.
Section 39.262(a) expressly precludes TNMP from overrecovering stranded costs.
Tex. Util. Code Ann. § 39.262(a). Because the Commission has disallowed recovery of certain
costs associated with TNP One, TNMP will not owe federal income tax on those costs, and TNMP
will not need the associated ADFIT balance. Were the Commission not to “gross up” these
disallowances, TNMP would overrecover stranded costs. Given the express legislative command
that a utility may not be permitted to overrecover stranded costs, see Tex. Util. Code Ann.
§ 39.262(a), we conclude that the Commission acted within its authority to “gross up” disallowances
and thereby prevent TNMP from overrecovering stranded costs. We overrule TNMP’s third issue.
CONCLUSION
Having overruled the parties’ issues on appeal, we affirm the judgment of the district
court affirming the Commission’s final order.
__________________________________________
Jan P. Patterson, Justice
Before Justices Patterson, Pemberton and Waldrop
Affirmed
Filed: January 25, 2008
34