State of Texas, Office of Public Utility Counsel, and City of Houston v. Public Utility Commission of Texas ( 2004 )


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  •       TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN
    NO. 03-03-00239-CV
    State of Texas, Office of Public Utility Counsel, and City of Houston, Appellants
    v.
    Public Utility Commission of Texas, Appellee
    DIRECT APPEAL FROM THE PUBLIC UTILITY COMMISSION OF TEXAS
    OPINION
    This direct appeal concerns the validity of a rule created to facilitate the transition to
    a competitive utilities market. Appellants—the State of Texas, the Office of the Public Utility
    Counsel, and the City of Houston—challenge the provisions governing adjustments to the fuel-factor
    portion of the price-to-beat rule promulgated in 2001 and amended in 2003 by appellee, the Public
    Utility Commission of Texas (“the Commission”). See 16 Tex. Admin. Code § 25.41(g) (2003); 28
    Tex. Reg. 3249 (2003); see also Tex. Util. Code Ann. §§ 39.001(e), .202(l) (West Supp. 2004).
    Besides defending the validity of the rule, the Commission1 contends that appellants waived their
    1
    For purposes of this opinion, the term “the Commission” will include parties who
    intervened and filed briefs supporting the Public Utility Commission of Texas. These intervenors
    include Alliance for Retail Markets; CPL Retail Energy, L.P.; Reliant Energy Retail Services,
    L.L.C.; Reliant Resources, Inc.; TXU Energy Retail Company, L.P.; and WTU Retail Energy, L.P.
    right to challenge the methodology used to compute the fuel-factor adjustment because they failed
    to challenge those aspects of the rule when it was originally promulgated in 2001. We will affirm
    the order adopting the rule as amended.
    BACKGROUND
    In 1999, the Texas Legislature amended the Public Utility Regulatory Act (“PURA”)
    by enacting Chapter 39 “to protect the public interest during the transition to and in the establishment
    of a fully competitive electric power industry” by 2007. Tex. Util. Code Ann. § 39.001(a) (West
    Supp. 2004); see also 
    id. § 202(a).
    As part of the transition, the legislature required electric utilities
    to “unbundle” into three distinct units: (1) power generation companies; (2) transmission and
    distribution utilities; and (3) retail electric providers. 
    Id. § 39.051(b).
    The unbundled units could
    be independent or remain affiliated with the other newly unbundled entities. 
    Id. § 39.051(c).
    The
    legislature intended for the affiliated retail electric providers (“AREPs”) to meet competition from
    retail electric providers entering the deregulated market. See Reliant Energy, Inc. v. Public Util.
    Comm’n, 
    62 S.W.3d 833
    , 836 (Tex. App.—Austin 2001, no pet.).
    During the transition period, AREPs must provide electricity to residential and small
    commercial customers at a base rate adjusted by the fuel factor; this adjusted rate is called the “price
    to beat.” Tex. Util. Code Ann. § 39.202. The base rate was six percent less than the rate in effect
    on January 1, 1999, with certain specified adjustments. 
    Id. § 39.202(a).
    The Commission set the
    fuel factor for each “electric utility” on December 31, 2001. 
    Id. § 39.202(b).
    The provision at the
    center of much of the dispute here permits the Commission to adjust the fuel factor up to twice a year
    if the AREP “demonstrates that the existing fuel factor does not adequately reflect significant
    2
    changes in the market price of natural gas and purchased energy used to serve retail customers.” 
    Id. § 39.202(l).
    In 2001, the Commission promulgated rule 25.41 and explained how adjustments to
    fuel factors would be made. See 26 Tex. Reg. 2680, 2704 (2001), amended in part by 28 Tex. Reg.
    3249, 3266 (2003) (codified at 16 Tex. Admin. Code § 25.41 (2003)).2
    Rule 25.41, as adopted in 2001, provided that the Commission would gauge changes
    in the market price of natural gas and purchased energy based on the “average of the closing forward
    12-month NYMEX Henry Hub natural gas prices, as reported in the Wall Street Journal” over ten
    consecutive business days.3 Former rule 25.41(g)(1)(A), (B). The Commission would compare this
    cumulative average to the cumulative average used to set the existing fuel factor. Former rule
    25.41(g)(1)(C). If the new cumulative average differed from the previous cumulative average by
    more than 4%, the Commission would adjust the fuel factor by the percentage difference. Former
    rule 25.41(g)(1)(D).
    Reliant Energy directly appealed the adoption of the 2001 rule. Reliant contended
    that the Commission erroneously failed to establish headroom.4 See 
    Reliant, 62 S.W.3d at 836-37
    .
    This Court sustained the 2001 rule. See 
    id. at 844.
    2
    For convenience, we will refer to the version adopted in 2001 (see 26 Tex. Reg. 2680
    (2001)) as the “2001 rule” or “former rule 25.41,” and will refer to the version adopted in 2003 (see
    28 Tex. Reg. 3249 (2003)) as “the 2003 rule” or “rule 25.41.”
    3
    The NYMEX (New York Mercantile Exchange) index reports the futures prices of natural
    gas; it is published in the Wall Street Journal. The Commission will compute an average of the
    prices each day (see rule 25.41(g)(1)(A)), then average those averages (see rule 25.41(g)(1)(B)).
    4
    The Commission defines headroom as “the difference between the price to beat and the
    sum of non-bypassable charges approved by the Commission.” Rule 25.41(c)(3).
    3
    In 2003, the Commission amended the rule in several ways. The Commission altered
    the provisions for adjusting the fuel-factor adjustment, lengthening the NYMEX monitoring period
    to twenty consecutive trading days, and increasing the gap necessary to qualify for a fuel factor
    adjustment to a 5% difference. Compare rule 25.41(g)(1), with former rule 25.41(g)(1). The
    Commission also added to the provision permitting AREPs to use an electricity commodity index
    instead of the NYMEX index once it was shown that a sufficiently liquid electricity commodity
    index existed; the rule now also permits use of a sufficiently liquid electricity commodity “trading
    hub (or hubs)” in addition to a qualifying index. Compare rule 25.41(g)(1)(F), with former rule
    25.41(g)(1)(F). The Commission also detailed the process for adjustments to the price to beat
    following certain “true-up” proceedings. See rule 25.41(g)(3).5 The rule originally stated only that
    the Commission could adjust the price to beat after the true-up proceeding. See former rule
    25.41(g)(3). The amendments detail how the Commission may adjust both components of the price
    to beat—the fuel factor and the base rate. See rule 25.41(g)(3).
    Several entities commented on and criticized the proposed amendments. Many of
    those entities have filed briefs in this direct appeal, defending and attacking the rule.
    5
    This Court has considered the validity of the rule establishing the true-up proceedings. See
    Reliant Energy, Inc. v. Public Util. Comm’n, 
    101 S.W.3d 129
    (Tex. App.—Austin 2003, pet.
    granted). We will not review the true-up proceeding at length because it is not at issue here, but will
    summarize the process to provide context for the contested rule. The true-up proceeding is the final
    step of a three-stage process permitting AREPs to recover for the “stranded costs” of investments
    in power-generating equipment. 
    Id. at 134.
    The costs are “stranded” because they were recoverable
    in the regulated market, but not in the competitive market. 
    Id. The first
    phase of the process
    required the AREPs to mitigate the stranded costs, the second phase allowed them to estimate the
    amount of stranded costs and charge customers a Commission-set rate for that amount, and the third
    phase—the true-up proceeding—requires the Commission to reconcile the estimated costs with the
    actual costs. 
    Id. at 134-35.
    4
    DISCUSSION
    Appellants raise essentially six challenges to rule 25.41.6 They assert that the rule
    exceeds the Commission’s authority because (1) the rule does not require AREPs to show that both
    the market price of gas and “purchased energy used to serve retail customers” have significantly
    increased; (2) the rule does not require AREPs to show that their existing fuel factor is “not
    adequate”; (3) the use of an electricity commodity index will violate PURA as does the current
    NYMEX framework; (4) the 45-day time line for contested cases imposed by rule 25.41 violates due
    process; (5) the rule’s provision for post-true-up adjustments violates PURA because it commands
    automatic adjustments to AREP fuel factors; and (6) the Commission failed to support these
    amendments with reasoned justifications.
    The Commission defends the validity of the rule, but also contends that appellants
    may not contest provisions of the amended rule that were promulgated through the former rule
    because appellants did not contest those provisions by direct appeal in 2001. We will begin by
    considering the challenge to appellants’ right to bring this direct appeal.
    Jurisdiction and Waiver
    This Court has jurisdiction over a direct appeal from an agency’s action only through
    a specific grant of statutory authority. See Yamaha Motor Corp. v. Motor Vehicle Div., 
    860 S.W.2d 223
    , 230 (Tex. App.—Austin 1993, writ denied); see also Tex. Const. art. V, § 6(a). Unless
    jurisdiction for direct review is explicitly granted, this Court must dismiss the complaint for lack of
    6
    Although not all issues are raised by all appellants, for simplicity, we will discuss them as
    if they were because all of the issues concern the validity of a rule that applies generally.
    5
    subject-matter jurisdiction. See 
    id. Under PURA,
    a party seeking judicial review of the validity of
    competition rules must file a notice of appeal with this Court within fifteen days of the publication
    of the rule. See Tex. Util. Code Ann. § 39.001(e), (f) (West Supp. 2004). It is undisputed that
    appellants’ challenges to the current version of rule 25.41 are validity challenges and that the notice
    of appeal was filed timely.
    The Commission argues, however, that the bulk of appellants’ challenges are
    untimely attacks on the 2001 rule.7 It contends that appellants waived complaints about the use of
    market prices and the NYMEX method to adjust fuel factors in the 2003 rule because the
    methodology is identical to that used in the unchallenged 2001 version of the rule. It argues that this
    Court lacks jurisdiction over challenges to parts of rule 25.41 that were not amended in 2003.
    PURA permits timely challenge to a “rule” adopted by the commission. Tex. Util.
    Code Ann. § 39.001(e), (f). The statute does not have separate provisions for amended rules or limit
    the scope of our jurisdiction to challenges to amended subparts of a rule. See 
    id. In 2003,
    the
    Commission promulgated a new version of section 25.41, not just a new version of certain subparts.
    Thus, we conclude that we have jurisdiction over appellants’ challenges to the amended rule.
    Validity of Rule
    This direct appeal is a challenge to the validity of the rule. See Tex. Util. Code. Ann.
    § 39.001(f). A validity challenge tests a rule on procedural and constitutional grounds. See
    7
    The provision detailing the post-true-up procedure undisputedly is a new feature added by
    the 2003 amendment process; the Commission does not challenge either appellants’ right to
    challenge it or this Court’s power to consider that challenge. See rule 25.41(g)(3).
    6
    Eldercare Props., Inc. v. Texas Dep’t of Human Servs., 
    63 S.W.3d 551
    , 558 (Tex. App.—Austin
    2001, pet. denied). An agency rule is presumed valid, and the challenging party bears the burden to
    demonstrate its invalidity. McCarty v. Texas Parks & Wildlife Dep’t, 
    919 S.W.2d 853
    , 854 (Tex.
    App.—Austin 1996, no writ). Absent specific or implied statutory authority, an agency rule is void.
    Public Util. Comm’n v. City Pub. Serv. Bd., 
    53 S.W.3d 310
    , 315 (Tex. 2001). An agency’s rules
    must comport with the agency’s authorizing statute, but the legislature does not need to include every
    specific detail or anticipate all unforeseen circumstances. Railroad Comm’n v. Lone Star Gas Co.,
    
    844 S.W.2d 679
    , 689 (Tex. 1992). The law prohibits agencies from exercising what is effectively
    a new power, or a power contradictory to the statute, based merely on a claim that the power is
    expedient for administrative purposes. Public Util. Comm’n v. GTE-Southwest, Inc., 
    901 S.W.2d 401
    , 407 (Tex. 1995). This Court does not decide matters of policy; we are limited to evaluating
    whether the Commission acted contrary to the statute. See 
    Reliant, 62 S.W.3d at 838
    . To establish
    the rule’s facial invalidity, a challenger must show that the rule: (1) contravenes specific statutory
    language; (2) runs counter to the general objectives of the statute; or (3) imposes additional burdens,
    conditions, or restrictions in excess of or inconsistent with the relevant statutory provisions. See
    Office of Pub. Util. Counsel v. Public Util. Comm’n, 
    104 S.W.3d 225
    , 232 (Tex. App.—Austin 2003,
    no pet.).
    Proof required for fuel-factor adjustment
    Appellants complain that the rule does not require AREPs to make the showings
    required by the statute to obtain an increase of the fuel-factor component of the price to beat.
    Compare rule 25.41(g)(1), with Tex. Util. Code Ann. § 39.202(l). The statute provides that an
    7
    AREP may request that the Commission adjust the fuel factor not more than twice a year if the
    AREP “demonstrates that the existing fuel factor does not adequately reflect significant changes in
    the market price of natural gas and purchased energy used to serve retail customers.” Tex. Util.
    Code Ann. § 39.202(l). The rule includes essentially all of this language, but appellants argue that
    the procedures do not implement all of its aspects. The amended rule authorizes an adjustment in
    the fuel factor when there is a 5% change in the average of the NYMEX Henry Hub natural gas
    prices over a 20-day period; the rule states that, when such a change occurs, the fuel factor is
    “unreflective of significant changes in the market price of natural gas and purchased energy.” See
    rule 25.41(g)(1)(D). Appellants argue that the rule fails to implement the statutory requirements that
    the AREP show that the market price of natural gas and purchased energy used to serve retail
    customers have significantly increased and that the existing fuel factor is inadequate.
    Appellants contend that this methodology does not satisfy the statute for several
    reasons. They complain that using the NYMEX index computation improperly uses a mechanical
    assessment of adequacy in lieu of an AREP’s demonstration that the existing fuel factor is
    inadequate. Appellants also contend that the exclusive use of the NYMEX natural gas index ignores
    the market price of purchased energy generated by coal, nuclear, and other sources. They further
    argue that an AREP’s price to beat must be based on that AREP’s actual costs of purchased energy
    because the statute requires an AREP to prove that its own fuel factor is inadequate to reflect market
    changes. Appellants contend that the legislature thereby meant to require an individualized showing
    rather than an adjustment based on a broad market index. They argue that, by using only a market-
    based measure of adequacy to adjust the fuel factor, the Commission essentially renders superfluous
    8
    every word after “market” in the subsection—especially the words “used to serve retail customers.”
    They complain that the formulaic use of the NYMEX natural gas index improperly permits AREPs
    to obtain an increase in their fuel factor and price to beat, even if the price they pay for electricity has
    not increased (due, for example, to lower-than-market, long-term contracts), and even if they do not
    rely on natural gas for electricity generation.
    Appellants further contend that rule 25.41 contravenes the legislative intent to
    promote competition in order to lower rates because the rule improperly permits electricity rates to
    rise more than the AREP’s actual cost of obtaining that power. Appellants also complain about the
    Commission’s creation of headroom. Appellants cite the following language from the Commission’s
    order adopting the 2001 rules: “It is illogical to remedy [the lack of headroom] problem by
    increasing the [price-to-beat] to a level that exceeds the rate that these customers would have paid
    with continued regulation in order that they can ‘benefit’ from competition.” 26 Tex. Reg. at 2691,
    quoted in 
    Reliant, 62 S.W.3d at 842
    . Appellants complain that the Commission has focused on
    maintaining the price to beat as an above-market rate with adequate headroom to promote
    competition to the exclusion of the legislature’s additional purposes of providing customers with a
    prompt reduction from regulated rates. They rely on our statement in Reliant that “[a]lthough the
    Commission could ensure adequate initial headroom, nothing in the statute requires it to do so.” See
    
    Reliant, 62 S.W.3d at 838
    (emphasis in original).
    In its 2003 order adopting the amendments, the Commission finds both express and
    implied support for adjusting fuel factors based on market indices and permitting headroom.
    Regarding the fuel-factor adjustment, the Commission reads section 39.202(l) as a whole, finding
    9
    that “market price” is the key term modifying the remainder of the clause. See Tex. Util. Code Ann.
    § 39.202(l). The Commission opines that the legislature’s use of “market price” is a rejection of the
    use of the AREP’s actual cost of natural gas and energy that helps accomplish the transition to a
    competitive market. “Basing price to beat fuel factor adjustments solely on the actual costs of the
    affiliated REP and not the market price of natural gas and purchased energy (as required by statute)
    will ignore the market prices that non-affiliated REPS must incur to compete against the affiliated
    REP.” 28 Tex. Reg. at 3261. The Commission states that tying an AREP’s price to beat to its actual
    fuel costs would favor the AREP by making entry into the market cost-prohibitive for non-affiliated
    REPs, and thus would conflict with the Commission’s obligation not to discriminate against any
    participant. See 
    id. (citing Tex.
    Util. Code Ann. § 39.001(c) (West Supp. 2004)).
    The Commission used the NYMEX natural gas index to measure changes in the
    market rate for both natural gas and purchased energy facets of the fuel factor because it concluded
    that the index is correlated to both facets. The Commission relied on Federal Energy Regulatory
    Commission findings that the NYMEX index plays an important role in setting benchmark prices
    and is not susceptible to manipulation. 28 Tex. Reg. at 3263. The Commission found that natural
    gas price drives the market price of purchased energy because
    natural gas fired generation is the marginal unit dispatched in most hours of the year
    in Texas, and therefore will set the market price of electricity. . . . [I]rrespective of
    whether that power is in fact generated by a nuclear or coal generation unit, it will be
    priced in the marketplace based on the price of the marginal unit, which is gas fired.
    ....
    The available data continues to demonstrate that natural gas prices and electricity
    prices in ERCOT are significantly correlated, in stark contrast to the assertions to the
    contrary made by OPC and Cities, State, and Houston. . . . A comparison of changes
    10
    in forward natural gas prices and the limited forward electricity prices contained in
    Platt’s MegaWatt Daily also suggest a very high (over 95%) correlation between the
    two prices.
    
    Id. at 3261-62.
    The Commission also concluded that a 5% change in the NYMEX index over 20
    consecutive trading days represents the significance of change necessary to support a change in the
    fuel factor so that the factor adequately reflects the new market price. See 
    id. at 3250.
    Thus, by
    showing this change in the NYMEX index, the AREP shows a change in the market price of natural
    gas, and therefore of purchased energy used to serve retail customers, that is so significant that the
    Commission deems that it renders the fuel factor inadequate to reflect the relevant market price.
    The Commission also found that maintaining headroom by adjusting the price to beat
    balances the interests of consumers and providers while fomenting competition; the Commission
    writes that
    the Legislature provided clear indication that it expected there to be adequate
    headroom under the price to beat for new entrants to be able to effectively compete,
    and that the price to beat could be adjusted in response to changes in market prices,
    not the specific costs of a specific REP.
    28 Tex. Reg. at 3261. The Commission quotes Representative Steven Wolens, who said to the
    House of Representatives, “If you want competition, they (competitors) have got to come in, and
    they got to have headroom to be able to come in and price.” See 
    id. at 3251
    (quoting Public Utility
    Regulatory Act: Second Reading of S. B. 7, 76th Leg., R.S. at 14 (May 20, 1999)). The Commission
    opines that “if the price to beat does not remain an above-market rate with adequate headroom for
    new providers to enter the market and be able to profitably compete for retail customers, then retail
    11
    competition in Texas will not succeed.” 
    Id. at 3250-51.
    This is similar to statements in the
    Commission’s 2001 order. Compare 
    id., with 26
    Tex. Reg. at 2692-93.8
    Appellants argue that the Commission’s interpretation is inconsistent with legislative
    and administrative history. They contend that the legislature permitted fuel-factor adjustments to
    protect AREPs from losses that would result if the fuel factor was not adjustable during a time of
    rising prices, citing statements at a senate hearing. See Public Utility Regulatory Act: Hearings on
    S. B. 7 Before the Senate Spec. Comm. on Elec. Util. Restructuring, 76th Leg., R.S. 18 (March 1,
    8
    In 2001, the Commission wrote:
    However, the commission also recognizes the undeniable fact that REPs,
    affiliated or not, will not incur costs after 2002 based on a historic fuel mix;
    rather, all REPs will be purchasing power in the market. As such, using a
    measure of the forward market price for electricity at or near the time of the final
    setting of the initial price to beat fuel factor to establish a benchmark for
    headroom appropriately reflects the fact that the price to beat may initially be
    above market in some areas, and below market in others. To the extent that any
    subsequent changes in market prices cause that headroom to shrink, disappear,
    or become even more negative, such changes represent significant changes in
    market conditions that will not be reflected in the setting of the initial fuel factor.
    Therefore, in accordance with PURA §39.202(l), a change to that fuel factor is
    warranted. To the extent headroom is initially insufficient to allow non-affiliated
    REPs to compete for price to beat customers in a particular area, competition will
    clearly not take hold until the market price of generation falls. However, the
    commission concludes that maintaining at least the initial level of headroom is
    fully consistent with the intent of SB 7 that the price to beat serve as a protection
    for customers while still fostering the growth of a robust competitive retail
    market.
    26 Tex. Reg. at 2692-93.
    12
    1999). Further, Representative Wolens spoke in support of headroom while explaining that utilities
    wanted the fuel-factor adjustment in order to lower their price to beat to match their competitors’
    prices. See Public Utility Regulatory Act: Second Reading of S. B. 7, 76th Leg., R.S. 14-15 (May
    20, 1999).
    Appellants’ arguments do not prove these amendments to rule 25.41 invalid. The rule
    does not contravene specific statutory language, run counter to the general objectives of the statute,
    or impose additional burdens, conditions, or restrictions in excess of or inconsistent with the relevant
    statutory provisions. The rule appears to be a reasoned attempt to effectuate the legislature’s intent
    and to balance competing concerns.9 We do not find anything in the statute prescribing the means
    by which AREPs must demonstrate the need for a change in their fuel factor, nor do we find any
    provision prohibiting the Commission from creating a formulaic means for AREPs to demonstrate
    that a fuel factor does not adequately reflect a significant change in the market price of energy. The
    Commission has supported the validity of extrapolating the market cost of electricity from the
    NYMEX natural gas index. The test is not invalidated either by its simplicity or by the fact that the
    adequacy of every individual AREP’s fuel factor is gauged by the same market-based measure. The
    scheme incorporates both the individual’s costs at the establishment of the price to beat and the
    behavior of the market during the transition to the competitive market. See Tex. Util. Code Ann.
    9
    The Commission contends in its brief that failure to allow headroom and let the price to
    beat fluctuate with the market price of power would result in “deregulation gone awry, with the worst
    possible result for consumers: a monopoly retail provider that can raise its unregulated rates with
    no competitive constraint.” Whether the legislature and the Commission have created a scheme that
    prevents that unpleasant result is not before us. We assess only whether the Commission has acted
    within the authority granted it by the legislature.
    13
    § 39.202(a)-(b) (West Supp. 2004). Permitting an AREP’s fuel factor, and therefore its price to beat,
    to fluctuate with the market is reasonably consistent with the legislature’s interest in facilitating the
    entry of competitors into the retail electricity market. We find that the Commission acted within its
    authority by basing adjustment of the fuel-factor component of the price to beat on fluctuations in
    the NYMEX index price of natural gas because that index is representative of fluctuations in the
    relevant market prices of energy.
    Use of an electricity commodity index
    Appellants raise similar challenges to the portion of the rule relating to use of an
    electricity commodity trading hub or index to assess the adequacy and adjustment of the fuel factor.
    The 2001 rule required the Commission to permit an AREP to use an electricity commodity index
    for that purpose only after a showing that a sufficiently liquid index had developed for the region and
    only after the affiliated power generation company had finalized its stranded cost determination. See
    26 Tex. Reg. at 2707 (former rule 25.41(g)(1)(F)). The 2003 amendments also allow use of a
    sufficiently liquid electricity commodity trading hub or hubs, and require that the Commission use
    the same methodology to adjust the fuel factor based on the electricity index or hubs as it uses with
    the NYMEX index. See 28 Tex. Reg. at 3269 (rule 25.41(g)(1)(F)). Appellants contend that this
    rule conflicts with the statute by failing to require AREPs to show that the market price of natural
    gas has increased and that the fuel factor is inadequate to reflect those changes.
    We conclude that this challenge is largely premature because at this time there is no
    sufficiently liquid electricity commodity index or hub that can be utilized by the Commission to
    14
    adjust the fuel-factor component. Simply referencing such an index or hub does not invalidate the
    rule.
    The 45-day timeline
    Appellants contend that the timeline for challenges to fuel-factor adjustments violates
    constitutional due-process guarantees encoded into the Administrative Procedures Act (“APA”). See
    Tex. Gov’t Code Ann. § 2001.051 (West 2000). Although the statute does not set a timeline for
    applications for or challenges to fuel-factor adjustments, the rule provides that, if no hearing is
    requested within 15 days of the petition, a final order will issue within 20 days after the petition is
    filed. Rule 25.41(g)(1)(D)(i). If a hearing is requested timely, an order will issue within 45 days
    after the petition is filed or as soon as practicable thereafter.10 Rule 25.41(g)(1)(D)(ii). Appellants
    assert that the 45-day period does not provide sufficient time for adequate presentation of the issues
    in this controversial fuel-factor adjustment process. They argue that the rule is based on a less
    contentious fuel-factor adjustment that was not representative of the typical proceeding. They cite
    the supreme court’s decision that criticized a 161-day decision process in which the opposing parties
    were allowed only 39 minutes of cross-examination. City of Corpus Christi v. Public Util. Comm’n,
    
    51 S.W.3d 231
    , 262 (Tex. 2001). They also contend that the short time-frame depends on the use
    of the NYMEX index, which they argue is itself improper.
    10
    The 2003 amendment added the “as soon as practicable thereafter” provision; it did not
    alter the pre-existing 45-day period. See 27 Tex. Reg. 10840, 10842 (2002). The 2003 amendment
    also added a provision that the parties could agree to extend the 45-day period and agree to provide
    interim rate relief. 
    Id. 15 We
    are not persuaded that the rule violates due process. The APA requires that a
    party have an opportunity for a hearing after reasonable notice of not less than 10 days and the
    chance to respond and present evidence and argument on each issue involved in the case. See Tex.
    Gov’t Code Ann. § 2001.051. The rule meets this plain language. The Corpus Christi case does not
    require a different result. In that case, the court held that the Commission had not adequately
    explained the need for such speedy resolution and particularly criticized the short cross-examination
    period. See Corpus 
    Christi, 51 S.W.3d at 262
    . We also note that the supreme court held that the
    time limits ultimately did not deprive the parties of due process because the dispositive issues were
    legal, not factual, and the parties failed to show how additional discovery or cross-examination
    would have changed the result. See 
    id. at 262-63.
    Here, the Commission has explained that the fuel-
    factor adjustment process should be expedited to provide certainty to the market and to allow
    companies to respond to market forces promptly. 28 Tex. Reg. at 3264. The Commission has, by
    use of the NYMEX index, established a relatively straightforward means of substantiating the need
    for a fuel-factor adjustment; our rejection of appellants’ challenge to that method also rebuts their
    argument against the truncated time period. The simplicity of the process negates the need for a
    lengthy hearing process. See 
    id. Even so,
    the rule provides some potential for extension of the time-
    period with the “as soon as practicable” language and provision for agreed extension. See rule
    25.41(g)(1). Given the need for speedy resolution and the provision of a relatively simple way to
    assess requests for change of the fuel factor, the Commission has created a rule that provides, at least
    in the generic case, all of the process that is due. Although it is possible that application of the
    16
    timeline might violate due process in a particular case, we cannot say that the timeline necessarily
    deprives all potential contestants of due process.
    Provisions for adjustment of price to beat after true-up proceeding
    Appellants complain that the Commission exceeded its authority in promulgating the
    provisions that govern adjustments to the price to beat following true-up procedures. See rule
    25.41(g)(3)(B). The true-up proceeding is the final step in a process permitting AREPs to recoup
    particular investments made in the regulated market that will be unrecoverable in the competitive
    market. See Reliant Energy, Inc. v. Public Util. Comm’n, 
    101 S.W.3d 129
    , 134-35 (Tex.
    App.—Austin 2003, pet. granted). The true-up proceeding is designed to reconcile charges AREPs
    made based on estimations of these stranded costs with the charges necessary to compensate for the
    actual stranded costs. See id.; see also Tex. Util. Code Ann. § 39.262 (West Supp. 2004). PURA
    authorizes the Commission to adjust the price to beat after a true-up proceeding. See Tex. Util. Code
    Ann. § 39.202(k) (West Supp. 2004). The challenged portion of the rule prescribes how the
    Commission will adjust the price to beat after the true-up to maintain the headroom that existed on
    January 1, 2002. See rule 25.41(g)(3). Appellants complain that the rule mandates automatic
    adjustment of rates in conflict with PURA sections 36.003 and 36.201, and that maintaining
    headroom is contrary to the statute, which does not mention headroom at all.
    Appellants’ complaint that the post-true-up adjustment violates particular sections
    of PURA is not persuasive. Both sections 36.003 and 36.201 by their own terms apply to electric
    17
    utilities.11 See Tex. Util. Code Ann. §§ 36.003, .201 (West 1998). “‘Electric utility’ . . . does not
    include . . . a retail electric provider.” 
    Id. § 31.002
    (6)(H) (West Supp. 2004). Language in the true-
    up provision underscores that there is a distinction between an electric utility and an AREP: “An
    electric utility, together with its affiliated retail electric provider and its affiliated transmission and
    distribution utility . . . .” 
    Id. § 39.262(a).
    The use of “together with” indicates that the entities are,
    by nature, separate. Further, the statutes asserted concern the regulation of rates electric utilities can
    charge, while rule 25.41 was promulgated under statutes governing the transition to a competitive
    retail electric market. Compare 
    id. §§ 36.001-.353
    (West 1998 & Supp. 2004) with 
    id. §§ 39.001-
    39.910 (West 1998 & Supp. 2004). Thus the statutes appellants cite do not govern AREPs and
    cannot render rule 25.41 invalid.
    Reasoned justification for amendments
    Appellants argue that the Commission has not fulfilled its obligation to provide a
    reasoned justification. An express purpose of the APA is to provide for public participation in the
    rulemaking process. Tex. Gov’t Code Ann. §§ 2001.001(2), .021-.034 (West 2000 & Supp. 2004);
    see Unified Loans, Inc. v. Pettijohn, 
    955 S.W.2d 649
    , 651 (Tex. App.—Austin 1997, no pet.). In
    order to adopt a rule, an agency must provide: (1) public notice; (2) an opportunity for and full
    consideration of comments; and (3) a reasoned justification for the rule enacted. See Tex. Gov’t
    11
    Section 36.003 provides in part: “The regulatory authority shall ensure that each rate an
    electric utility or two or more electric utilities jointly make, demand, or receive is just and
    reasonable.” Tex. Util. Code Ann. § 36.003(a) (West 1998) (emphasis added). Section 36.202
    provides in part: “the commission on its own motion or on the petition of an electric utility, shall
    provide for the adjustment of the utility’s billing . . . .” See 
    id. § 36.202(a)
    (emphasis added).
    18
    Code Ann. §§ 2001.023, .029, .033 (West 2000); see also 
    McCarty, 919 S.W.2d at 854
    . An agency
    rule not adopted in substantial compliance with the rulemaking provisions of the APA section is
    voidable. Tex. Gov’t Code Ann. § 2001.035(a) (West 2000). To satisfy the reasoned justification
    requirement, an agency’s order adopting a rule must explain how and why the agency reached the
    conclusion it did. See 
    Reliant, 62 S.W.3d at 840
    . A reasoned justification must include: (1) a
    summary of comments the agency received from interested parties; (2) a summary of the factual
    basis for the rule; and (3) the reasons the agency disagrees with a party’s comments. Tex. Gov’t
    Code Ann. § 2001.033(a)(1) (West 2000); 
    Reliant, 62 S.W.3d at 840
    .
    Our review is limited to the face of the order finally adopting the rule. See 
    Reliant, 62 S.W.3d at 840
    ; see also Methodist Hosps. v. Industrial Accident Bd., 
    798 S.W.2d 651
    , 659 (Tex.
    App.—Austin 1990, writ dism’d w.o.j.). In Methodist Hospitals, this Court held that the
    question of substantial compliance . . . is a question of law to be determined solely
    from the face of the [adopting] order. . . . So much is necessarily implied by the
    statute itself. Substantial compliance is not a question of fact, to be determined by
    evidence adduced subsequently in a reviewing court, concerning whether the agency
    had unstated factual bases for its rule or unstated reasons for disagreeing with party
    submissions and proposals, and what these were in fact, or whether any stated factual
    bases or reasons for disagreeing were in fact considered and accepted by the agency
    on sufficient 
    evidence. 798 S.W.2d at 659
    (emphasis in original). To substantially comply with the reasoned-justification
    requirement, the four corners of the agency’s final notice must present the agency’s justification in
    a relatively clear, precise, and logical fashion. 
    Reliant, 62 S.W.3d at 840
    . Furthermore, an agency’s
    order must accomplish the legislative objectives underlying the reasoned-justification requirement
    and come fairly within the character and scope of each of the statute’s requirements in specific and
    19
    unambiguous terms. See 
    id. at 841.
    The reasoned-justification requirement is intended to give
    notice of the factual, policy, and legal bases for the rule as adopted or construed by the agency in
    light of all the evidence gathered by the agency during the comment period in order to ensure that
    the agency fully considered the comments submitted by interested parties and to provide the factual
    basis and rationality of the rule as determined by the agency. 
    Id. We review
    a challenge to the reasoned justification requirement using an “arbitrary
    and capricious” standard, with no presumption that facts exist to support the agency’s order. 
    Id. In applying
    an arbitrary and capricious test to agency rulemaking, we examine whether the agency’s
    explanation of the facts and policy concerns it relied on when it adopted the rule demonstrates that
    the agency considered all the factors relevant to the objectives of the agency’s delegated rulemaking
    authority and engaged in reasoned decision making. 
    Id. An agency
    acts arbitrarily if in making a
    decision it commits any of the following errors: (1) does not consider a factor that the Legislature
    intended the agency to consider in the circumstances; (2) considers an irrelevant factor; or (3)
    reaches a completely unreasonable result after weighing only relevant factors. 
    Id. Appellants complain
    that the Commission failed to provide a reasoned justification
    for these amendments because it failed to summarize accurately and fully the comments of
    opponents of the rule and failed to state fairly the basis for the Commission’s disagreements with
    those comments.
    The comments appellants claim were omitted relate to evidence from the first five
    fuel-factor contested cases that the market-based adjustments were bestowing a windfall on the
    AREPs. In their comments on the proposed amendments, appellants noted that Reliant was granted
    20
    a 20% fuel-factor increase even though its own witness testified that it recovered all costs without
    the increase.12 They also noted that the administrative law judges who heard three other fuel-factor
    adjustment cases found the possibility of windfall to the AREPs to be troubling. Appellants wrote
    that they suspected that there was no relationship between NYMEX futures prices, the prices paid
    by AREPs for gas and energy used to serve retail customers and the AREPs’ existing fuel factors.
    Appellants urged the Commission to explore those relationships to determine whether the NYMEX
    indices served any purpose in implementing the legislature’s intent. Finally, appellants contended
    that the Commission’s rule was inconsistent with the plain language of the statute, in particular
    because it failed to give effect to the phrase “used to serve retail customers.” Appellants contend
    that, with the exception of an attempt to discuss the relationship between the NYMEX indices and
    the AREPs’ costs, the Commission failed to mention these arguments in the summary of the
    comments. Appellants also complain that the summary of their comments concerning the 45-day
    timeline was too concise.
    The Commission mentions concerns about windfalls raised by ongoing contested
    cases. It does not refer directly to specific facts developed in any ongoing contested case, but it does
    refer to the “[Office of Public Utility Counsel] and Cities’ comments that Reliant’s recent filing is
    proof that REPs have gamed the selection of the rolling average period to ‘maximize price
    increases.’” 28 Tex. Reg. at 3262. The Commission also notes, “Houston argued that the
    mechanism could increase the price to beat base rates even if the utility’s costs have not changed,
    12
    Appellants conceded in their comments to the Commission, though not in their brief to
    this Court, that the witness’s statement was excluded from evidence as irrelevant. They nevertheless
    noted that the witness was under oath and that the truth of his statement was not challenged.
    21
    or may have even decreased creating a windfall that would flow to the utility’s bottom line.” 
    Id. at 3252.
    The Commission also writes, “The State cited statements by affiliated REPs that actual
    financial cost is irrelevant to fuel factor adjustment as reason to discount the affiliated REPs’ claims
    of potential losses; and described the losses which affiliated REPs claim as reduced windfalls, rather
    than actual losses.” 
    Id. at 3263.
    There are other references to parties’ concerns about windfalls, but
    we find no reference by the Commission to comments reporting that administrative law judges were
    concerned about bestowing windfalls in ongoing fuel-factor-adjustment contested cases.
    The windfall issue is substantively raised by the lengthy discussions on parties’
    criticisms of the appropriateness of the use of the NYMEX index (or natural gas prices in general)
    to adjust the fuel factor because of the lack of correlation between gas prices and the cost of
    purchased energy used to serve retail customers. For instance, the Commission notes, “The State
    suggested that the NYMEX trading index should not be used at all because it does not reflect the
    prices an affiliated REP has paid for energy purchased to serve retail customers.” 
    Id. at 3260.
    The
    Commission also writes:
    Consumer groups argued that using only gas prices results in a price to beat fuel
    factor which overstates the actual cost of fuel and purchased power. Houston and
    OPC and Cities argued that the rule should be amended so that natural gas fuel factor
    adjustments based on a significant change in natural gas should only be applied to the
    portion of the initial fuel factor, which was subject to the October 1, 2001 gas price
    update, not on costs associated with non-gas fired generation. . . . OPC and Cities
    further stated that basing a price to beat fuel factor change on natural gas prices
    exaggerates the impact of gas prices upon power market prices. Houston, OPC and
    Cities stated that ERCOT power prices are poorly correlated with gas price changes
    ....
    22
    
    Id. The Commission
    also writes, “OPC and Cities, the State, and Houston all stated that meeting
    these thresholds for natural gas prices, whether 4.0% or higher, do not by themselves meet the
    statutory requirement that a demonstration of an increase in the market price of energy used to serve
    customers be made.” 
    Id. at 3263.
    The Commission summarizes comments by appellants while
    rejecting them, stating, “The commission disagrees with Houston that the market price of natural gas
    and the market price of electricity in ERCOT are uncorrelated.” 
    Id. at 3260.
    The Commission does
    the same in the following passage:
    The commission disagrees with the comments of the State, Houston, and OPC and
    Cities that suggest that fuel factor adjustments should, in fact, become a review of all
    of the power contracts actually executed by the affiliated REP or should result in an
    adjustment of only a portion of the fuel factor for changes in natural gas prices. The
    commission disagrees that examining whether or not there have been “significant
    changes in the market price of natural gas and purchased energy used to serve retail
    customers” should be interpreted as something other than an examination of current
    market prices for natural gas and purchased energy.
    
    Id. at 3261.
    The Commission also lists arguments against the 45-day timeline. The Commission
    writes:
    The State supported the amendment in subsection (g)(1)(D)(i) and (ii) to increase
    flexibility in the processing of an affiliated REP’s fuel factor adjustment; but argued
    that the 45-day deadline has no basis in statute, is unprecedented for a contested case
    at the commission, and is not consistent with fundamental requirements of due
    process.
    
    Id. at 3264.
    The Commission uses comments favoring the rule to obliquely indicate the substance
    of the opposition to the rule; it writes: “TXU, in reply comments, disagreed with the State’s claim
    23
    that a 45-day deadline constitutes a denial of due process. TXU argued that if the limited scope of
    a fuel factor filing under the rule is properly observed, then there should be no issue that requires
    extensive discovery or litigation.” 
    Id. We find
    that the Commission did not present appellants’ comments as fully as it
    might have. We are concerned by the failure to mention that the administrative law judges who were
    implementing the rule had expressed concern that the rule was bestowing windfalls. However, we
    conclude that the Commission nevertheless presented the substance of appellants’ comments
    sufficiently to apprise the public of the concerns raised in the rulemaking process, including the
    concern that tying the fuel factor to market rates rather than the AREPs’ actual fuel costs would
    lavish windfall profits on the AREPs, as well as concerns about the brevity of the process.
    Appellants contend that, because the Commission did not fairly summarize their
    contentions, it could not adequately state its reasons for disagreeing with them. Appellants cite in
    particular their argument that, when permitting AREPs to petition for fuel-factor adjustments, the
    legislature intended that AREPs demonstrate losses attributable to rising wholesale fuel costs before
    obtaining an increase in the price to beat. Appellants complain that the Commission never addresses
    these concerns, but simply justifies the use of a 5% threshold to demonstrate a significant change in
    the market price.
    We conclude, however, that the Commission addressed this issue when rejecting
    appellants’ interpretation of the purpose for fuel-factor adjustments. As discussed above, the
    Commission consistently rejected the contention that the price to beat be tied to the AREPs’ actual
    costs. Concerning the meaning of section 39.202(l), the Commission writes:
    24
    Notably, this provision does not refer to the actual costs incurred by the affiliated
    REP to serve retail customer[s]; it refers instead to the market price of natural gas
    and purchased energy. This provision recognizes that, from the perspective of a new
    entrant into the marketplace, market prices are what will dictate its ability to compete
    for service to the retail customer. Again, this supports an interpretation that the
    Legislature intended that the price to beat remain an above market rate for new
    entrants.
    28 Tex. Reg. at 3258; see generally 
    id. at 3260-62.
    The Commission reasoned that, instead, PURA
    required it to ignore the AREPs’ actual costs:
    Moreover, the arguments made by OPC and Cities and State ignore the fact that new
    entrants seeking to acquire retail customers will most certainly need to buy all of their
    power needs from the marketplace. Basing price to beat fuel factor adjustments
    solely on the actual costs of the affiliated REP and not the market price of natural gas
    and purchased energy (as required by statute) will ignore the market prices that
    non-affiliated REPs must incur to compete against the affiliated REP. As discussed
    previously, the Legislature provided clear indication that it expected there to be
    adequate headroom under the price to beat for new entrants to be able to effectively
    compete, and that the price to beat could be adjusted in response to changes in market
    prices, not the specific costs of a specific REP. Tying price to beat fuel factor
    adjustments solely to the costs of the affiliated REP would arguably conflict with the
    directive in PURA § 39.001(c) that the commission “may not make rules . . . (that)
    discriminate against any participant or type of participant during the transition to a
    competitive market and in the competitive market.”
    28 Tex. Reg. at 3261. Under such logic, the AREPs’ costs, losses, or profits are irrelevant. While
    PURA does not require expressly that the Commission consider the effect of these rules on the
    economic viability of non-affiliated retail electric providers entering the market, the Commission has
    argued reasonably that it must do so to protect the public’s interest in having competitive markets,
    particularly in the long-term. See 28 Tex. Reg. at 3250-52, 3258; see also Tex. Util. Code Ann.
    25
    § 39.001 (“the public interest in competitive electric markets requires that . . . prices should be
    determined by customer choices and the normal forces of competition”).
    The Commission also rejects challenges to the relevance of the NYMEX index to the
    market price of purchased energy used to serve retail customers. 28 Tex. Reg. at 3249 (“natural gas
    and electricity prices are very highly correlated in Texas”), 3260 (“forward natural gas prices
    compared to forward electric prices for the comparable period of time in ERCOT indicates a very
    strong correlation”), and 3261-62 (“The available data continues to demonstrate that natural gas
    prices and electricity prices in ERCOT are significantly correlated, in stark contrast to the assertions
    to the contrary made by OPC and Cities, State, and Houston. The capacity auction prices cited by
    Reliant in its reply comments demonstrate a very strong correlation between the two. A comparison
    of changes in forward natural gas prices and the limited forward electricity prices contained in Platt’s
    MegaWatt Daily also suggest a very high (over 95%) correlation between the two prices.”). These
    excerpts demonstrate why the Commission views the NYMEX index as representative of the cost
    of natural gas that controls and correlates to the price of purchased energy that is used to serve retail
    customers, thus explaining the Commission’s decision to use its fluctuation to assess and adjust the
    fuel factor.
    The Commission also refutes comments on other subjects that appellants argue were
    omitted. The Commission explains that the 45-day period for orders on petitions for fuel-factor
    adjustments is sufficient because of the simplicity of the process and the need for expeditious
    resolution. 
    Id. at 3264.
    With respect to windfall profits, the Commission’s admissions that a
    market-based fuel factor will, in times of rising natural gas prices, likely lead to fuel charges that
    26
    exceed the AREPs’ actual fuel costs is essentially an acceptance of possible interim windfalls to
    AREPs as a cost of the transition to competitive markets that will, theoretically, lead to lower prices
    for consumers. See, e.g., 
    id. at 3257,
    3261, 3263.
    We conclude that the Commission’s order is sufficiently thorough and responsive to
    be a reasoned justification and not arbitrary or capricious.
    CONCLUSION
    Having resolved all the issues in this direct appeal in favor of the Commission, we
    sustain rule 25.41, adopted as amended in 2003.
    Mack Kidd, Justice
    Before Chief Justice Law, Justices Kidd and Puryear
    Affirmed
    Filed: March 11, 2004
    27