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

NO. 03-0 6 -00 585 -CV
Appellan ts, Cities of Corpus Christi, et al. // Cross-Appellant,

AE P Te xa s C e nt r al C om pany

v. App e lle e , P ublic Ut ili tyCo m m iss ion of Te xa s // Cr os s- App e lle e s, Ci ti e s o f Co r pus C hr ist i, e t a l.

F ROM THE DISTRICT CO URT OF TRAVIS COUNTY , 53RD JUDICIAL DISTRICT NO. D-1- GN-05- 0043 78 , HO NORAB LE SCO TT H. JENK INS , JUDGE PRESIDI NG

M E M O R

A N D U M O P I N I O N
This is an appea l f

rom a final order of the Public Utility Commi ssion in a ratemaking proce edinginitiated by

AEP Texas Central Company (TCC) to set transmission and dis t ri bution rate s. The district c ourt aff irmed the Commi ssion’s f inal order
. Be cause we con cl u d e t h at the Commi ssion’s final order was c onsistent with the plain langua g e of the relev an t s t at u t es and w as
su pp or te d b y su bs tanti a l e vid e nc e , w e a ff ir m th e jud g me nt o f t

he dis tr ic t c ourt
.
F ACTUAL AND P ROCEDURAL BACK GR OUND I n 1999, the leg islature dete rmined it was in the public intere st to restructure and partially dere g ulate the Te x as re tail electr ic power in d u s t ry . Se e ge ne ra lly

Tex. Util . Code Ann. § 39.001 (West 2007). To acc omplish this mandate, the leg islature enacted Senate B ill 7 (“SB 7”) ,Tex. Util . Code Ann. §§ 11.001-64.158 ( West 2007). 1 TCC is t he tra

nsmissi on and distribution utility of the former ly integ rate d utilit y

known as 2 C e n t r a l P o w e r

& L i g h tC o mp an y. TCC se rv e s an a

re a of a pp ro ximate ly

44 ,0 00 sq

ua re mil e s in

so uth Te xas. 3 2 which ame nded the Public Utility Reg ulatory

Act (“ PURA”). SeeAc t of May 27 , 199 9, 76 th 1 L e g ., R.S. , c h. 40 5, 19 99 Te x. Ge n. L aws 25 43 (n ow c od if ie d in Cha pte r 39 of the PUR A, Te x. Ut il. Cod e Ann. §§ 39 .0 01 -. 91 0 ( Wes t 20 07 )) ; se e als o Cen te rP oin t Ene rg y Ho us ton El e c ., LLC v . G ulf Coast Coalition of

Citi es , N o . 0 3

- 0 5
- 0 0 5 5 7
- CV , 2 0 0 7 T e x. Ap p . L E X I S 9 9 1 9 , a t *3- *18 (T e x. Ap p. —Aus tin

De c . 2 0, 20 07 , n o p e t. h. ) (des cri bin g statut or y fr ame wo rk

fo r t ra ns iti on to competitive reta il e lectric marke t) (her eaf ter “ CenterPoint ” ). SB 7 r e qu ir e d e a c h inte g ra te d e le c tr ic utilit y to separate its business activities into t hree separ ate units—a powe r g ener ation co m p any , a transmission and distribu t i o n u t i lity , and a r etail elec tric provider
. SeeTex. Util . Code Ann. § 39.051. After

the passag e of SB 7 , and with fe w exceptions, only transmission and distribution utilit ies rema in subject to rate r egulation by the Commiss ion. See id. § 39.001(a)
. Th is a pp e a l ari se s f

ro m th e fi rs t r a te makin g pr oc e e din g fo r T CC since the e nactment 2 of SB 7. TCC initiated this ratemakingproce edingon November 3, 2003, when it fi l ed an application with the Commissi on to increa se the tra nsmissi on and d i s t ri bution rates for its entire service are a. TCC’s application soug ht a pproval to inc rea se its rates by $66.5 milli on, or 14.7%, 3 to rec over a

claimed r evenue require ment of $519.9 million. The Comm i s s i o n ref

err ed TCC’s application to the St ate Of fice of Administrative Hea ring s for a

contested c ase pr ocee ding. Seve ral pa rties interve ned in the proc eeding s bef o reThere wer e 86 cities serve d by TCC, including Corpus Christi, Ha rling en, Lare do, 4 McAllen, a

nd Victoria. We re fer

to all 86 cities collectively as the “ Citi es.” CPL Retail Energy , L P, is the af filiated re tail electr ic provider of the for merly integ rate d 5 u t i l i t y kn o w na s C e n t r a l P o w e r & L i g h tC o mp an y. Com mis sio n St a ff

a lso pa rt ic ipate d a s a

pa rt y in t he se pr oc e e din g s. 6 3 SOA H. I nc lud e d amon g the int e rv e no rs we re the Citi e s se rv e d b y TCC , CPL

Re ta il E ne rgy , L P, 4 5 t h e O ff i ce o f P u b l i c U t i l i t y

C o u n s el (O P C ), th e S t at e o f T ex as , an d t h e T ex as In d u s tri al E n er gy Consumers (TI EC). Followinga hea ringand brie fing o n al l disputed matters, the a dminist rative 6 law judg es re commended f indings of f

act a nd conclusions of law in a proposal for de cision. After the Co mm is s io n is s u e d tw o o r d e r s r e ma n d in g th e c a

u s e to SO A H f

o r a d d it io n a l p r o c e e d in g s , the AL J s issued a PFD on Remand. Ultimately , the Commiss ion held its own hearingon cer tain issues raised by the par ties. Upon consider ing a dditional evidence , the Commiss ion adopted in par t and
re je c te d in pa rt , th e AL Js’ r e c omm e nd a tio ns in t he or ig ina l PF D a

nd the PF D o n Re mand . In it s final orde r, the Comm i s s i o n d eter mined that TCC’s appropriate re venue r equire ment was $443.6 mil lio n. Th is r e du c tio n r e pr e se nte d a n a g re e d dis a llo wa

nc e of $1 0. 5 mil lio n in a ff ili a te e xpe ns e s, plus other disallowanc es made by the Commiss ion. TCC, the Cit ies, and the State soug ht judicial reviewof the Commi ssion’s f inal order in district court. See id. § 15.001; T ex. Gov’ t Code Ann. §§ 2001.171, .174, .176 (West 2000). The dis tr ic t c ourt c on so lid a te d a ll of the pe tit ion s f or jud ic ia l r e vie w i nto on e c a us e fo r p ur

po se s o f t ri a l. Af te r c o n s id e r in g th e p le a d in g s , b r ie f s , an d ar g u me n t o f

th e p arti e s , a s w e ll a s th e a dmi n is tr a tiveNeither the State nor TI EC appea led the district cour t’s judgme nt, but TI EC did file a brief 7 in s up po rt

of the Commis sio n r e g ard ingthe fi rs t is su e ra ise d o n a pp e a l by TCC
. 4 re c or d, the dis tr ic t cou rt e nte re d f ina l ju dg me nt a ff

ir min g the Commis sio n’ s f ina l or de r i n a ll respe cts. This appea l followed. Only TCC and th e C ities appea l from the district cour t’s final jud g me nt. 7
DI SCU SSIO N

On appe al, TCC and the Cities challeng e the district cour t’s judgme nt affir

ming the Commi ssion’s final order on various g rounds. TCC ra ises three issues. TCC arg ues that the district court e rre d in affir

ming the Commission’s final order beca use the Commission erroneously imposed a $7.5 million penalty

reduc ing T CC’s proposed rates af t er de termining that TCC ini tiated the rate making proce eding , err oneously reduc ed TCC’s pr oposed rate s based on a n estimate of f

uture costs, and er

roneously applied a c onsolidated tax savings adj u s t m en t t o reduc e TCC’s proposed rate s. The Cities raise f

our issues. The Citi es ar gu e t h at the district court e rre d in affir ming the Commi ssion’s final order beca us e t h e Commi ssion violated section 36.058 of the PURA by inc lud inga ff

ili a te d e xpe ns e s in

TCC ’s rate s w ith out makin g the re qu ir ed st a tut or y fi nd ing s,
e rr on e ou sly

se ve re d s e rv ic e qu a lity

and re lia bil ity iss ue s in to a

no the r p ro c e e din g and

fa ile d to
c on sid e r T CC’ s p oo r s e rv ic e qu a lity wh e n settin g TCC ’s rate s, vio late d s e c tio n 3 6. 06 0 o f t he PUR A by allocatingonly

23.1% of the c onsolidated tax savings to TCC, and failed to a llocate to ratepayers any of the g ain re alized from the sale of TCC’s aff iliated reta il electric provider.5

Stan dard of Revie w

W e re v i ew the Comm ission’s final order under the substantial evidence rule. See Tex. Util . Code Ann. § 15.001; Tex. Gov’t Code Ann. § 2001.174. “This is a limited standard of
re v iew that g ives signif

icant def ere nce to the a g ency

in its field of expertise.” R a il r o a d Comm’n

v . To r c h O

p e r a ti n g Co. , 9 12 S.W. 2d

79 0, 79 2 ( Te x. 19 95 ); see Tex as Health Facilities Comm’n

v. Charter M

edical-D allas, Inc. , 665 S.W .2d 446, 452 (Tex. 1984). W e pre sume that the ag ency ’s order is valid and that its findings, infe renc es, conc lusions, and d ec i s i o n s are supported by substantial evidence
. Ci ty o f E l P a s o v . P u b li c U

ti l. Comm’n , 8 83 S.W .2d 179, 185 (Tex. 1994); Charter Med. , 6 65 S.W. 2d at 45 2. Th e c omp la ini ngpa rt y ha s th e burd e n to ov e rc ome thi s presumption. City

of E l P as o , 8 83 S.W. 2d

a t 18 5; Hammac k v. Public Util. Comm’n , 131 S.W .3d 713, 725 (Tex. App.—Austin 2004, pet. denied). In conductinga substantial evidenc e re view, we
e va luate the e nti re re c or d to de te rm ine wh e the r t he e vid e nc e, as a whol e , is su c h th a t r e a so na ble minds c ould ha

ve rea ched the conclusion the ag ency must have re ache d in order to take the disputed action. Te x as Sta te Bd

. o f D e nta l E

x am ’r s v . S ize mo re , 7 59 S.W. 2d 11 4, 11 6 ( Te x. 19 88 ); Suburban Util. Corp. v. Public U

til. Comm’n , 652 S.W .2d 358, 364 (Tex. 1983). We may not substit ute our judgme nt for that of the ag ency on the weig ht of the evide nce on ques t i o n s committed to the
a g e nc y ’s dis c re tio n. Te x. Go v’ t Co de Ann. § 2 00 1. 17 4; Ch a r te r M ed. , 66 5 S .W .2 d at 45 2; H.G. Sledge, I nc. v. ProspectiveInv. & Trading Co., Lt d. , 36 S.W .3d 597, 602 (Tex. App.—Austin 2000, pet. denied)
. Under

a substantial evidenc e re view, the issue for t he reviewingcourt is not whether
we be lie ve the a g e nc y ’s de c isi on wa s c or re c t, b ut whe the r t

he re c or d d e mon str a te s so me re a so na ble6

basis fo r t h e agenc y ’s ac tion. Charter Med. , 6 65 S.W. 2d a t 45 2; Central Power & Light Co. v. Public Util. Comm’n , 36 S.W .3d 547, 561 (Tex. App.—Austin 2000, pet. denied). T he evide nce in t he re c or d ma

y pr e po nd e rate a g a ins t th e de c isi on of the a g e nc y

and ne ve rt hel ess a mou nt t o substantial evidence
. Charter Med. , 6 65 S .W .2 d at 45 2; Meie r Infinity v. Motor Vehic le Bd. , 918 S.W .2d 95, 98 (Tex. App.—Austin 1996, writ deni ed). We will uphold the ag ency ’s orde r unless the ag ency ’s dec ision is: not rea sonably supported by

substantial evidenc e, in violation of a
co n s t i tu t i o n al o r s t at u t o ry p ro v i s i o n , i nex ce s s o f t h e a gen cy ’s s t at u t o ry au th o ri ty , m ad e t h ro u gh unlawful proc edure , aff

ecte d by other e rror

of law, a rbitrar y or ca pricious, or c hara cter ized by an abuse of discretion. SeeTex. Gov’t Code Ann. § 2001.174(2)( A)-( F)
. Certain issues ra ised by

the parties involve questions of statutory construction, which
we r eview de novo
. See, e .g. , City of San Antonio v. Ci ty of Boerne , 111 S.W .3d 22, 25 (Tex. 2003) (appe llate cour

ts review matters of statutory construction de novo ); In re Humphreys , 880 S.W .2d 402, 404 (Tex. 1994) (questions of law are alway s s u b

j ect to de novo revie w). When construing a statute, our pr imary

g oal is to determine a

nd g iv e eff

ect to the leg islature’s intent. City of Sa n A nto nio , 111 S.W .3d at 25. To dete rmine leg islative intent, we look to the statute as a whole,
as opposed to isolate d provisions. State v. Gonzalez , 8 2 S. W.3 d 3 22 , 3 27 (T e x. 20 02 ). We b e g in with the plain lang uag e of the statute at issue a nd apply its common meaning
. City of S an An ton io , 111 S.W .3d at 25. Where the statutory text is unambiguous, we adopt a c onstruction supported by the st atut e’s plain languag e, unless that construc tion would lead to an absur d result. Fleming Foods of Tex., Inc . v. Ry lander , 6 S.W .3d 278, 284 (Tex. 1999)
. We g ive serious consider ation to an ag ency ’s interpre tation of the statutes it is charg ed with enf orcing, so longas that interpr etation7

is reasona

ble and c onsistent with the statutory languag e. Tarra nt

Ap prais al D ist . v . M

oo re , 84 5 S. W.2 d 8 20 , 8 23 (T e x. 19 93 ); Steering Co mm s. for the Cit ies Serve d by TXU Elec . v. PUC , 42 S.W. 3d

29 6, 30 0 ( Te x. Ap p. —Aus tin 20 01 , no pe t.)
. Th is is pa rt ic ula rl y tr ue wh e n th e statut e involves a complex subject matter. Steering Comms. f or Citi es , 42 S.W .3d at 300. Courts, however ,

“ do no t de fe r t o a dmi nis tr a tiv e int e rp re tatio n in re g ard to q ue st io ns wh ic h d o n ot l ie wi thi n administrative expertise, or de al with a nontec hnical question of law.” Ry lan de r v . F ish e r Co ntrols Int’l, Inc

. , 45 S.W .3d 291, 302 (Tex. App.—Austin 2001, no pet.).

A d d i t i o n a l l y , c e r

t a i n i s s ue s c ha lle ng e the Com mis sio n’ s a uth or ity . T he Pub lic Ut ili ty Commi ssion “is a cr eatur e of the L eg islature and ha s no inherent a uthority .” Public Util. Comm’n v. GTE-Southwest, Inc

. , 9 01 S.W. 2d 40 1, 40 7 (T e x. 19 95 ). L ike oth e r state a dmi nis tr a tiv e a g e nc ie s, the Commiss ion “has only those power s that th e L egi s l at u re ex pressly confe rs upon it” and “ any implied powe r s th a t a

r e n e c e s s ar

y to c ar r y o u t t h e e xp r e s s r e s p o n s ib il it ie s g iv e nto it b y the L eg islature.” Public Util. Comm’n v. City Pub. Serv . Bd. , 53 S.W .3d 310, 316 (Tex. 2001). I t is not
e no ug h th a t th e po we r c la ime d b y the Com mis sio n b e re a so na bly us e fu l to the Com mis sio n in discharg ing its duties; the power must be either e x pressly confe rre d or nec essar ily

implied by

statute. The a g ency

may not “exercise what is eff ectively a new p o we r, o r a p o wer

contra dictory

to the statute, on the theory

that such a pow er is expedient for a dminist rative pur poses.” Id.
Rat e making Proc ess Be fore addre ssing the me rits of the par ties’ contentions, we prov id e a b r ie f discussion of the ratemakingproce ss. A lthough the le g islature in 1999 der egulated ce rtain portions of the Te x as
e le c tr ic mark e t, i nc lud ingpo we r g e ne ratio n a nd re ta il s a le s, the le g isl a tur e did no t de re g ulate8

transmission and distribution ut iliti es. See Te x. Ut il. Cod e Ann. § 39 .0 01 (a ). Th e rates o f al l transmission and distribution ut iliti es re main su b j ec t t o regulation, and all of the tra ditional
r a t e m ak i n g r

u l e s an d p r i n c i p l e s a

p p l y. As a g ener al rule, a u t i l ity ’s rates must be just and rea sonable. Id. § 36.003(a) (West 2007). Reg ulated utilities a re entitled to r ates that allow them to collect total re venues e qual to t he ir c os t of se rv ic e and

pr ov ide the uti lity

an o pp or tun ity to e arn a re a so na ble re tur n o n it s invested ca

pi t al. Id. § 3 6. 05 1 ( Wes t 20 07 ); see Suburban Util. Corp. , 652 S.W .2d at 363. Fundamental in the ut ility rate making proce ss is the principle that util ity rate s are set for the future, not the past. State v. Public Util. Comm’n , 8 83 S.W. 2d 19 0, 19 8- 99 (T e x. 19 94 ); Railroad Comm’n v. Lone Star Gas Co. , 656 S.W .2d 421, 425 (Tex. 1983).

Even so, ratemakingstarts with an historic t es t y ear . See G TE-Southwest, Inc. , 901 S.W .2d at 411; 16 Tex. Admin. C ode §§ 25.231(a) (cost of se rvice ), .234(b) (rate desig n) (2007) (P ub . U til . Co mm’ n) . B e c a us e rate s are to b e c ha

rg e d in the futur e , th e his tor ic te st- y e ar a mou nts must be adjusted for known and mea surable c hang es t o m o re acc urate ly ref lect costs that will be inc ur red in the f

utu re . T he Commis sio n h a s th e a uth or ity to i nc or po ra te kn ow n a

nd me a sura ble chang es to test-y ear

data a t its di s cre tion. Se e City

of E l P as o , 8 83 S.W. 2d

a t 18 8; see also GTESouthwest, Inc. , 901 S.W .2d at 411; 16 Tex. Admin. C ode §§ 25.231(a )-( b) (c ost of service ), .234(b) (rate desig n). Onc e these adjustments h av e b ee n m ade, the Commi ssion must deter mine a
rea sonable rate of re turn. See Te x. Ut il. Cod e Ann. § 3 6. 05 2 ( Wes t 20 07 ). To e sta bli sha re a so na ble
rate of re turn , th e Commis sio n c on sid e rs se ve ra l f a c tor s, inc lud ingthe e ff

or ts o f t he uti lity in
conser ving resourc es, t he quality of the utility ’s servic e, the e fficie ncy of the utility ’s oper ations, and9

the quality

of the utility ’s manag ement. Id. W i t h t h i s g ener al desc ription in mi nd, we turn to the pa rt ie s’ c omp la int s o n a

pp e a l.
Pe nal ty fo r In iti ati ng Ra te Inc re as e I n its first issue on appea l, TCC complains that the C ommissi on err oneously reduc ed TCC’s proposed rates by

imposing a $7.5 million penalty afte r dete rmining that TCC had violated the terms of t h e I nteg rate d Stipul ation Ag ree ment (I SA) signe d when TCC’s par ent company Am e ri c an E le c tr ic Pow e r ( AE P) me rg e d w ithCe ntr a l and South We st C or

po rat io n (CSW). TCC argues that the Commission m isconstrued the unambig uous terms of the I SA and, there fore , e rr on e ou sly

re du c e d T CC’ s p ro po se d r a te s. B e c a us e we c on c lud e tha

t th e pla in l angua g e of

the I SA
a llo we d th e Com mis sio n to imp os e a pe na lty if it d e te rm ine d th a t T CC in iti ate d a pr oc e e din g to incre ase r ates within six y ear s after the I SA was signed, we reject TC C’s claim t hat the Commissi on
e rr on e ou sly

imp os e d a

pe na lty wh e n it re du c e d T CC’ s p ro po se d r a te s.
A. The ISA I n April 1998, AEP and CSW initiated pr ocee dings befor e the Commiss ion seeking approva l of the terms of the ir proposed me rge r agr eeme nt as requir ed under section 14.101(b) of the PURA, which authoriz es t he C ommissi on to revie w proposed combinations and “to dete rmine whether the ac tion is consist ent with the public intere st.” SeeTex. Util . C o d e Ann. § 14.01(b) (West 2007). The Commi ssion ope ned Docke t N o. 19265 to c onsider various issues posed by the merge r, and several pa

rties interve ned. Dur ing the se proc eeding s, most of the parties re ache d ag ree ment on the disputed issues and memor i al i z ed the terms of the ir ag ree ment in the I SA.10

Consist ent wit h the Tex as S upreme Court’s holding in City of El Paso v. Public Utility Commissi on , the Commi ssion made an indepe ndent eva luation of the merits of the I SA and deter mined that the terms of the I SA w ere just a nd rea sonable and supported by substantial evidence
. See883 S.W .3d at 183. The Commission approved the te rms of the I SA in its final orde r in Docke t No. 19265.

T h e t erm s o f t h e ISA re co gn i z edth at th e A E P / C S W m er ger wo u l d p ro d u ce s av i n gs
ov e r p re vio us op e ratio ns and pr ov ide d th a t th e Te xas AEP su bs idiari e s, inc lud ingTCC , w e re to sh are tho se s avi ngs with

rate pa y e rs in f ixed annua l amou

nts kn ow n a s “ ne t me rg e r s avin g s r a te reduc tion riders.” To guara ntee these saving s, the I SA expressly limit ed the ability of the utilities to seek rate increa ses. For the first three y ear s following the merg er, the I SA prohibited the utilit ies from see king a

ny adjustment to r ates, subject only to a forc e majeure exception. During y ear s four throug h six , the utiliti es, including TCC, could seek an inc rea se in rate s, but doing so would trig g er the I SA’s penalty

provision. Thi s p enalty provision require d the utility to apply substantial prede termined “ reve nue re quirement c redits,” or reduc tions, to offset any

possible rate inc rea se. I n r e le va nt p art , th e I SA p e na lty

pr ov isi on

state s:
I n a ny pr oc e e din g ini tiate d b y

a Te xas o pe ratin g c omp any re qu e sti ngan in c re a se to overa ll base rate re venues to become eff ective prior to the end of the six y ear period afte r the e ffe ctive date of the mer g er: (a) The ne t merg er savings ex pense item and annual amount of amortization of c os ts t o a c hie ve the me rg e r wi ll no t be inc lud e d in t he c a lc ulatio n o f t

he c os t of se rv ic e un le ss t

he Te xas o pe ra

tin g c omp any

de mon str a te s: (i ) that th e pr op os e d r a te inc re a se re su lts fr om ci rc ums tanc e s not d ir e c tly or indirec tly

related to the merg er; a

nd (ii) that the full level of achie ved merg er savings for t he applicable y ear as re flec ted in Attachment D ha ve bee n achie ved; andSeeTex. P ub. Util. Com m’n, A p p li c a ti o n o

f C e n tra l & S o u th W es t C o r p . & A m . E le c. 8 Po w er Co . , Inc. Re

garding Proposed Business Combination , Docke t No. 19265 (Nov. 18, 1999) (F inal Orde r) ( I SA § 3.F.(3) ). The c ities of Corp u s C h ri sti, Edna, Har linge n, McAllen, L are do, and Victor ia all filed 9 sim ila r r e so lut ion s to inq

uir e int o T CC’ s r a te s. 11 ( b ) the rev e nu e r e qu ir e me n ts o th e r w is e d e te r

mi n e d to b e r e a s o n a

b le and nece ssary will be reduc ed by the annual amounts included in Attachment E. 8
B. TheCom mi

ssi on ’s de c isi on an d TCC ’s c lai m The Commission determined that the plain languag e of this pe nalty provision applied be c a us e TCC ini tiate d a pr oc e e din g re qu e sti ng an inc re a se to o ve ra ll b a se ra te re ve nu e s. I t is thi s de te rm inatio n th a t T CC c ha lle ng e s o n a pp e a l. Ar g uin g that the Com mis sio n mis c on str ue d the langua g e of the I SA pe na lty pr ov isi on , T CC ma int a ins tha t t he Citie s, no t T CC, ini tiate d th e pr oc e e din gto i nc re a se ba se ra te
reve nues. In support of t his argument, TCC claims that six of t he C ities “took the first de cisive steps that beg an the r ate pr ocee ding” by adopting resolutions “to proc eed w ith an inquiry into transmission and distribution rates cha rg ed by [TC C] .” Prior to any

filings, TCC and the six cities ag ree d in a 9 stipulation si g ned Jul y

14, 2003, (“July 14th A g ree ment”) that in lieu of filing separ ate r ate pa ckag es with eac h city , TCC would file a s t an d ar d ra t e fi ling pa ckag e with ea ch city and with the Commi ssion on the same date . The July 14th Ag ree ment ref

lects that TCC specifica lly ag ree d to make the f

iling with the Commissi on “i n o rd er to initi ate the [Commis sion’s] review of AE P Texas Central Company ’s rates.” TCC a rgues that it only filed the rate making proce edingwith the C o m m i s s i o ni nr e s p o n s e t o t h e C i t i e s ’ r a t e i n qu i r y.The Commission’s decision is further supp o rt ed by TCC’s statement in its brief that 10 TCC ’s fi lin g “ did

no thi ngmor e tha

n e ns ur e that the ov e ra ll out c ome of the pr oc e ss w ou ld r e su lt i n sy ste mw ide rate s. ” Th e re is n oth ingin t he PUR A that re qu ir e s TCC to c ha rg e “ sy ste mw ide ” ra

te s. I ndeed, the PURA ex pressly allows for utilities to charge d i ff er ent rates for diff

ere nt customer classes. See Te x. Ut il. Cod e Ann. §§ 36 .0 01 (a )( 1) , . 00 3( b) -( c ) ( Wes t 20 07 ); see also id. § 36.005 (We st 2 00 7) (a llo wi ng uti lit ie s to c ha rg e dif fe re nt r a te s f

or are a s o uts ide a

mun ic ipa lity

). Thus , T CC wa s n ot o bli g a te d to ini tiate a rate makin g pr oc e e din g a t the Com mis sio n to c ha rg e sy ste mw ide rate s. Havingchosen to do so, TCC must acce pt the conseque nces of its action. 12 Having approve d the I SA as part of its final order approvingthe AEP/CSW merg er, the Co m mission had ex clusive jurisdiction to interpret the pr ovisions of the I SA and to resolve any dispute ari sing the ref

rom, including the question of who initiated the pr ocee ding. Se e In re Entergy Corp. , 1 4 2 S
. W
. 3 d 3 1 6 , 3 2 4 ( T e x. 2 0 0 4 ) ; Pu blic Ut il. Com m’n v . S ou thw este rn Be ll Te l. Co. , 960 S.W .2d 116, 119-20 (Tex. A pp.—Austin 1997, no pet.). The Commi ssion’s construction of the I SA is consistent with t he plain languag e of the penalty provision. We a g ree with the Commi ssion that the plain languag e of the I SA mandates that the penalty provision applies “[i] n any proce eding initiated by a Tex as operating company reque sting
an in c re a se to o ve ra ll b a se rate re ve nu e s” pri or to the e nd of the sixthy e ar a ft e r t

he AE P/CSW
m er ger . (E mp h as i s ad d ed
. ) T h e p en al ty p ro v i s i o ni s n o tl i m i t edi ni t s ap p l i ca t i o n t o p ro ce ed i n gs before mun ic ipa lit ie s, or

to p ro c e e din g s b e fo re the Com mis sio n, but a pp lie s in any pr oc e e din g in which the utility seeks an incre ase in ba se rate re venues. TCC, not the Cities, filed an application to incre ase its base rate revenue s. I t matters not whethe r this application was f iled with the Citi es or with the Commissi on. Be cause TCC’s application sought an increase in base r ate r evenue s, the Com m i s s i o np r o p e r l y

d e t e r m i n e d t h a tth e p e n a l ty

p r o v i s i o na

p p l i e d
. T h e C o m m i s s i o nc o r r e c tly ob se rv e d that TCC c ou ld have fi le d an a pp lic a tio n se e kin g to de fe nd its e xistin g rates , b ut TCC
c ho se ins te a d to se e k a

pp ro va l of

an in c re a se in i ts b a se rate re ve nu e s. 1013 We likewise reje ct TCC’s argument that the proceeding befor e the Com mission was
mere ly a continuation of pr ocee dings be fore the municipalities. Neither the rec ord nor the la w supports this contention. The recor d ref lects—and TCC acknow ledg es—that this proce edingwas not an appe al from a

decis i o n b y a muni cipality as per mitted under sec tions 33.051, 33.052, or 33.053 of the PURA. SeeTex. Util . Code Ann. §§ 33.051-.053 ( West 2007). I t was an or igina l
a pp lic a tio n fil ed wi th the Com mis sio n to inc re a se TCC ’s ba se ra te re ve nu e s a

nd e sta bli sh sy ste mw ide rate s.

For these re asons, we ove rrule T CC’s first issue.
Po st- Te st- Yea r Ad

just ments I n its second issue, TCC complains t h at the Commissi on err ed in adoptingTCC’s pr op os e d “ po st- te st- y e ar a dju stm ent” f or re du c e d p os t- e mpl oy

me nt b e ne fi t e xpe ns e s. TCC challeng es the Commission’s adoption o f this particular a djustment, which was base d on an ac tuarial stu dy , b e c a

us e the Com mis sio n d e c lin e d to a do pt t hr e e other pr op os e d p os t- te st- y e ar a dju stm e nts based on a ctuar ial studies. TCC contends that the Commission’s adoption of this adjustm ent was arbitra ry and ca pricious. We disag ree . Th e r e c o r d

r e f l e c t s t h a tT C C p r o p o s e d

f o ur p o s t
- t e s t
- y e ar

a d j u s t m e n t s r e l a t e d

to expenses for se vera l categ or ie s o f e mp lo yee be nefits, including employ ee pe nsions, gr oup insurance , po st- re tir e me nt b e ne fi ts o the r t ha n p e n s ion s ( OPE B s) , a

nd po st- e mpl oy

me nt b e ne fi t e xpe ns e s. TCC witness Randall Hamlett testified that e ach of these propose d adjustments were based on a n actua rial estimate of future costs anticipated to occur afte r t he test y ear . The other parties challeng ed all but one of TCC’s propose d post-test-y ear adjustments. The proposed adjustment for post-e mploy ment14

benef it ex penses wa s n o t ch al leng ed. In its final order, the Commi ssion adopted only TCC’s pr op os e d a dju stm e nt f

or po st- e mpl oy

me nt b e ne fi t e xpe ns e s. The supre me cour

t has ac knowledg ed t h at rate making relies substantially upon informed judg m en t an d ex p ertise and utiliz es projec tions and estimates in virtually all are as. See GTE-Southwest, Inc. , 901 S.W .2d at 411. The Commission has broad discre tion when setting the rate s of public utiliti es. See Tex as Alarm & Signal Ass’n v. Public Util. Comm’n , 603 S.W .2d 766, 77 2 (T e x. 19 80 ); Southwestern Bell Tel. v. Public Util. Comm’n , 571 S.W .2d 503, 515 (Tex. 1978). The Commission’s ratemakingauthority includes the discr etion to disallow improper expenses. See S u b u r b a n U

ti l. Co rp. , 6 5 2 S.W .2d at 362. The Commission may decide in its di scre tion whether to incorporate “known a

nd measur ab l e” chang es to the test-y ear data. Se e Of

fic e of P ub . U

til

. Counsel v. Public Util. Comm’n , 185 S.W .3d 555, 566 n.14 (Tex. App.—Austin 2006, pet. denied); 16 Tex. Admin. Code § 25.231(a)
. We w ill not substitute our judgme nt for that of the Commi ssion on the weig ht to be g iven the evide nce on que stions commit ted to the Commiss ion’s discretion. Office of Pub. Util. Counsel , 1 85 S.W. 3d a t 56 7; se e als o Tex. Gov’t Code Ann. § 2001.174. TCC would fault the Commi ssion f or adopting an un contested a djustment proposed by TCC me rely because the Commis sio n r e je c te d o the r c on te ste d p ro po sa ls. In s up po rt of its argument, TCC cites to statements made by the commi ssioners duringtheir deliber ations at an ope n meeting . Howeve r, it is imm ater ial what the c ommissi oners may h ave thoug ht or stated in the proce ss of arr iving at a dec ision. See City of Frisco v. Tex as W ater Rights Comm’n , 579 S.W .2d 66, 72 (Tex. Civ. App.—Austin 1979, writ ref’d n.r .e.). Such state ments are simply not releva nt to the judicial deter

mination of whether

the Commiss ion’s final orde r wa s supported by substantial evidenc e. Id.15 I n its final order, the Commi ssion gave indepe ndent re asons for its r e jection of TCC’s proposed post-test-year

adjustments. The Commissi on’s explanations were support ed by the
e vid e nc e and

we re no t ba se d s ole ly

on the re je c tio n o f a c tua

ri a l st ud ie s. Withre g ard

to e mpl oy e e pe ns ion s, the Commi ss ion a do pte d th e AL Js’
rec ommendation reje cting this post-test-y ear adjustment. In the P FD, the AL J s expl ained that they reje cted the te stimony

offe red by TCC witness Michae l Turk reg arding the adjust ment for e mploy ee pensions. Turk testified that his projec tions wer e based on declines in the e quity marke ts, declines in interest rates, a rece nt incre ase in actuaria l liabilit ies, and his own pre diction that these dec lines
w o u l d c o n t i nu e i n t o 2 0 0 5
. T u r

k f u rt h e r t e s t i f

i e d th a t h e “ c o u l d n o t p r e d i c t w i thr e a s o n a b l e c e rt a i n ty” how stock price s or intere st rates would a ff ec t fu t u re a ctuar ial pension funding . Ba sed on Turk’ s te sti mony , th e AL Js de te rm ine d th a t T CC’ s pro po se d ad jus tme nt fo r e mpl oy e e pe ns ion s w a s n ot a “known a nd measura

ble cha ng e” a nd rec ommended disallowanc e of this ex pense. The Commi ssion adopted this rec ommendation in its final order.

Wit h reg ard to OPEB s, the AL J s found that this ex pense item wa s sub j ect to the Commi ssion’s rule 25.231(b)(1)(H )(i), which expressly require s such expenses to be base d on “ac tual pay

ments made.” See 16 Tex. Admin. Code § 25.231(b)( 1)(H) (i). B eca use TCC’s proposed adjustment was base d on actua rial projec tions, and not a ctual pay ments made, the AL J s determined that TCC’s proposed adjustment for O PEBs d id not comply with the Commi ssion’s rule and
re c omm e nd e d th a t th e Com mis sio n d isa llo w this e xpe ns e ite m. Th e Com mis sio n a do pte d th is
rec ommendation in its final order.

Wit h reg ard to gr o u p insurance , the Commiss ion determined that the evidenc eHa vin g re qu e ste d and re c e ive d the a dju stm e nt it so ug ht fo r po st- emp lo y men t ben e fi ts, 11 TCC wa s ne ith e r a g g ri e ve d no r pr e jud ic e d b y

the Com mis sio n’ s d e c isi on . It is the re fo re argua ble whether TCC wa s entitled to judicia l r eview, much less reve rsal, on this iss ue. Com pa reTe x. Ut il. Code Ann
. § 1 5
. 0 0 1 ( a ll o w in g an y p arty to p r o c e e d in g b e f

o r e th e Co mm is s io nto s e e k ju d ic ia l revie w), with Tex. Gov’t Code Ann. §§ 2001.171 (allowingonly ag g rieve d parties to see k judicial revie w of a g ency

decisions), .174 (a

uthorizi ng reve rsal only

wher e s ubstantial rig hts have be en prejudice d) (West 2000). 16 prese nted by

TCC did not satisfy the “known and measura ble” standard f

or cha ng es to test-y ear

data. Th e re c or d r e fl e c ts t

hat T CC p re se nte d th e te sti mony of va ri ou s w itn e sse s, but no ne of the se wi tne sse s p ro vid e d d ir e c t e xplanator y test imo ny

on the iss ue of

g ro up ins ur anc e be ne fi ts. TCC witness Michae l Turk testi fied ge nera lly that TCC provided various bene fits including medic al and de nta l be ne fits , bu t he di d no t te sti fy a bo ut t he c os t of the se be ne fi ts. An d n o o the r T CC w itn e ss testified about the c osts of g roup insuranc e. In its final order, the Commi ssion determined that the
e vid e nc e pr e se nte d by TCC wa s in su ff ic ie nt t o s up po rt

an in c re a se a

bo ve the te st- y e ar a c tua l c os t. Finally , reg ardingpost-employ ment benef

its, TCC propose d a reduction in rates for this expense item. The rec ord re flec ts that TCC presented evide nce a nd testimony

in support of this proposed adju s t m en t
. No ne of the parties c halleng ed TCC’s proposal. In the abse nce of any
c ha lle ng e to TCC ’s pr op os a l, the Commis sio n a do pte d TCC ’s pr op os e d a dju stm e nt t o r e du c e po ste mpl oy me nt b e ne fi t e xpe ns e s. As a re viewingcourt, the issue be fore us is not whether we be lieve the Commission made the c orre ct dec ision, but whether ther e is a re asonable basis in the rec ord for the ac tion taken by the Commi ssion. Charter Med. , 6 65 S.W. 2d a t 45 2; Central Power & Light Co. , 36 S.W .3d at 56 1. B e c a

us e no on e c ha lle ng e d TCC ’s pr op os e d a dju stm e nt to po st- e mpl oy me nt be ne fi t e xpe ns e s,
we c on c lud e that the Commis sio n a c te d wi thi n its dis c re tio n to a do pt TCC ’s p ropo sa l. We 1117

likewise conc lude that the Commissi on’s orde r wa s supported by substantial evidence, and we
overr ule TCC’s second issue.
Cons oli da te d T ax Sav ing s Ad just ment I n its thi rd issue, TCC complains that the Commis sion erre d in adopting a n
a dju stm e nt f

or c on so lid a te d tax sav ing s. F or the fo llo wi ngre a so ns , w e re je c t T CC’ s c omp la int
. Fe dera l law allows af

filiated cor

porations to file a sing le, joint income tax return, or consolidated tax return, in ce rtain situations. See26 U.S.C. § 1501 (2002). By filing a consolidated ta x re tur n, a ff ili a te d c or

po ratio ns c an r e du c e thei r tota l tax lia bil ity by of fs e tti ngthe ir

oth e rw ise taxable ga ins with the loss es o f t heir unprof itable af filiates. See Ce ntral Power & Light Co. , 36 S.W .3d at 555.

B e c a us e the po te nti a l f

or su bs tanti a l sa

vin g s e x is ts wh e n a

c or po ra tio n f ile s a consolidated tax return, se ction 36.060 of the PURA re quires the Commission t o consider suc h saving s when settinga uti l i t y ’s rate s. Tex. Util . Code Ann. § 36.060 (West 2007). This sec tion pr ov ide s:
Un le ss i t is sh ow n to the satis fa c tio n of the re g ulator y a uth or ity that it wa s r e a so na

ble to choose not to consolidate r eturns, an e lectric uti l i t y ’s i n come tax es shall be computed as thoug h a consolidate d return had been filed and the utility had re alized its fair shar e of the saving s resulting from that re turn, if: (1) the utility

is a member of

an af fi l i at ed group eligible to file a c onsolidated income tax return; and (2) it is advantag eous to the utility to do so.
Id. Un d er

t h i s p ro v i s i o n , t h e C o m m i s s i o ni s re qu i re d t o ca l cu l at e T C C ’s fa i r s h ar e o f t ax s av i n gs18

resulting from the filing of a consolidate d tax return. Id. ; see Central Power &Light Co. , 36 S.W .3d at 555. He re , th e Commis sio n d e te rm ine d a nd TCC a g re e s t

h a t T C C ’ s p a r e nt c o m p any , A EP,
e njo y e d s ignifi cant t a x sav ing s a s a re su lt o f f

ili nga c on so lid a te d tax re tur

n. Ho we ve r, in i ts r a te filing pa ckag e with the C ommissi on, TCC failed to allocate any of AEP’s tax savings to TCC. So,
a s r e qu ir e d und e r s e c tio n 36. 06 0, the Com mis sio n ad op te d an a dju stm e nt to TCC’ s c la ime d in c ome ta xes t o r e fl e c t T CC’ s a

pp ro pr iate sh are of

c on so lid a te d tax sav ing s. TCC a rgues that the Commi ssion lac ked authority to make such an a d j u s t m ent be caus e sect io n 36. 06 0 o nly re qu ir e s sh ari ngof

ta x sav ing s w he n a

uti lity do e s not

file a consolidated re turn. TCC’s construction of sec tion 36.060 conflicts with the plain languag e of that statute. Section 36.060 plainly require s the Commis sion to calculate TCC’s tax es as though a consolidated re turn had been filed, unless TCC can show to the Commissi on’s satisfac tion that it was
rea sonable to choose not to consolidate tax returns. TCC doe s not attempt to demonstrate that it was
rea sonable for

AEP to choose not to consolidate re turns. Under the plain languag e of se ction 36.060, the Commiss ion was there fore require d to calculate TC C’s taxes as if a consolidated r eturn ha d been filed, which it wa s. We rejec t TCC’s contention that the C o m m i s s i o n may only consider a consolidated tax savings a djustment when the compa ny does not file a c onsolidated tax return. TCC fu rt h er c ontends that the Commissi on’s dec ision to adopt a consolidated tax saving s adjustment was not supported by substantial evidence . Be cause the record de monstrates that the Commiss ion’s decision wa s s u p p o r te d b y s u b s ta nti a l e v id e n ce, w e likewise r ejec t this contention. I n i t s fi n al order , the Commiss ion reduc ed TCC’s fede ral income tax ex pense byThe c onsolidated tax savings adjustment was $1,509,656. This amount was “g rossed-up” 12 to $2,322,545 to capt u re t h e tax effe ct of the a djustment and to refle ct the prope r re venue re qu ir e me nt. TCC witnesses J eff

rey Ba rts ch and D onald Moncrie f testified on re mand re g ardingthe 13 pr op os e d a llo c a tio n a

nd a dju stm e nt f

or c on so lid a te d tax sav ing s. T h is a p p r o a c h is a ls o kn o w n a s th e “ inte r e s t- c r e d it , ” “ r a te
- b a s e , ” o r “ ti me - v a lu e - o f

- tax- 14 shield” methodolog y . We do not ag ree with the Commi ssion’s assertion that TCC challeng es the methodology

chosen by

the Commiss ion. 19 $2,322,545 to acc ount for consolidated tax savings. This amount was ba sed on a pr ox y proposed 12 by TCC , which allocated TCC’s share of consolidated tax saving s over the r eleva nt fifteen- y ear 13 period ba sed on TCC’s r ate base. This a pproac h was c onsistent with the Com mission’s approac h in TCC’s last ratemakingproce eding , which wa s aff irmed by this Court i n Central Power & Light v. Public Utility Commission
. See36 S.W .3d at 555-57. As the C ommissi on explained in its final 14 order , a consolidate d tax s aving s adjustment is a ppropriate ly based on the value of the tax shield that the utility provi d es t o t h e p are nt company and its nonregulated af

filiates. The r ecor d evidenc e demonstrates that the Commi ssion calculate d the adjust ment to TCC’s taxes based on the value of the tax s h i eld that TCC provided to its parent compa ny . TCC witness J eff

rey Ba rtsch agree d that the adjustment adopted by the Commiss ion was ca lcul at ed i n accorda nce w ith the Comm ission’s past applicati o n o f t he “inter est-cr edit”—or “ rate -base ”—methodolog y . We conclude that the Commi ssion’s decision was supporte d by substantial evidence , and we overr ule TCC’s third issue. I n a related issue, the Citi es argue in the ir third issue on appea l that the Commi ssion’s consolidated tax savings a djustment failed to follow the Commi ssion’s own prec edent and wa s not
su pp or te d b y su bs tanti a l e vid e nc e . A s a

re su lt, the Citi e s c on te nd that the Com mis sio n’ s o rd e r f a ils to a llo c a te TCC ’s fa ir

sh are of c on so lid a te d tax sav ing s to ra te pa y e rs .20 I n support of this contention, the Cities cite to this C ourt’s holding in Reliant Energy, Inc. v . Public Utility Commission , 153 S.W .3d 174 (Tex. A p p . — Aus tin 2004, pet. denied). The Citi es’ r eliance on Reliant Energy is mispl ace d. In Reliant Energy , this Court rec og nized that “ [t ]he leg islature has g rante d the Commiss ion broad discretion in determininga utility ’s fa ir share of the saving s arising from the f iling of a consolidated tax return by the par ent company .” Id. at 198. As in Central Power & Light , we a ffirme d the Commiss ion’s use of the “ time-value- of-t ax -shield” methodology to c alculate the appropr iate consolidated tax savings a djustment. Id. a t 19 8 n .1 3; see als o s up ra n.14 (explaining that the time-va lue-of- tax-shield methodology is a lso r efe rre d to as the “intere st-cre dit” or “r ate- base” methodology ). As pr e vi ou sl y

di scu ss ed, th e C om mi ss io n ad op tedth e AL J s’ r ecom men dation on thi s iss ue , w hic h w a s b a se d o n a pr oxy pr op os e d by TCC . T he Citi e s argue that th e Commis sio n s ho uld have a dopted the Cities’ proxy instead of that pr oposed by TCC. W e concl u d e t h at the Com mis sio n’ s d e c isi on

to a do pt t

he pr oxy su

bmi tte d by TCC wa s n e ith e r a rb itr ary no r c a pr ic iou s. The Commission was entitled to acce pt or rej ec t, in whole or in part, the te stimony of the va rious wi t n es s es who testified. City of Cor pus Christ i v. Public Util. Comm’n , 1 8 8 S. W. 3 d 6 8 1 , 695 (Tex. App.—Austin 2005, pet. denied). I n light of our

previous conclusions that the Commissi on’s decision wa s consist ent wit h its prece dent and supporte d by substantial evidence , we ove rrule the Citi es’ third issue. Af fl iat eCos ts I n th e ir

fi rs t iss ue , the Citi e s argue that th e Com mis sio n e rr e d b y inc lud inga ff

ili a te costs in TC C ’s cost of ser vice without makingthe spec ific finding s require d by section 36.058 of the PUR A. F or the re a so ns that f

oll ow , w e re

je c t th e Citi e s’ c omp la int
.I n r e le va nt p art , s e c tio n 3 6. 05 8 s tate s: 15 (a) Ex cept a s provided by Subsection (b), the regulatory authority may not allow as ca pital cost or as e x pense a

pay ment to an af

filiate for : (1) the cost of a

service , proper

ty , rig ht, or other item; or (2) interest expense. (b) The re g ulatory au t h ority may allow a pa

y ment descr ibed by

Subsection (a) on ly to t he e xtent tha t the re g ulator y a uth or ity fi nd s the pa

y me nt i s r e a so na

ble and n ec es s ary

for e ach item or

class of items as de termined by the commission. (c) A finding under Subsec tion (b) must include: (1) a spec ific finding of the reasona bleness and ne cessity

of ea ch item or class of items allowe d; and (2) a findingthat the price to the elec tric ut i l i t y i s not highe r than the price s char g ed by the supply ing aff iliate for the same item or c lass of items to: (A) its other aff

iliates or divisions; or (B ) a nonaf

filiated person within the same marke t a rea or having the same mark e t c on dit ion s. Tex. Util . Code Ann. § 36.058. 21

TCC originally

reque sted $63.8 milli on in a ffiliate expenses. Section 36.058 of the PURA provides that the Commissi o n m ay n o t i n clude a ffiliate c osts in a utili ty ’s rates unless the Com mis sio n ma

ke s a sp e c if ic fi nd ingof

re a so na ble ne ss an d ne c e ssi ty fo r ea c h ite m or c la ss o f i te ms, and also finds that the pr ice char g ed by the af filiate to the utility

is no highe r than the pr ice c harg ed by the af filiate to other pur chase rs. SeeTex. Util . Code Ann. § 36.058 (West 2007). Be cause the 15 Commi ssion disagr eed w ith the AL J s’ rec ommendations reg arding aff iliate costs, the Commiss ion22

conducte d its own hearingon this iss ue. The Commi ssion he ard evidenc e fr om all of the par ties on aff ili at e cost s. Howeve r, bef ore the Commi ssion made its final decision on this issue, TCC and TI EC filed a nonuna

nimous sti pulation (NUS) proposing a $10.5 milli on disallowance to TCC’s
re qu e ste d a ff

ili a te c os ts. Th e Citi e s did no t op po se the a do pti on of the NU S, b ut t

he y c on tin ue d to oppose the level of administrative and g ener al (A& G) expenses proposed by TCC, including $13.8 mil lio n o f a ff

ili a te c os ts. Th e Ci ti es argued tha t TC C’ s A&G ex pen ses were to o high in rel ati on to th e A&G expenses of other utilities. Ba sed on t h e t est imony of two witnesses, the Cities ar g ued that all of TCC ’s a ff ili a te c os ts that w e re a llo c a te d to dis tr ibutio n A & G s ho uld be dis a llo we d. Citi e s w itn e ss Ge ra ld T uc ke r p ro po se d a n in iti a l di sa llo wa

nc e of $1 4. 8 mi lli on

in TCC ’s a ff

ili a te A& G c os ts. Ci ti es w it nes s A .D. P att on pro po sedan ad di ti on al r edu cti on of $ 13 .8 mi ll io n t o T CC’ s a ffi li ate A&G
c os ts b a se d o n his c omp ari so n of TCC ’s A& G c os ts in r e latio n to the A& G c os ts o f o the r util iti e s.

I n it s f ina l or de r, the Com mis sio n r e je c te d th e a

pp ro a c h u rged by Citi e s w itn e ss Pat t o n and the Cities’ cla im that TCC ’s A& G expenses wer e too hig h when c ompare d to other ut il it ies
. Th e Co mm is si on ’s fin al ord er adop ted th e AL J s’ fin di ngs tha t all bu t t wo o f TC C’ s A &G expenses wer e re asonable and nec essar y . Wit h reg ard to a ffiliate c osts, the Com m i s sion adopted t h e N US p ro p o s edb y

T C C an d T I EC. T h e C o m m i s s i o n ’s fi n al o rd er i n cl u d edth e f

o l l o wi n g fi n d i n gs of fa c t:
158E. The NU S proposed a disallowa nce of $10,501,860 in [aff iliate] expenses
. . . . 15 8F
. Th e NU S pr op os e s to a llo c a te the sti pu late d d isa llo wa nc e a s f oll ow s: $10,300,935 to the distribution function and $200,925 to the t ransmission function.23

15 8G
. Th e sti pu latin g pa rt ie s a g re e that th e re ma ini ng$5 3, 28 9, 70 6 in a ff ili ate e xpe ns e s, wh ic h c on sis ts o f $ 49 ,8 60 ,2 27 in a ff ili a te e xpe ns e s f

ro m A EPSC and $3,429,479 in a ffiliate expenses from other aff iliates, are rea sonable a

nd neces s ar y , and that the pr ice is not hig her tha n the price char g ed by

the supply ing a ffiliate to it s o t h er a ffiliates or divisions or to nonaff iliated pe rs on s f or the same ite m or

c la ss o f i te ms. 158H. The rang e of expert testimony reg ardingdisallowance s of af filiate costs ar e a s f oll ow s: Citi es $16.6 milli on OPC $13.4 milli on CPL Retail $10.3 milli on
The Commission’s final order a lso included the followingconclusions of law :
25A. $53,2 89,706 of TCC’s aff iliate expenses are rea sonable a nd nece ssary , and the price ch ar ged to TC C is not hi g her tha n the price char g ed by

the supply ing a ffi l i at e to its other af filiates or divisions or to nonaffiliated pe rs on s f or the same ite m or

c la ss o f i te ms. 25 B
. To be appro ve d b y the Com mis sio n, a

no n- un anim ou s st ipu latio n mu st c omp ly wi th a pp lic a ble law; be jus t and

re a so na ble , a nd in t he pu bli c int e re st; and be suppor

ted by a prepondera

nce of the re cord e vidence
. City of E l P as o v. Public Util. Comm’n , 883 S.W .2d 179, 183 (Tex. 1994). 25C. The non-una

nimous sti pulation providingf or a disallowa

nce of $10.5 milli on in a ff ili a te e xpe ns e s is jus t and re a so na ble , an d in the pu

bli c int e re st, and

is supported by

a pre pondera

nce of the re cord e vidence
. I n light of the ir stipulated ag ree ment, the Cities do not challeng e the Commission’s adoption of the NU S on appea l. Rather the Cities ar g ue that the f indings made by

the Commiss ion in r e latio n to the NU S are insuf fi c ie nt t o s a tis fy

the re qu ir e me nts of

se c tio n 3 6. 05 8 o f t

he PUR A beca use t hey do not take into acc ount those aff iliate A& G costs cha lleng ed by Citi es witness Patton. We disag ree . Th e re c or d re fl e c ts that the NU S, a s it wa s a do pte d b y

the Com mis sio n, c ov e re d a llBe cause we conclude that the Commi ssion’s f indings satisfied the re quirements of se ction 16 36.058 and additional finding s wer e there fore unnece ssary , we do not a ddress TCC’s es t o ppel argume nt. 24 $63.8 milli on of TCC’s r equeste d aff iliate costs. Under the terms of the NUS, the Commiss ion
a pp ro ve d $5 3. 3 mil lio n of a ff ili a te c os ts a

nd dis a llo we d $ 10 .5 mil lio n. Withre sp e c t to the a ff ili a te costs approve d by t h e C ommissi on, the finding s and conc lusions quoted above demonstrate that the Commi ssion made the re quired finding s under se ction 36.058 of the PURA. SeeTex. Util . Code Ann. § 3 6. 05 8. Th e Commis sio n e xpre ssl y fo un d th a t th e a ff

ili a te c os ts a

pp ro ve d und e r t

he te rm s of the NU S were “re asonable and nec essar y , and t h e p ri ce charg ed to TCC is not hi g her tha n the price char g ed by

the supplying a ffiliate to its other af filiates or div i s i o n s or to nonaff iliated pe rs on s f or the same ite m or cla ss of ite ms. ” We c on c lud e that th is f ind ingsatis fi e s th e re qu ir e me nts of sec tion 36.058 for those af filiate costs appr oved under the terms o f t h e NUS
. See id. § 36.058(c) (1)- (2). B eca

use the re cord de monstrates that the NU S covere d all of TCC’s reque sted aff iliate costs, including those costs ch al leng ed by Citi es witness Patton we c onclude that the Commi ssion was not require d to make additional finding s under se ction 36.058. We overrule the 16 Citi es’ f irst issue. Quality of Service

The Cities next argue that the Commission fa il e d to consider TCC’s quality of ser vice when se tting TCC’s retur n on equity

and that the Commi ssion e rre d in se vering quality of ser vice issues into another proc eeding . Acc ording ly , the Cities argue that t he Commissi on’s dec ision violates sections 36.052, 38.001, and 38.005 of the PURA. See T ex . Util. Code Ann. §§ 36.052; 38.001, .005 (West 2007).25 Section 36.052 re q

u ir e s th e Co mm is s io n

to c o n s id e r

v a r io u s f a c to r s wh e n

e stablishing
a u ti li ty ’ s r e a s o n a

b le r e tu r n o n inv e s te d c a

p it a l. See id. § 36.052. Among those fac tors to be consid er ed b y

the Commiss ion are : the eff orts and ac hievements of the utilit y in conserving
re so ur c e s; the qu a lity

of the uti lity ’s se rv ic e ; the e ff ic ie nc y of the uti lity ’s op e ra

tio ns ; and the qu a lity of the utility ’s manag ement. Id. Section 38.001 require s an electric util ity to provide ser vice that is “safe , adequate, ef

ficient, a nd rea sonable.” I

d. § 38.001. In addition, section 38.005 imposes service quality

and re liability

s t an d ards r elatingto the delivery of ele ctricity

by transmission and distribution ut iliti es. Id. § 38 .0 05
. Se c tio n 38 .0 05 a uth or ize s the Com mis sio n to take a pp ro pr iate enfor ceme nt action ag ainst those ut i l i t i es who fa il to meet the service and re liability standards imposed by

the PURA. Id. § 38.005(b). Th e re c or d d e mon str a te s th a t va riou s wi tne sse s te sti fi e d r e g ard ingthe a pp ro pr iate return f or TCC. Citi es wit ness S tephen Hill testified that the appr opriate r ate of return w as betwe en 9.00% and 9.75% . Commi ssion St aff witness Slade Cutt er t es t i fi ed that the prope r rate of re turn should be betwe en 9.22% a nd 10.23%. CPLRetail witness Dr. Charle s Smaistrla te stified that the appropr iate rate of re turn was 10.00% to 10.25%. OPC witness Dr. Carol Szerszen testified that the appropr iate rate of re turn was 9.2% to 10.0%. TI EC witn es s Michae l Gorman testified that the appropr iate rate of return was betwee n 9.2% to 10.5%. And TCC witness Paul Moul testified that the rate of re turn should be 12.00%.

I n its final order , the Commiss ion adopted the nonuna nimous sti pulation proposed by TCC, TI EC, CP L , and Commi ssion Staff reg arding TCC’s r eturn on invested capital. Unde r the te rm s o f t his sti pu latio n, the Commis sio n se t TCC ’s rate of re tur n a t 10 .1 25 %. Th e Citi e s c omp la inDocke t No. 25157 was e stablished in 2001 to addres s ce rt ain eleme nts of the “Ser vice 17 Q u a li ty Pl an , ” w h ic hw a s c r e a te d d u r in g th e me r g e r

b e tw e e nA E P a

n d CS W. Th a t th e Com mis sio n s e ve re d o nl y the iss ue of se rv ic e qu a lity

of c omm itm e nts is 18 confirme d by

the plain languag e of TCC’s motion to sever. 26 that the Commi ssion’s de cision fails to c onsider quality of ser vice be cause the Commiss ion severe d all re l i ab i l i t y

an d qu al i t y o f s erv i ce i s s u es i n t o an o th er p ro ce ed i n g. The re cord de monstrates that the Commission s ever ed only the issue of “ service quality commitments” into another procee ding. T his issue conce rned howrate cre dits related to service quality

wer e to be c alculate d under TCC’s “Ser vice Qua lity

Plan. ” Be cause the C o m m i s s i o nwa s al re ad y

co n s i d er i n g s erv i ce qu al i ty co m m i t m en t s i n an o th er p en d i n g p ro ce ed i n g, 17 the Com mis sio n s e ve re d th is i ssu e fr om T CC’ s r a te c a se so that the Com mis sio n c ou ld c on sid e r a ll of the ser vice qua lity

commitments togethe r. The Commi ssion did not se ver the issue of ser vice 18 quality as it relate s to TCC’s rate of r eturn. The Commission’s procedura l rules expressly al l o w t he Commissi on to sever a proce edingor an issue if suc h sever ance “would ser ve the inter est of ef

fi ci en cy or pre vent
unwa rr ante d e xpe ns e and

de lay ; and

the a pp lic ant’ s a

bil ity to p res ent it s ca se and

oth e r p art ie s’ ability to r espond to the applicant’ s case would not be unduly prejudice d.” 16 Te x . Admin. Code § 22.34 (2007) ( Pub. Util. Com m’n). The Texas Supreme Court has re cog nized that administ rative ag encie s are entitled to considera ble proc edura l flexi bility , se e City of C or pu s Ch ris ti v . P ub lic Ut il. Comm’n , 51 S.W .3d 2 3 1, 262 (Tex. 2001), and that c ourts may interfe re w ith the proce dures of an administrative a g ency only if they are arbitra

ry an dcapricious or deny due proc ess. Le wis v. Me tropolit an Sav. &Loan Ass’n , 550 S.W .2d 11, 16 (Tex. 1977). Acc ording ly , we c onclude that27

the Commiss ion acted within its discretion to se ver the issue of service quality commitments from Docke t No. 28840 into Docket No. 25157.

Th e Citi e s d o n ot co nte nd that the y we re de nie d due pr oc e ss, but th e y do c on te nd

that,
as a r esult of t he severanc e, the Commi ssion failed to c onsider one of the re quired statutory

fac tors in section 36.052. We construe the Citi es’ c laim to be that t h e C o mmissi on’s orde r wa s arbitra ry and ca pricious. See, e .g. , City of E l P as o , 883 S.W. 2d a t18 4 (e xpla ini ngthat an a g e nc y ’s or de r i s arbitra ry when it fa ils to consider a fa ctor that the leg islature directs it to consider)
. But the r ecor d be lie s th is c la im.

TCC and the Comm is s io n a gr ee that the Commi ssion was requir ed to consider TCC’s quality of ser vice wh en s et t i ng TCC’s rate of return. T he re cord r efle cts that the Commissi on’s resolution of TCC’s rate of re turn was ba sed o n a nonunanimous stipulation (differ ent from the stipulation reg ardingaff

iliate costs), which only

the Cities and one other party opposed. The Com mis sio n’ s f

ina l or de r i nc lud e s th e fo llo wi ngfi nd ing s o f f a c t:
60. The ter

ms of the Return Stipulation are that: TCC’s ROE be set at 10.125%; its capital structure be set at 60% debt and 40% equity ; its rate of re turn on invested ca

pital be set at 7.475%; a

nd no penalty be applied to TCC’s ROE for qua lity

or re liability

of ser vice. * * * 64
. Th e qu a lity

of TCC ’s se rv ic e is g e ne ra lly a de qu a te and do es no t war ra nt a reduc tion i[ n] TC C’s ROE. 65. The stipulated re turn of 10.125% is more likely than not a re asonable return on TCC’s equity
. The Commission’s final order a lso included the followingconclusion of law :The re cord demonstrates that the C ommissi on considere d the nonunanimous stipulation 19 “on its merit ” an d fo u n d that it was based on a preponde ranc e of the rec ord evide nce a nd that the propo s ed ra t e o f return was r easona ble and, ther efor e, in the public intere st. Se e City of E l P as o v. Public Util. Comm’n , 883 S.W .2d 179, 183 (Tex. 1994). 28 60. PURA § 36.052 require s the Commis sion to consider the “ quality of the utilit y ’s servic es” a

nd the “qua lity

of the utility ’s man a g e me nt: in e s ta blishing a rea sonable return on invested capital as part of the PUC’s “e stablishing an elec tric utility ’s rates.”
These f indings a nd conclusion make clea

r that the Commission considered TCC ’s qu a lity of se rv ic e wh e n det erm ini ngTCC ’s RO E. Th e pla in l angua g e of se c tio n 3 6. 05 2 me re ly require s the Commis sion to consider the statutory fac tors. Tex. Util . Code Ann. § 36.052. I t does not require the Commiss ion to give w eig ht to any particula r fa ctor. Consistent with our prior holdings, we conclude that the leg islature left it to the Commi ssion’s disc retion to w eigh t he i m p o rt an ce o f ea ch fa ctor in a g iven ca se. See, e .g. , Me ie r I nfi nit y , 9 18 S.W. 2d

a t 10 0. B e c a

us e the Commiss ion’s final orde r conta ins underlying f indi n gs t h at re asonably

and log ically

support the statutory

criter ia, we conclude that the Commi ssion pr operly considere d the re quired fa ctor of quality of ser vice. Id. We likewise conc lude that the Commissi on’s adoption of the nonuna nimous Return Stipulation was proper. Se e City of E l P as o , 883 S.W. 2d

a t 18 3. We o ve rr

ule the Citi e s’ 19 second issue.
Ga ins f ro m the Sa le

of TCC ’s AREP I n their fourth and final issue, the Cities asser t that the Commi ssion improperly failed to allocate the g ains from the sa le o f TCC’s aff iliated reta il electric provider to r atepa y ers. The Cit i es ar g ue that the Te x as Supreme Court’ s decision in Public Utility Commission v. Gulf Stat esSe c tio n 3 9. 05 1( g ) s tate s: 20 Transa ct i o n s b y

elec tric utiliti es involving sa les, transfe rs, or other dispositi on of assets to ac complish the purposes of this sec tion are not subject to Section 14.101, 35.034, or 35.035. Tex. Util . Code Ann. § 39.051(g ).
29 Utiliti es Co. , 8 09 S.W. 2d 20 1, 21 1 (T e x. 19 91 ), re qu ir e d th e Commis sio n to c on sid e r c e rt a in f a c tor s, wh ic h the Citi e s c omp la in we re no t c on sid e re d, in a llo c a tin g any g a in re a lize d fr om t he sa le of uti lity assets. B eca

use we conclude that the P URA does not authorize the C ommissi on to allocate the g ains fr om t he sa le of TCC ’s AR EP t o r a te pa

y e rs , w e re

je c t th e Citi e s’ fi na l c omp la int
. Pursuant to section 39.051 of the PURA, utiliti es we re r equire d to un b u n d leinto thre e separ ate e ntities to accomplish the leg islative mandate of dere gulation. See T ex . Util. Code Ann. § 39.051 (re quiring utilit ies to separate into a power g ener ation company , a re tail electr ic provider , and a tr ansmission and distributi on u t i l i t y ). This section conte mplates that a utility might sell off its assets to accomplish the require d separ ation and expressly provides that such tra

nsactions wer e not subje ct to those provisions in the PUR A which r equire the Commiss ion to capture g ains on asset
sa le s f or rate pa y e rs . Id. § 39.051(g ) (e x empting unbundling transac tions fr om the require ments of 20 sections 14.101, 35.034, and 35.035 of the PURA). The Com m i s s i o n conclude d that the sale of TCC’s AREP was an unbundling transac tion within t he mea ning of section 39.051. The Commission also conclude d that the sale of TCC’s AREP did not involve any transmission and distribution assets. The Commi ssion therefor e
re fu se d to a llo c a te a

ny of the g a ins fr om TCC ’s sa le of its AR EP t o r a te pa y e rs . T he Citi e s p oint to30

no other provision in the P URA that would require the Commiss ion to allocate the g ains from the sale of TCC’s A REP to rate pay ers. Be cause we conclude that the Commi ssion’s deci s i o n was consistent with the plain lang uag e of se ction 39.051(g ), we reject the Cities’ contention that the Commi ssion was requir ed to consider the fa ctors identified by the supreme court in G ulf States Utiliti es . We lik e wi se c on c lud e tha t th e C o mm i s s ion

pr op e rl y de c lin e d th e Citi e s’ re qu e st t o a llo c a te any g ains from the sa le of TCC’s AREP to ratepa y ers. We over

rule the Cities’ four

th issue.
CO NC LU SION Havingconclude d that the Commiss ion’s final orde r wa s consistent with the releva nt statutes and wa s supported by substantial evidence , we a ffirm the district c ourt’s judg ment, which aff irmed the fina l order of

the Commiss ion.

__________________________________________

J an P. Patterson, J ustice Be fore J ustices Patterson, Pember ton and Waldrop Affir med Filed: Mar ch 5, 2008