### TEXA S C OU R T OF A PPEAL S, THIR D DIST R ICT , AT AU STIN

NO. 03-04-00688- CV

Ce nt e r P oin t E ne r gy

Ent e x, App e lla nt
v. Railroad Com m ission of T exas, Appellee

F ROM THE DISTRICT CO URT OF TRAVIS COUNTY , 201ST JUDICI AL DISTRICT NO. GN402318 , HO NORAB LE LORA J. LIVINGSTO N, JUDGE PRESIDI NG

O P I N I O N This appea l co n cerns whether the Railroad Commission properly ref used to allow Ce nte rP oint E ne rgy

Ente x to c ha

rg e c us tom e rs re sid ing

outs id e of Hou sto n- are a mun ic ipa lit ie s a share of the fr anchise fee s Entex paid to t he Houston-a rea municipalities in connec tion with Entex ’s
us e of mun ic ipa l la

nd and se rv ic e s. Th e dis tr ic t c ourt a ff ir me d the Com mis sio n’ s or de r. We r e ve rs e the district court’s judgment a nd rema nd this cause to the district cour t with inst ructions to rema nd to t he Com mis sio n f

or fu rt he r p ro c e e din g s.
F ac ts and P r oc e dur al B ac kgr ound

Entex i s a g as utility

subject to the Ga s Utilit y Reg ulatory Act. SeeTex. Util . Code § 102.001 (West Supp. 2005). The Houst on Division of Entex provides natural g as ser vice to the Houston are a. The Houston Division comprises sever al municipalities as well as uninc orporated2

are as, which a

re c alled the “ environs.” T he 283,85 8 cu s t o m er s living in the Houston environs comprise 36.57% of the c ustomers in Entex’s Houston Divi sion.

B e fo re fi lin g thi s r a te re qu e st for th e Ho us ton e nv ir on s, En te x re a c he d a g re e me nts with severa l municipalities in t he Houston Division reg arding Entex’s rates, the fra nchise fe es the
mun ic ipa lit ie s w ou ld c ha

rg e fo r us e of mun ic ipa l la nd to p ro vid e g a s se rv ic e s, and ho w E nte x co uld
rec over those f

ees f rom its customers. SeeTex. Util Code Ann. § 103.001 (Wes t S u p p. 2005) (municipali t i es h av e ex clusive jurisdiction over g as rates, operations, and service s within the municipalities unless they cede that power to the Commi ssion). The fr anchise fee s were calc ulated ba se d o n g a s sa le s w ith in t he mun icip ali tie s. En te x ag re e d w iththe mun ic ipa lit ie s th a t it wo uld
c oll e c t the amou

nt pa id in fr anc his e fe e s f ro m all Ho us ton Di vis ion c us tom e rs , inc lud ingtho se in the e n v ir o n s o u ts id e th e mu n ic ip a li ti e s . A c c o r d in g ly , w h e n E n te x f il e d w it h th e Co mmission a state me nt o f i nte nt t o in c re a se g a s r a te s w ith in t he H ou sto n e nv ir on s, it p ro po se d to c oll e c t a proportionate sha

re of the fra nchise fe es paid fr om en v i ro n s cu s t omers. The reque sted new r ates confor med with those set by

the ag ree ments with the municipalities. No oppositi on was filed. The Commis s io n ’ s h e aring s examiners proposed, a nd the Commiss ion adopted, rates that do not allocate a shar e of the municipal fra nchise fe es to be borne by Entex’s Houston environs customers. Entex filed a motion for re hear ing, a rguing that the necessar ily implied requireme nt that municipal residents be ar the full brunt of the fr anchise fee s marked a cha ng e fr om previous orde rs not supported by

the re cord. Tha

t motion was denied. Entex sought judicial revie w. The Commission filed a plea to the jurisdiction, arguing that Entex lacke d standing to c halleng e the Commi ssion’s r efusa l to a llow Entex to rec over3

a shar e of municipal fr anchise fee s from non-municipal c ustomers bec ause Ente x was not ag g rieve d by the dec ision. After de nying the plea to the j urisdiction reg arding the fee i ssue, the district cour t aff irmed the Commission’s order.

En te x a pp e a ls, arguin g that re qu ir ingit t o c oll e c t a mun ic ipa lity ’s fr anc his e fe e on ly from customer s in that municipa lity is not supported by substantial e vidence in the rec ord and ma rks a cha ng e fr om p re v ious orders. Ente x also contends that, by this order, the Commission
unrea sonably

discriminated within customer c lasses, re ndere d a dec ision in vi olation of the substantial evidence rule, a bused its discretion, ac ted ar b i t rar ily and ca priciously , and violated Entex’s due proce ss r ights. The Commi ssion de nies these c ontentions and argues that, bec ause the C o m m i s s i o n ’ s d e c i s i o ni s r e v e nu e n e u tr a l f o r E n t e x
—th a ti s , i ta f

f e c t s o n l y w h i c hc u s t o m e r s p ay a share of the fr anchise fee s rather than whethe r the fe es ar e re couped by E n t ex
— E ntex i s not
a g g ri e ve d b y

the de c isi on

and la c ks sta nd ingto c omp la in a

bo ut i t.
Stand ing an d jurisdi ction

We reviewde novo whether the tria l court had jurisdiction, takingthe pleading s as true a nd construingthem in favor of the pleade r as we ll as consider i n g evidenc e re levant to the jurisdictional inquiry
. S

e e Te x a s D e p ’ t o f Pa r k s &W il d li fev . M iranda , 133 S.W .3d 217, 226-28 (Tex. 2004). Standing is a c omponent of subject- matter jurisdiction and is thus essential to a court’s power to hear a ca se. Texas Ass’n of Bus. v. Texas Air Control Bd. , 8 5 2 S. W. 2 d

4 4 0 , 4 4 4

- 4 5 ( T e x. 19 93 ); Te x as Lot te ry

Com m’n v . S

c ie nti fic Ga me

s I nte rn . , Inc. , 9 9 S. W.3d 376 , 3 8 0 ( T e x. App.—Austin 2003, pet. denied)
. A person who has exhausted available administrative re medies and is ag g rieve d by an age ncy order in a contested case is entitled to judicial revie w of that orde r.4

Tex. Gov’t Code Ann. § 2001.171 (West 2000); se e Ho ok s v . Te x as De p’ t of W ate r R es. , 611 S.W .2d 417, 419 (Tex. 1981). To be a g g rieve d, a par ty must have a justiciable interest—that is, the ag ency ’s order must inj ure or

threaten the par t y

specific ally

and diffe rently

from the public at larg e. See Hooks , 6 11 S.W. 2d

a t 41 9; Scientific Game

s , 99 S.W .3d at 380. The Commission does not assert that E nte x ha s f

a ile d to e xha

us t it s a dmi nis tr a tiv e re me die s. The re cord shows that Entex may be ag g rieve d by the C ommissi on’s decision in one of two wa

y s: it m ay

not be able to r ecover fr o m municipal customers all of the f ranc hise fee s assessed a

nd, even if

it does, that rec overy

from only

a p o rt i o n o f t h e customers ser ved by the fac iliti es the fe es support could put Entex at a c ompetitive disadvantag e in the ene rg y marke t among municipal customers. As the he aring s examiners noted, Entex’s ag ree ments with the municipalities call for fra nchise fe es to be c ollected pr oportionately from a l l o f i t s cu stomers in the Houston Di vis ion , w hic h in c lud e s e nv ir on s c us tom e rs . A c c or din g ly , th e City and oth e r m un ic ipa lit ie s c ou ld resist any attempt by Entex to rec over all of the fe es fr om their reside nts. I f instead Ente x is allowed to r e c ov e r a ll o f t

he fe e s f ro m munic ipa l r e sid ent s, th at wi ll i nc re a se the c os ts p a id b y tho se
c us tom e rs . E nte x vic e pr e sid e nt G e or g e He pb ur n te sti fi e d b y

a ff ida vit that th is i nc re a se d c os t w ou ld impair the cost-competitiveness of Entex ’s s ervic e in the Houston marke t. Entex fac es compe tition f r o mu n r e g u l a t e d

e l e c t r i c u t i l i t i e s an d

a l s o , a tl e a s ti nM i s s o ur i C i ty, an o th e r g a s u t i l i ty. Although the Commi ssion pr oduced evidenc e that Entex mig ht r ecove r al l o f t he fr anc his e fe e s f

ro m munic ipa l c us tom e rs , it did no t c on c lus ive ly pr ov e e ith e r (1 ) t hat E nte x wou ld
rec over a ll of the fee s or (2) that Entex would not be place d at a c ompetitive disadvantag e by doing so. Entex’s pleadings and Hepbur n’s t estimony descr ibe at least a threatened harm from the ag ency5

order that is unique to Ente x . This pr ovides standing for Entex and subjec t-matter jurisdiction for the district court be low and this Court. W hether Entex i s entitled to relief is a dif fer ent question.
Stand ard of Review

Entex challeng es the Commission’s refus al to allow it to recoup f rom environs
c us tom e rs a

po rt ion of the fr anc his e fe e s it pa id to mun ic ipa lit ie s. Pr e fator y to that re vie w, we mus t deter mine what standa

rd of r eview to a

pply . The pa

rties d ispute whether

the fra nchise fe e issue
un de r r e vie w a

ri se s f ro m a rate makin g pr oc e e din g or an a d h oc ru le makin g . T he a pp lic a ble standards of

revie w ar e substantial evidenc e and a buse of discr etion, respe ctively . Both sides contend that they

preva il under either

standard. The two ty

pes of decisions are not mutually exclusive. Gas rates ar e set in conte stedc a se he ari ng s “ in whic h th e le g a l r ig hts , d uti e s, or pr ivi le g e s o f a

pa rt y are to b e de te rm ine d b y

a state ag ency afte r an oppor

tu n i t y for a djudicative hea

ring .” SeeTex. Gov’t Code Ann. § 2001.003(1) (West Supp. 2005). Ad hoc r u l emakingoccur s when the a g ency makes a deter mination that has implications bey ond the instant parties, but pref ers not to make a

formal r ule bec ause the ag ency

may not have ha d sufficie nt e x perie nce with a particula r problem to support making a rule or bec ause the problem is so specialized and varying in nature as t o be im possible of capture within t he boundar ies of a g ener al rule. See City of El Paso v. Public Util. Comm’n , 883 S.W .2d 179, 188-89 (Tex . 1994). A na d h o c r u l e i s ana g e n c y s t a t e m e n tt h a ti n t e r p r e t s , i mp l e m e n t s , o r

p r e s c r i b e s a g e n c y l aw o r

p o l i c y. W est Tex. Util. v. Officeof Pub. Util. Couns el , 896 S.W .2d 261, 272 (Tex. App.—Austin 1995, no pet.). I f the de cision made duringa ratemakingproce edingref lects a policy

choice that has not bee n committed to a formal r

ule, it can be considere d an ad hoc rulemaking
. See Tex as Ass'n of Long6

Distance T

ele. Cos. ( TEXALT EL) v. Public Util. Comm’n , 79 8 S. W.2 d 8 75 , 8 86 (T e x. Ap p. —Aus tin 1990, writ denied)
.

The de cision at issue here appea rs to be pure ly

rate mak i n g . Although the finding under r eview is broa dly

stated and pa

rties in simil ar r atemakingcase s may look to this order

for gu i d an ce , t h e h ea ri n gs ex am i n er s ex p r e s s l y s t at edi nth ei r p ro p o s al fo r d ec i s i o nth at co l l ec t i n g a share of municipal fr anchise fee s from environs c ustomers was unr easona ble “in this particular circ umstance.” Tex. R.R . Comm’n, Statement of I n te n t f il e d by Centerpoint Energy

Entex to Change Rates in the Environs of the City of Houston, Tex. , Gas Utils. Docke t No. 9469 at 10 (May 20, 2004) (p ro po sa l for de c isi on ). Th e Commis sio n’ s f ina l or de r d oe s n ot s e t do wn a ru le that no g a s util ity
c ou ld sh ow that su c h a fe e -c oll e c tio n str a te g y is re a so na ble
. Th e de c isi on a

pp e ars to be lim ite d to thi s r a te c a se and

no t ba se d o n b ro a de r p oli c y c on c e rn s. Whether viewe d as ratemaking or ad hoc rulemaking , the re sult of our revie w of the Commi ssion’s decision is the same. I n the intere st of eff iciency , we will re view the Commission’s de c isi on un de r b oth

sta nd ard s.
Ra te m aki ng We re v i ew the Commiss ion’s decision in a ratemakingproce edingto determine whether it is supported by

substantial evidence
. The appea ling party bear s the burden of showing a lac k of substantial evidenc e. Sportscoach Corp. of Am. v. Eastex Camper Sales, Inc

. , 31 S.W .3d 730, 733 (Tex. App.—Austin 2000, no pet.). Fi n al orders of the Commission are pre sumed to be prima fa cie va lid and subject to revie w under the substantial evidence rule. City of E l P as o , 883 S.W .2d at 185. We revie w the Commissi on’s leg al conc lusions for err ors of law and its findings of7

fac t for support by substantial evidence
. See Te x.Go v’ t Cod e Ann. § 20 01 .1 74 (We st 2 00 0) ; Heat Energy Advance d Tech., Inc. v. W . Dallas Coali tion , 96 2 S.W. 2d 28 8, 29 4- 95 (T e x. Ap p. —Aus tin 1998, pet. denied). To constitute substantial evidenc e, the evidenc e in its entirety must be sufficient that rea sonable mi nds could have rea ched the conclusion that the a g ency must have re ache d to justi fy the disputed ac tion. Te

x as Sta te Bd

. of Den ta l Exa m’rs v . S

ize mo re , 7 5 9 S. W. 2 d

1 1 4 , 1 1 6 ( T e x. 1988). The e vidence in the rec ord may preponde rate ag ainst the ag ency ’s decision and st ill provide
a re asonable basis fo r t h e d ec ision and satisfy the substantial evidenc e standa rd. Nucor Steel v. P u b l i c U t i l

. Comm’n , 168 S.W .3d 260, 267 (Tex. App.—Austin 2005, no pet.). We may not
s u b s ti tute o u r

ju d g me n t f

o r th a t o f t he a g e n c y

o nqu e s ti o n s c o mm itte d

to a g e n c y

d is c r e ti o n . T e x. Go v’ t Co de Ann. § 2 00 1. 17 4; Gulf States Utils. Co. v. Public Util. Comm’n , 947 S.W .2d 887, 890 (Tex. 1997). When setting rates, the Railroad Commission is “veste d with all the autho ri t y and power of this state to ensure compliance with the obligations of ga s utili ties” and ma y establish and
re gu l at e rate s char g ed by the utiliti es in are as outside municipalities. Tex. Util . Code Ann. §§ 103.001 (municipalities) & 104.001 (other) (West 1998)
. The Commi ssion must ensure that the rate s ar e j u s t an d rea sonable. Id . § 10 4. 00 3( a ) ( Wes t 19 98 ). “ A r a te may no t be unre a so na

bly pr e fe re nti a l, p re

jud ic ia l, o r d isc ri min a tor y but mu st b e su ff

ic ie nt, e qu ita

ble , an d consis te nt i n application to ea ch cla ss of consumer .” Id . F ur the r, a g a s util ity

may no t: (1 ) g ra nt a n unr e a so na

ble pr e fe renc e or

a dv anta g e c on c e rn ingrate s o r s e rv ic e s to a per son in a classification; (2 ) s u b j ec ta p er s o ni na c l as s i fi ca t i o nt o an un re as o n ab l e p re j u d i ce o r d i s ad v an t age conce rning rate s or servic es; orTh e Commis sio n mad e on e oth e r f ind ingon the fr anc his e fe e iss ue : “ En te x pro po se d to 1 require e n v i rons custom ers, who live outside of the cor porate limit s of a municipality , to pay the fra nchise fe es incurr ed throug h the sale of g as to customers within the cor porate limit s of the mun i ci p al ity .” Te x . R.R. C omm’n, Sta te me nt o f I nte nt F ile d b yCe nte rp oin t E

ne rg yEn te xto Change Rates in the Environs of the City of Houston, Tex. , Gas Utils. Docke t N o. 9469 at 3, finding 32 (Jun e 8, 20 04 ) ( fi na l or de r) . E nte x doe s n ot c ha lle ng e thi s r e state me nt o f i ts p ro po sa l. 8 (3) establish or maintain an unr easona ble diffe renc e con cerning rate s of servic es betwee n localities or betwe en cla sses of ser vice.
Id . § 104.004 (West 1998).

Th e C o m m i s s i o n ’ s r e

j e c t i o n o f E n t e x’ s f

e e a s s e s s m e n t o n e n v i r o n s c u s t o m e r s is based on the finding of fa ct that “[s] hifting f ranc hise fee s fr o m m u n i ci pal customers to e nvirons customers is unre asonable .” Te x . R.R. C omm’n, Statement of Intent Filed by Centerpoint Energy Entex to Change Rate

s in the Environs of the City of Houston, T ex. , Gas Utils. Docke t No. 9469 at 3, finding 33 (June 8, 2004) (final order)
. The conclusion of l aw reac hed based on this finding is the Commi ssion’s a

pproval of Entex’s re quested rate s except for the r ecove ry of the fr anchise fee s from environs customer s. Id . at 4, conc lusion 6. This finding and c onclusion are adopted ve rbatim from the fi nd ing s and

c on c lus ion s p ro po se d b y the he ari ng s e xami ne rs . This finding only

ref ere nces the utilit y

code s t an d ar d t hat rates be re asonable
. Id
. There are no other fi n d i n gs underlying this dec ision that Entex ’s re quest was unr easona ble. The 1 Commi ssion’s order doe s not satisfy the re quirement that “ [f] indings of f act, if set forth in statutory langua g e , mu st b e a c c omp anie d b y a c on c ise and

e xplic it s tate me nt o f t

he un de rl yingfa c ts supporting the finding s.” Tex. Gov’t Code Ann. § 2001.141(d) (West 2000).9 The proposal for decision provides the only explanation by

the Commiss ion for the finding that requiring environs customers to be ar a share of the fee s is unr easona b l e. W e m ay consider the examiners’ re commendations in light of the pertinent e vidence, and they are entitled
on ly to s uc h valu e a s th e y

int ri ns ic a lly c omm and

wh e n a g e nc y

de c isi on make rs de pa

rt fr om t he m. See Exx on Corp. v . Railroad Comm’n , 993 S.W .2d 704, 709-10 (Te x . App.—Austin 1999, no pet.). The e x aminers wr ote: Presumably , the fra

nchise fees paid by

the re sidents provide funds for city service s wi thi n th e mun ic ipa l bo un da ri e s. I t is no t re a so na

ble fo r En te x to sh if

t the burd e n of pa

ying tho se fe e s, a t th e re qu e st of the c iti e s, to e nv ir on s c us tom e rs . Sp e c if ic a lly , it is n ot r e a so na

ble to s hif

t th os e costs to residents outside of the municipa l boundarie s who derive no b e ne fi t from the fra nchise fe es. Those c ustomers derive no benef it from the municipal servic es that are funded by

fra nchise fe es. As a r esult, in this particular cir cumstance , it does not appea r re asonable to require an envir on cust omer to pay an allocated fra

nchise fe e a pp lic a ble to t he c omm un iti e s o f B e lla ir e , He dw igVi lla g e , Pi ne y Poi nt V ill a g e (a ll o f w h i c har e e n c o mp a s s e d b y t h e C i ty o f H o u s t o n ) , an d th e C i ty o f H o u s t o n . F i n a l l y, it should be noted that shifting those c osts would result in a larg er inc rea se in rate s to the environs customer

than to municipal customer. (Emphasis in orig inal.) The he aring s examiners rejec ted Entex’s arguments that it should be allowed to re c ou p the se fe e s fr om e nv ir on s c us tom e rs be c a us e the mun ic ipa l fr a

nc his e fe e s e na

ble En te x to use public l ands t o install and maintain infrastruc ture for providing natura l g as service, that ne ither the infra stru ct u re n o r the base load ends at the city limit s, that the mains meteringequipment and other re lated fa cilities are a n indivisi ble sy stem t h at p ro v i d es a benefit to all city and envir ons customers, a

nd that all customers should share in paying the fee s that permit the sy stem to provide them g as. The examiners also reje cted the a pplicability

of the Public Utility

Commi ssion’s prac tice10

of allowingsuch c o ll ection of municipa l franc hise fee s outside the municipalities assessing such fe es
on e le c tr ic uti lit ie s. Th e e xami ne rs dis mis se d th is p re c e de nt b ecaus e th e elec tr ic uti lity mark e t is de re g ulate d unli ke th e gas mark e t. T he e xami ne rs state d th a t th e y kn e w o f n o o the r g a s util ity
rec overingmunicipal fee s from environs c ustomers. The examiners also noted that fr anchise fee s
are c a lc ulate d b a se d o n g ro ss r e ve nu e s f ro m sa le s w ith in t

he mun ic ipa l bo un da

ri e s. I n support of the findingthat char g ing environs customers a shar e of the fra nchise fe e is unreasona

ble, the Commissi on cites Ente x S enior Couns el Charles H arde r’s testimony that the fee s are based on a

perc entag e of the g ross rec eipts of sales within the municipal boundar ies and that the c iti e s u se the fe e s re c e ive d fo r n on -g a s- re late d c ity se rv ic e s. Th e Com mis sio n a rgue s th a t th is
case is controlled by t his Court’s previous holding that rec ouping f ees only from municipal
c u s t o m e r s i s r e a s o n a

b l e w h e na

c i t y b a s e s i t s f

r a n c h i s e f e e s o ng r o s s r e c e i p t s i nth e m un i c i p a l i ty. See Cit y of Houston v. Publi c Util. Comm’n , 6 56 S.W. 2d 10 7, 11 1 ( Te x. Ap p. —Aus tin 19 83 , w ri t ref ’d n.r.e .) (r eviewingrate s set i n re gu l ated tele phone utility marke t). This Court wrote that the city ’s choice to base the f ranc hise fee on g ross rec eipts rather than as a flat renta l f

ee indicated that something othe r than re ntal was involved. Id
. T his Court also wrote that city residents we re the predominant user s of the infra structure place d in the city
. Id . This Court stated:
I ns of ar a s th e re c or d in dic a te s, it i s p os sib le th at th e Ci ty ’s re ve nu e fr om t he g ro ss rec eipt char g es could e x cee d the re asonable value of the use of its st ree ts and fa c ili tie s made by

B e ll, wi th t

he re su lt that a

dis tr ibutio n o f t

he c ha rg e s amon g a ll Be ll rat e p ay e r s w o u ld

r e s u lt in n o n - r e s id e n ts s u

b s id iz in g th e g e n e r a l c o s t o f the City ’s g ov e rnme nta l and

oth e r a c tiv iti e s.
Id
.11 Howeve r, we are cited to no evidenc e tha t co n d i t ions ex ist here makingthe
rec oupment of fees from environs customers unrea sonable. We are not cited to any evidenc e that t h e f e e s c o l l e c t e d w i l l e x c e e d t h e r e a s o n a

b l e v a l u e o f

th e u s e o f

th e m un i c i p a l i t i e s ’ p r o p e rty. I nstead, the r ecor d contains a le tter fr om the City of Houston’s leg al depa

rtment—filed af

ter the pr op os a l f

or de c isi on but be fo re the fi na l or de r— a sse rt ingthat th e City of Ho us ton charg e s f

a ir marke t rental va lue for the municipal proper ty used by Entex. W e ar e not cited to a ny evidenc e of what city service s the proce eds of the f ranc hise fee s support or any evidenc e that envir ons customers do no t be ne fi t f

ro m th os e se rv ic e s. Most critical l y , there is no evidence that environs customer s do not benefit fr om En te x’s pa

y me nt of the fe es for

which it seeks r ecoupme nt. The only evidenc e in the rec ord is to the contra ry . I n his supplemental testimony , Har der quote s an Entex response to the Comm i ssion’s reque st for data

in which Entex ex plains that the fra nchise fe es ar e asse ssed and co l l ec t ed so that Entex

may us e str e e ts, a lle y s, and pu bli c ri g ht- of

-w ay s to ins ta ll a

nd ma int a in i ts infrastruc ture to provide natural gas service. Howeve r, neither the i nfra structure nor the base load serve d by

Entex en d at t he boundar y lines of ea ch city

within the Houston Division. Entex’s mains, meter ing e quipment, and other r elated f acilities integ ral to the provision of natural g as ser vice c onstitut e an indivisi ble sy stem that e xten ds thr ou g ho ut t

he Ho us ton

Di vis ion , a

nd a s su c h, pr ov ide s a

be ne fi t to a ll c ity and envir ons customers within the Houston Division.
Har der opine d that the use of gr oss rec eipts on sales withi n the m unicipalities to calculate the fe es did not chang e the purpose for which the fee s wer e collecte d—to pa y for the use o f t he12

mun ic ipa lit ie s’ land

—a nd did no t r e nd e r t

he c oll e c tio n of suc h fe e s a tax on e nv ir on s. Ha

rd e r a lso
wr o t e t h e f

o l l o wi n g: The mains, ser

vice lines a

nd other utility

fac iliti es that ar e plac ed in the stree ts and r i g h t s - o f

- w ay a l l o w E n t e x t o p r o v i d e n a tur a l g a s s e r v i c e t o c u s t o m e r s i n s i d e th e c i ty, or cities, as well as to c ustomers that are located in the environs. The fra nchise fe e pay ments by Entex t o the re spective ci t i es represe nt rea sonable a nd nece ssary expenses of the Company that are direc tly

associ at ed with assets used to pr ovide natur a l g a s se rv ic e to c us tom e rs in t he c iti e s a nd in t he e nv ir on s.
Th is e vid e nc e is unc on tr ov e rt e d. State d d if fe re ntl y , th e re is n o e vid e nc e in t he re c or d to su

pp or t a
co n t ra ry fi n d i n g. An ag ency may acc ept or reje ct the testimony of witnesses. Southern Union Gas v. Railroad Comm’n , 6 92 S.W. 2d 13 7, 14 1 ( Te x. Ap p. —Aus tin 19 85 , w ri t r e f’ d n .r .e .) . A n a g e nc y is not obliged to a cce pt opinion testi mony from an e x pert—e ven if it is the sole evidenc e on the issue and is uncontra dicted and unimpea ched. Reliant Energy, Inc. v . Public Util. Comm’n , 153 S.W .3d 174, 191 (Tex. App.—Austin 2004, pet. filed) (ne vert h el es s reve rsing reje ction of non-opinion testimony). B ut an ag ency must provide a basis fo r i ts rejec tion of uncontradic ted, unimpeac hed testimony that is neither inher ently improbable or c onclusory
. Citi es of Po rt A rth ur , P or t Ne c he

s, Nederland &Grove

s v. Railroad Comm’n , 886 S.W .2d 266, 270-72 (Tex. A pp.—Austin 1994, no pet.). The Commi ssion can re ject such uncontra dicted evidence if it explains or m akes f indings that pe rm it c o u rt s t o r e v i e w t h e r e a s o n a b l e n e s s o f th a t r e

j e c t i o n , b u t a f

a i l ur e t o e xp l a i n c an r e s ultin
reve rsal. Id . at 271-72.13 Her e, the Commission failed to ex p l ai n its im plicit rejec tion of Harde r’s uncontrove rted testimony . The Com mission also failed to provide its basis for a dopting a contra ry conclusion. T h e hear ings e x aminers did not explain their conclusion that environs c ustomers
re c e ive d n o be ne fi t fr om the inf ra str uc tur e on mun ic ipa l la

nd s ma de po ssi ble in p art

by the fr anc his e fee pay ment. The Commissioners did not ex plain why it is unreasonable for Ente x to rec over a portion of the fe es paid fr om environs customers. There was no evidentiary showing that the fe es pa id b y En te x we re no t r e a so na

bly re late d to En te x’s u se of

c ity pr op e rt y fo r i ts i nte g rate d s y ste m. There is no ex planation or support in the rec ord for ref using to a llow E ntex to rec over a share of the municipal fra

nchise fe es that bene fit the environs c ustome rs . E v en if the he aring s examiners and the Commiss ion could reject wit hout expl anation the unc ontroverte d evidenc e that pay ment of the fe es b en ef i t s t h e e n v i ro n s cu s t o m er s b y en ab l i n g E n t ex t o p ro v i d e ga s s erv i ce t o th e e n v i ro n s th ro u gh the re nted municipal prope rty , neither the hear ings e x aminers nor the C o m m i s s i o n ref

er to a ny
e vid e nc e su

pp or tin g the ir c on tr ary c on c lus ion s th at th e pa

y me nt o f f ra nc his e fe e s p ro vid e s n o b e ne fi t to e nv ir on s c us tom e rs and , he nc e , that re c ou pin g tho se fe e s fr om e nv ir on s cus to mer s is
unrea sonable. By

this review, we do not inva de the Commiss ion’s policy -makingpurview. Rathe r, we simply

fulfill the mandate that we dete rmine whe ther the Commission’s decis i o n i s supported by substantial evidence
. See id . at 27 0- 71 ; se e als o Tex. Gov’t Code Ann. § 2001.174. The Commi ssion has not e x plained the basis for its re jection of the uncontra dicted evide nce that environs customers be nefit fr om the pay ment of municipal fr anchise fee s. Thus , we ca n n o t ignor e that uncontra dicted evidenc e when revie wing the sufficie ncy of the e vidence
. See Cit ies of Port Arthur ,14

886 S.W .2d at 271. The Commission and the hear ings e x aminers did not set out facts or policy
rea sons underlying the decision t hat Ent ex’s reque sted char g e is unrea sonable. See Tex. Gov’t Code Ann. § 2001.141(d). T he orde r does not supply the nec essar

y basis for e stablishing a f

ranc hise fee
rec overy structure that favor s environs customer s at the expense of municipa l customers. SeeT e x. Util. Code Ann. § 104.004. We conclude that the rec ord lac ks substantial e vidence to support the finding and conc lus i o n t h at assessinga shar e of the municipal fra nchise fe es ag ainst environs customers is unre asonable
. Ad h oc r ule m aki ng

We rea ch the s ame c o n c lu s io nif w e tr e a t t

h e is s u e un d e r

r e v ie w a s ana d

h oc
ru le makin g . T he a

pp ro pr iate sta

nd ard of re vie w fo r an a

pp e llate c ourt re vie wi ng an ad ho c ru le is not whether the age ncy ’s pol icy choice is supported by substantial evidenc e, but whethe r the c hoice
wa s a rb itr ary and c a pr ic iou s. Th e Com mis sio n a rgue s th a t a llo c a tin g re c ov e ry of e xpe ns e s is a policy d ec i s i o n l ef

t to the Commi ssion’s discretion and is not subject to evidentiar y revie w. See W est Tex. Util. v. Officeof Pub. Util. Couns el , 896 S.W .2d 261, 271 (Tex. App.—Austin 1995, no pet.). I n W

TU , this Court upheld the assessment o f a surchar g e on two sets of c ities who had intervene d in r atemaking proce eding s befor e the Public Utilit y Commi ssion. Id
. at 270-71. The Com mis sio n d e fe nd e d a sse ssi ngthe surc ha rg e by fi nd ingthat it

wa s fa ir to al loc a te the c os ts o nly to c us tom e rs in

t h e i nt e rv e no r c iti e s b e c a

us e (1 ) c us tom e rs in o the r m un ic ipa lit ie s h a d n o o pp or tun ity to p art ic ipate in t

he int e rv e no r c iti e s’ de c isi on -m akin g c on c e rn ingint e rv e nti on , ( 2) the surc ha rg e is15

an e ff e c tiv e wa y to e ns ur e tha

t su c h e xpe ns e s are re a so na ble and no t dupl ic a tiv e , a

nd (3 ) t he int e re sts of no ninte rv e no r c iti e s’ re sid e nt c us tom e rs may no t ha ve coi ncide d w iththe int e re sts of tho se in other c ities. Id . at 271. This Court deeme d the Commi ssion’s de cision a policy deter mination that constituted an ad ho c ru l emaking
. Id . at 27 2- 73 . T he re fo re , th e c ourt re vie we d th e de c isi on

on ly to discern whe ther it was arbitrary , capr icious, and without a rational basis. Id . at 273. This Court aff irmed af ter finding the decision reasonable , based on a review of the records of the interve ntion. Id
. Th is c a se is d ist inc t f ro m W TU be c a us e of the natur e of

the or de r a

nd the pr oc e e din g s. The finding s and conclusions in this case provide no ba sis on which to assess the rationality of the decision. In W

TU , th e Commis sio n e xpla ine d it s reaso ns fo r a sse ssi ngthe surc ha rg e a g a ins t customers in the two g roups of cities instead of ag ainst all of the customers. Se e id . at 271. Her e, the Commiss ion deemed rec ouping the fra nchise fe e pay

ments from all customer s “unre asonable ” without explanation. More cr itically , the re cord in the W TU case showed that the municipalities that
wer e asse ssed the surc harg e cr eate d costs by intervening in the l itigation that the other municipa lities chose not to incur ( and may not have a g ree d with or bene fitted from), a nd may have e x ace rbate d the costs by duplicating eff

orts unnece ssarily
. Id
. He re , the re is no e vid e nc e that a sse ssi ngthe fr anc his e fee s on all customers is unrea sonable. The only evidenc e is that the fra nchise fe es per

mit ins tallation and maintena

nce of distribution i nfra structure that benef its municipal and environs customers a like. Ba sed on this rec ord, we conclude that the Commi ssion’s f inding reg arding sprea ding the cost of the fr anc his e fe e s to e nv ir on s c us tom e rs is a rb itr ary and c a pr ic iou s.16 Conclusion We conclude that the rec ord does not conta i n substantial evidence to support the Commi ssion’s finding a

nd conclusion that i t i s u nrea sonable for Entex t o rec over a

share of the municipal fra

nchise fe es fr om environs custom ers. We also conclude that the Commiss ion’s action, if viewe d as an a d hoc rule making , is a rb i t ra ry and ca pricious on this recor d. Acc ording ly , we
reve rs e the jud g me nt o f t he dis tr ic t c ourt

and re mand the c a us e to t hat c ourt wi th i ns tr

uc tio ns to
rema nd the ca use to the Commissi on for f urther pr ocee dings c onsistent with thi s opinion.

G. Alan Waldrop, Just ice Be fore Chief J ustice L aw, Justi ces Pembe rton and Waldrop Filed: Apr il 28, 2006 Reverse d and Remande d