Th e State of Tex as, s e pa rate ly fr om t he Com mis sio n, int e rv e ne d in thi s c a se and

is 1 repr esente d by

the consumer

protec tion and publi c h ealth division of the Off ice of the Attorney Ge ne ra l. Ho n. El iza

be th Ame s J on e s is su c c e sso r in of fi c e to H on . Ch arl e s R. Matth e ws , o ri g ina lly a par ty to this sui t in his official ca pacity as a c ommissi oner of the railroad commission. W e have substitut ed Jones for Matthews a s a par ty to this sui t. See Tex. R. App. P . 7.2(a)
. 

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

NO. 03-04-00731- CV

Cente rP oint En ergy Entex, A ppellan t

v. Ra ilr oa d Co m m iss ion of Te xa s, Vi c to r Ca r r ill o, Eliz abe th A. Jo ne s, Michael William s, City of Tyl er and State of Texas, Appellees 1

F ROM THE DISTRICT CO URT OF TRAVIS COUNTY , 353RD JUDICI AL DISTRICT NO. GN402169 , HO NORAB LE DARLENE B Y RNE, JUDGE P RESIDING

O P I N I O N
This app e a l p r e s e n ts a

qu e s ti o no f

f ir s t i mp r e s s io n : w h e th e r

th e T e xa s Ra il r o ad Commi ssion (the Commis sion) may conduct a

retroa ctive prude nce rev i ew of char g es flowe d throug h a purc hased g as adjustment clause (PG A cl ause) and orde r re funds of c harg es that the Commi ssion finds the utility imprudently incurre d. We must also consider whether such a re view is a “ rate makin g pr oc e e din g ” in w hic h a pa rt ic ip ati ng mu nici pa lity

is e nti tle d to e xpe ns e reimburse ment. See Tex. Util. Code Ann. § 103.022 (West 1998). The Commission and the district court a nswered both questions in the affir mative. B eca

use we find that the Commissi on hasWe r e fe r t o th is e nti ty a s E nte x, a s it

wa s k no wn duri ngthe re le va

nt e ve nts fr om wh ic h th is 2 appea l arose. Citi es have ex cl u s ive orig inal jurisdiction over natura l ga s rates in a rea s within the 3 municipality

while the C ommissi on has t he same over rates in areas outside of municipalities. See Tex. Util . Code Ann. §§ 102.001(a )(1) (A) & 10 3
. 0 0 1 (W est Supp. 2005). A municipality can surre nder its authority

to the Commi ssion. Id . §§ 102.001(a) (1)( B) , 103.001, 103.003. We h a ve re pr od

uc e d a n e xamp le of on e of the City -a pp ro ve d r a te sc he du le s at App e nd ix A. 2 authority to conduct the r eview a nd order ref unds b u t that such a re view is not a “r atemaking proce eding ,” we aff

irm the order

of the district cour

t in part but reve rse a

nd rende r in part.
BACK GR OUND Ap pel lan t Ce nterPoi nt E ne rg y En te x is a

g a s u til ity

su bje c t to the Ga s U til ity 2 Reg ulatory

Act. See Te x. Ut il. Cod e Ann. § 1 01 .0 03 (7) (W est S upp. 20 05 ); se e ge ne ra lly id
. §§ 101.001-105.051 (West 1998 & Supp. 2005) (GURA). F or m ore than twenty -five y ear s, Entex purcha sed g as on beha lf of customer s serve d by the Ty ler I nteg rate d Distribution S y stem (TI DS) and char g ed customer s under tar iffs appr oved by the City of Ty ler (the City), terme d “rate sche dules.” 3 Since 1985, ea ch of E n t ex ’s appr oved rate sche dules included a “Purcha sed Ga s Adjustment Pr ov isi on ” (P GA cl aus e), a n au to mat ic e scal ato r m echan is m d evi sedby ut il it y regul ato rs to de a l w ith rapid fluc tuations in the cost of natura l ga s. See R ailroad Comm’n of Tex

. v. High Plains Natural Gas Co. , 613 S.W .2d 46, 48 (Tex. Civ. App.—Austin 1981), writ r ef’d n.r.e. , 6 2 8 S. W. 2 d 7 5 3 ( T e x. 1981) (pe r curiam). Such a clause operates to i ncre ase or decr ease the re venue of

the g as compa

ny by e xac tly the a mou

nt o f i ts i nc re a se d o r d e c re a se d c os ts o f g a s c ha rg ed th e g a s c omp any

by itsWe w il l d is c u s s th e n a tu r e o f PG A c la u s e s in mo r e d e ta il w h e nw e c o n s id e r E n te x ’s 4 a pp e llate iss ue s. 3 s u p pliers. Id
. (c i t i n g City of Nor folk v. Virginia Elec. &Power Co. , 9 0 S. E
. 2 d 1 4 0 ( Va. 1955) ). Although Texas ha s never expressly addre ssed the use of PGA clause s in a statute, our c ourts have long a pproved of

their use by

regulators. Se e Sa n An ton io In de p. Sc h. Di st. v . Ci ty of S an An ton io , 55 0 S. W.2 d 2 62 , 2 66 -6 7 & n. 2 ( Te x. 19 76 ); High Plains Natural Gas Co. , 613 S.W .2d at 48 (c iting City of Chi cago v. I

llinois CommerceComm’n , 150 N.E.2d 776 (I ll. 1958)); Railroad Comm’n of Te x . v . Ci ty of F or t W or th , 576 S.W .2d 899, 902 (Tex. Civ. App.—Austin 1979, writ ref’d n.r .e.);

se e als o Tex. Util . Code Ann. §§ 101.001-105.051 ( no express rec og nition of PGAs). 4

Since at lea st N ovember

1992, Entex not ified the City on a monthly

basis reg arding
any g a s c os t c ha

ng e s that it w ou ld f

low to i ts c us tom e rs thr ou g h th e PGAc la us e . In s ome mon ths , Entex reported no ch an g es. In others, it informed the City of a c hang e, either

an incr ease or a decr ease , and g ener ally

p ro v ided supporting information in the form of two Entex-ge nerated do c ume nts statin g the c os t of g a s p ur c ha se d f ro m se ve ra l g a s d ist

ri bu tor s and

the e ff e c t th os e c os ts would have on the amounts char g ed to customers.

I n 2 00 2, the City be g an re vie wi ng En te x’s pa st c us tom e r g a s c ha rg e s, a ft e r w hic h it inf or me d E nte x of “ c on c e rn s” it ha d ab ou t the mann e r by wh ic h Ent e x purc ha se d g a s f or re sa le to its c us tom e rs . In p art ic ula r, En tex ha d b e e n a c qu ir ingits g a s th ro ug h tw o g a s c on tr a c ts, on e wi th Texas GasMar

k, I nc. (TG M contrac t) and one with TXO Ga s M arketing Corpor ation (TXO
c on tr a c t) . B oth

of the g a s su

pp lie s p ur c ha se d und e r e a c h c on tract were “ fi rm ” (a s o pp os e d toOn J anuar y 8, 2003, the City , by

ordinanc e, surr ender ed to the Commissi on its claimed 5 jurisdiction over the matter
. See Tex. Util . Code Ann. § 103.003 (West Supp. 2005). 4 i n t e r r u p t i b l e ) , b u tt h e T G M c o n t r a c tp r i c e w a s s i g n i f i c an t l y l o w e r t h ant h e T X O c o n t r a c tp r i c e . It
wa s a lle g e d that En te x a c te d wr on g fu lly by c ha rg ingthe hig he r p ri c e d g a s to re sid e nti a l and sma ll
commerc ial customers while r eser ving the lower- price d g as for larg e commerc ial customers. The City believed tha

t this procedure resulted in “ove rcha rg es” of about $39,000,000 to r esidential and
sma ll c omm e rc ia l c us tom e rs be c a us e En te x ha d p a ssed th e hi g he r- pr ic e d g a s c ha rg e s to tho se customers throug h the PGA clause s in Entex ’s filed rates. The City made f urther c harg es alleg ing that E nte x ha d f

ile d mi sle a din g tari ff

s, fa ile d to re qu e st annua l pr ic e re de te rm inatio ns , and fa ile d to char g e non-Ty

ler customers for their proportionate share of Entex’s capital costs. The City set the matter for considera

tion at a city

council mee ting. En te x fil e d s uit

in T ra vis County

dis tr ict cou rt se e kin g a

de c lara tio n th a t th e City la c ke d a uth or ity to o rd e r r e fu

nd s and an injunc tio n to pre ve nt co ns ide ra tio n of the iss ue a t th e c ity council mee ting. Ente x asser ted t hat ordering ref

unds for g as distribution was within the exclusi ve jurisdiction of the Commis sion. See Tex. Util . Code Ann. § 104.005(c) (West 1998)
. Entex and the City ag ree d that Entex would di smiss i ts district court proce eding s and t hat t he par ties would instead submit t he issues direc tly

to the Commi ssion. I n their “Joi nt Petition for Review of Cha rg es for Gas Sa le s, ” the pa

rt ie s r e qu e ste d th a t 5
the Commiss ion initi ate a proce eding to determine whether Entex has properly

and lawfully char g ed and c ollected for g as sales to re sidential and commer cial customer s serve d from the TI DS during the period from November 1, 1992 to Oc tober 31, 2002, to co ns i d e r

an y a p p r o p r i a t e r e m e d i e s , i n c l u d i n g b u tn o tl i m i t e d t o , r e f u n d s , w i th interest, and to e nter such or ders a s may be appr opriate.T h e C o mm i s s i o n ’ s h e a r i n g e x a m i n e r s c h ar a c t e r i z e d t h e p art i e s ’ p o s i t i o n s t h u s : “ G e n e r a l l y, 6 the City of Tyle r, on the on e ha

nd , a rgue s th a t th e pr oc e e din g inc lud e s a ‘p ru de nc e re vie w’ of

pa st purc ha se s. On

the oth e r h and , E nte x ar g ue s th a t th e Com mis sio n la c ks the a ut hori ty to c on du c t a retroa ctive prude nce r eview and t hat t his case is limit ed to an audit of its g as costs flow throug h.” (F ootnotes omitt ed.). 5

But the parties disputed what the Commission’s review should e ntail. Entex urg ed that the Commiss ion had power only to determine w hether

Entex “properly

and lawf ully char g ed and collecte d for g as sales to re sidential and commercial customers in Ty ler a s authorized under its tariff s and rate sche dules” bu t t h at t h e C ommissi on could not consider the prudenc e of Ente x ’s g as purcha ses bec ause that would constitu t e re troac tive rate making
. Se e id . § 10 4. 15 1. En te x als o maintained that the Commission shoul d first con s i d er the scope of its reviewauthority befor e
rea ching the merits of the City ’s alleg ations. The City argued that the Commi ssion could conduct
a re tr oa c tiv e pr

ud e nc e re vie w o f E nte x’s g a s pur c ha se s and that th e Com mis sio n s ho uld a dd re ss i n 6 a sing le proc eedingb o t h t h e scope of its authority to reviewEntex’s charg es and to orde r re funds and the merits of t he C ity ’s allega tions. The City

also reque sted that the Commissi on order Entex to re i m b u rs e the City

for its expenses bec ause it consider ed the pr ocee ding to be a “r ate c ase” as define d in the utilit ies code
. Se e id . § 103.022 (West 1998). Entex responde d that the ca se wa s not a “r atemakingproce eding ” and, thus, the City was not entitled to rec over its expenses. Se e id
. § 103.022. The C o m m ission set the matter bef ore two he aringexaminers, who dec ided that “issues re lated to a considera tion of t he re asonable ness and ne cessity of Entex’s ga s costs and g as purcha se pra ctices w ill be considere d in this proceeding .” The Commi ssion de nied Entex’s appealCommi ssioner Michae l Wi lliams diss ented. 7 After filing its peti t i o n in district court, Entex filed a petition for writ of ma ndamus 8 reque sting that this Court stay the Commiss ion from enga g ing in its prudenc e re view of Ente x ’s g as purcha ses during the pende ncy of this appea l. W e denie d the petition. The par ties repor t that the Commi ssion has conducte d i t s re v i ew, f ound that no ref

und was due , and seve red f rom that proce eding the issue of the City ’s claim for rate case expense reimburse ment. The Commission l ater denied the City reimburse ment in the sever ed ca use. B eca

use this appea l continues to prese nt live issues aff ectingmatters still pending be fore the Commiss ion, we proc eed to c onsider them. 6 of this decision. After a hear ing on the merits, the hea ring examiners reje cted the City ’s ar g ument that any proce eding that aff

ects the c ompensation of a utility is a rate making proce eding . I nstead, they decide d that “ratemaking proce eding s” ar e only those that are exclusively devoted to rates such that they may result in chang ed rates. Thus, the examiners found that the City could not be entitled to reimburseme nt for its expenses. On appe al, the Commi ssion r ever sed that holding and aw arde d the City 90 pe rc e nt o f i ts e xpe ns e s. 7 Entex t h en filed suit i n Travis County district court see king a

decla ration that the Commi ssion lacks authority to conduct a r etroa ctive prude nce r eview of g as purc hases a nd, alternatively , that such an action by the Commi ssion is not a “ratemaking proce eding ” in which the City could obtain expense re imbursement. I t also asked the district court to enjoin enfor ceme nt of the Comm is s io n ’ s o r d e r r e qu ir in g E n te x to r e im b u r s e th e Ci ty 9 0 p e r c e n t o f it s e xp e n ses. The d is tric t court re ndere d judgme nt declar ing that the Commi ssion has authority to conduct a r etroa ctive prudenc e re view of g as purcha ses and that such a pr ocee ding is a rate making proce eding in which the City could re cover

expenses. This appea l followed. 87 DI SCU SSIO N Entex bri n gs two issues on appea l that mirror its issues before the district court—whe ther the Commissio n h as authority to conduct a r etroa ctive prude nce r eview of g as purcha ses that Entex flowed throug h the PGA clause s and whether such a proce eding is a rate making pr oc e e din g fo r w hic h th e City c an s e e k e xpe ns e re imb ur se me nt.
Stand ard of review

Our c onsideration of Ente x ’s appe llate issues ultimat ely turns upon statutory construction. Statutory

construction is a matter

of law, w hich we r eview d e n o vo . City of San Antonio v. City of Boerne , 1 11 S.W. 3d 22 , 2 5 ( Te x. 20 03 ). Th e g oa l of statut or y c on str uc tio n is to g ive ef fec t to the intent of the leg islature. Fleming Foods of Tex., Inc. v. Ry lander , 6 S.W .3d 278, 28 4 ( Te x. 19 99 ); Union Banke rs Ins. Co. v. Shelton , 889 S. W. 2 d 2 7 8 , 2 8 0 ( T e x. 1 9 9 4 )
. We consider, among other fac tors, the lang uag e of the statute, leg islative history , the nature and objec t the leg islature intended to be obtained, and the conseque nces that would fol l o w f ro m alternative constructions, eve n when a statute is not ambiguous on its fa ce. Tex. Gov’ t Code Ann. § 311.023 (West 1998); Helena Che m. Co. v. W ilkins , 4 7 S. W.3 d 4 86 , 4 93 (T e x. 20 01 ); United Serv s. Auto. As s’ n v . S

tra y ho rn , 124 S.W .3d 722, 728 (Tex. App.—Austin 2003, p et
. d enied). We consider disputed provisions in contex t, not in isolation. Te x as W or k e rs’ Com p. Com m’n v . Co nti ne nta l Ca s. C o. , 8 3 S. W.3 d 9 01 , 9 05 (T e x. Ap p. —A us tin 20 02 , n o p e t.) ; s e e F

it z g e r a ld v . A d

v a n c e d Spine Fi x ati on Sy s. , 996 S.W .2d 864, 866 (Tex. 1999). Th e le g isl a tur e ha s ins tr

uc te d us that G UR

A i s to “ be c on str

ue d li be ra lly

to p ro mot e the e ff e c tiv e ne ss a

nd e ff ic ie nc y of re g ulatio n of g a s utili tie s. ” Te x. Ut il. Cod e Ann. § 1 01 .0 07 (We st8

1998). Howe ver, as an a dminist rative a g ency , the Commiss ion may exercise only

those power s that the leg islature conf

ers upon it i n cl ea r and ex press lang uag e and c annot cr eate and exerc ise what
r e a l l y a m o u n t s t o a

n e w o r a d d i t i o n a l p o w e r

f o r t h e p u r p o s e o f a d m i n i s t r a t i v e e x p e d i e n c y. Te xas Natural Res. Cons er va t i o n Comm’n v. Lake shore Util. Co. , 164 S.W .3d 368, 377 (Tex. 2005); Pu bli c Ut il. Com m’n v . Ci ty Pu b. Se rv . B d. of S

an An ton io , 53 S.W.3 d 3 10 , 3 16 (T e x. 20 01 ). Th is is b e c a u s e a s an a d mi n is tr a ti v e a g e n c y th e Co mm is s io n is a c r e a tu r e o f th e le g is latu

r e with no inhere nt authority

of its own. La k

es h o r e Util. Co. , 1 6 4 S.W .3d at 377. “When the L eg islature expressly confe rs a powe r on an a g ency , it also impl iedly intends that the ag ency have w hateve r p o we rs are rea sonably

nece ssary

to fulfill its express functions or duties.” Id . at 378. And, an ag ency cre ated to ce ntralize expertise in a ce rtain re gulatory are a is ordinar ily

“g iven a lar g e deg ree of latitude in the methods it uses to acc omplish i ts reg ulatory function.” Texas Mun. Power Age ncy v. Public Util. Comm’n , 150 S.W .3d 579, 586 (Tex. A pp.—Austin 2004, pe t. gr anted) . Howeve r, an ag ency m ay

not, in the guise of implied powers, e x erc ise what is ef fec tively a new power , or a power contra

ry to a statute, on the theory that such exercise is ex pedient for the ag ency ’s purpose, City of Austin v. Southw estern Bell T el. Co. , 92 S.W .3d 434, 441 (Tex. 2002), nor may it contrave ne specific statutory lang uag e, run counter to the g ener al objectives of the statute, or impose additional burd e ns , c on dit ion s, or

re str ic tio ns in e xce ss of or inc on sis te nt w iththe re le va nt s ta tut or y pr ov isi on s. State v. Public Util. Comm’n of Tex. , 131 S.W .3d 314, 321 (Tex. App.—Austin 2004, pet. denied).
Ret roact ive prudence re view of gas pu rchases I n its first issue, Entex argues that the Co m m i ssion lacks authority to conduct retroa ctive prude nce r eviews of g as purc hase c harg es flowe d throug h a PGA cla use or to orde r9

re fu nd s. I t als o ass e rt s tha t su c h a re vie w that mi g ht r e su lt i n a re fu nd or de r v iol a te s th e fi le d r a te d o ct ri n e a n d

i s a f o rm o f p ro h i b i t edre t ro ac t i v e r at em ak i n g. Regulatory and pol

icy c ontext We b egi n b y rec og nizi ng that the leg islature to date ha s continued to impose a
c omp re he ns ive re g ime of tr a dit ion a l r a te re g ulatio n o n g a s u til iti e s. Ga s u til iti e s are mon op oli e s in the ar eas the y

serve . Tex. Util . Code Ann. § 101.002(b) (West 1998). As a res ult, “the normal forc es of competition that regulate pric es in a fr ee e nterprise society do not operate.” Id . I nstead, the leg islature soug ht throug h GURA “to e stablish a compre hensive a nd adequate re g ulatory

sy stem for ga s utilit ies to assure rate s, operations, and service s that are just and rea sonable to the c onsumers and to the utilit ies,” with the overa rching g oal of protec ting “ the public intere st inherent in the rates and service s of g as utiliti es.” Id . § 101.002(a) . To this end, the leg islature cha rg ed the Commission with the t ask of ensuring “complianc e with the obl iga tions of ga s utili ties” in GURA and g rante d the C o m m i s s i o nb r o a d

p o w e r s t o r e g u l a t e “ u t i l i t y r a t e s , o p e r a t i o n s , an d

se rv ic e s a s a substitut e for compe tition .” Id
. § 104.001 (empha sis added). The leg islature empha siz ed that the Commission “shall ensure that eac h rate a g as utilit y or two or more g as utiliti es jointly make, de mand, or re ceive is just and r e a s o n a

b le ” in a ma

n n e r th a t w il l “ p e r

mi t th e u ti li ty a r e a s o n a

b le o p p o rtu

n it y to e arn a
re a so na ble re tur n on the uti lity ’s inv e ste d ca pit a l use d a

nd us e fu l in pr ov idi ngse rv ic e to t

he pu bli c in excess of its reasona

ble and ne cessa

ry operating e x penses.” Id . § 10 4. 00 3. Th ese po lic y g oa ls inform our a

naly sis o f t h e C o m m i ssion’s powers he re. Se e id . § 10 1. 00 7; compare with T XU Gene ration Co., L .P. v. Public Util. Comm’n of Tex. , 1 65 S.W. 3d 82 1, 85 1- 52 (T e x. Ap p. —A us tin 2005, pet. filed) ( Pemberton, J., di ssenting) (ar g uing that PURA’s competition statutory objectivesWe do so while mindful of the admoniti o n t hat a “ lawy er w ho attempts to chop his way 9 aro un d in the jun g le of

le g a l op ini on

on the su bj ect of th e se [PGA ] cl a

us e s is a pt t o f ind him se lf wa nd e ri ngin c ir c le s wi th his int e lle c tua l ma c he te so du lle d he is so on br ou g ht t o a sta nd sti ll. ” Phi lip P. Ardery , Sh ou ld T

he re BeRu le

s a bo ut E sc ala tor Cla us es? , 53:1 Pub. Util . For t. 35, 39 (1954). 10 should inform our view of the Commiss ion’s g ener al p o we rs to ensure both “ safe , reliable , and
re a so na bly pr ic e d e le c tr ic ity” in re ta il mark e t and that anc ill ary se rv ic e s are a va ila ble a t “ re a so na

ble price s”).
PGA clauses

We next note the natur e and f unction of PGA cla

uses. Fue l adjustment clauses for 9 uti lit ie s, su c h a s th e PGA c la us e s a t is su e in t

his c a se , o ri g inate d a s p art of uti lity rate sc he du le s in response to the rapid c hang es in coa l prices dur ing World War I . Richard J. P ierc e, Rec onsidering theRo le s o f R e gula ti on an d Com

pe tit ion in t

he Natural G as In du str

y , 97 Har v. L . Rev. 345, 373 (1 98 3) . T he y

a llo w a uti lity to a dju st c ha

rg e s a uto ma tic a lly , e ith e r u

p o r d ow n, on

an o ng oin g ba sis in re sp on se to f

luc tuatin g fu e l c os ts. De nn is Sc hif fe l, Electric Utility Regulation: An Ov ervie w of Fuel Adjustment Clauses , 9 5 : 1 3 P u b
. Ut i l
. Fo rt
. 2 3 , 2 3 -2 4 (1 9 7 5 ); R
. S
. T ri gg, Es c ala tor Cla us es in Public Utility Rate Schedule s , 106 U. P a. L
. Rev. 964, 964 (1958). I n other words, an automatic f uel adjustment clause is “ a fixed rule under which future rate s to be char g ed the public are deter mined. I t is sim ply

an addition of a

mathematica l formula to the filed sc hedules of the Company under which the rate s and cha

rg es fluctuate as the w holesale c ost of g as to the Company fluctuate s.” City of N or fol k , 9 0 S. E. 2d

a t 14 8; se e als o Lo uis ian a P ub . S e rv . Co mm ’n v . F

e de ra l E ne rg yRe gu lator y Comm’n , 688 F.2d 357, 360- 61 (5th Cir. 1982).I n th e sampl e rate sc he du le re pr od uc e d a s App e nd ix A, fi xed -c os t and vari able- c os t 10 po rt ion s o f t

he sc he du le are re po rt e d to g e the r u nd e r the he a din g “ Ne t Monthly Ra te .” Som e c ourt s have te rm e d th e se numbe rs a s th e “ ba se rate ,” wh ic h f luc tuate s b a se d o n c ha

ng e s in the g a s- cost varia ble as descr ibed i n the PGA clause
. See , e.g. , Southern Cal. Edison Co. v

. Public Util. Comm’n , 576 P.2d 945, 954-55 (Cal. 1978). Pierce has asse rted that e scalator clause s, such as the PGA c lauses in this case, “ are 11 essential to the fina

ncial viability

of many p i p el i n es and othe r utiliti es.” Richa rd J. P ierc e, Re c on sid e rin g th e Ro le

s o f R e gu lat ion an d Co mp e tit ion in t heNatural G as In du str

y , 9 7 H ar v . L. Rev. 345, 373 (1983). N onetheless, c riticism has been voic ed ag ainst the use of suc h clause s beca use of their automatic natur e. See G. Will iam Fowle r, Purchased G as Adjustment Clauses: An Adjuster’s Viewpoint , 6 St. Mar y ’s L .J
. 567, 578-81 (1974) (re viewing major ar eas of criticism of fuel a djustment cl auses, includingincentive issues a nd pare nt-subsidiary

self-de aling considerations). “ Re g ulator

y la g ” is the los s o f e arn ing s b e tw e e n th e tim e a uti lity fi le s a pe tit ion fo r a rate 12 inc re a se and

wh e n th e rate re lie f a c tua lly be c om es effect ive . Pi e rc e , 9 7 H arv . L . Re v. a t 36 0; see R
. S
. T ri gg, Escalator Clauses in Public Utility Rate Schedule s , 106 U. Pa. L . Rev. 964, 964 (1958); see also Eliza

beth Warre n, Regulated Industries’ A utomatic Cost of Service Adjustment Clauses: Do The yIn c re as e or

De c re as e Cos t to theCon su me r? , 5 5 Notre D ame L . Rev. 333, 348 (1980) (“Regulatory

lag simply

operates as a sque eze on the utility .”).

11 Other c ost components of rate sche dules are g ener ated f rom h i s torically

based p ro j ec t i o n s of future costs and so ar e re flec ted in fix ed compone nts of the rate sche dule. See 10 Pierce , 97 Har

v. L . Rev. at 373. Althoug h sometimes criticized, this bifurcated regulatory treatment is g e ne ra lly de e me d sat isf a c tor y be c a us e mos t cos ts te nd

to i nc re a se g ra du a lly

and pr e dic ta bly wh ile f u e l c o s t s ar e p art i c u l ar l y s u b j e c t t o dr a m a t i c an d u n f

o r e s e e a b l e c ha ng e s. Id
. a t3 7 3 n . 1 5 2
. In

11 addition, fuel costs constitute such a larg e propor t ion of a utility ’s total costs that any substantial regulatory

lag in approving rate incre ases to re flec t fuel cost incr ease s can c ause the rapid fina ncial 12F our p ra g ma tic jus tif ic a tio ns have g e ne ra lly

be e n id e nti fi e d f

or us ingsu c h c la

us e s: 13 (1) to re duce the number of rate proce eding s and the e x penses attended ther eon, (2) a series o f s m al l er inc rea ses to the consumer , (3) improve d financ ial stability for the utility

by reduc ing the variations in e arnings ca used by such incre ase in e x p en s es , and as a result (4) a

somewhat re duced c ost of capital which ultimately

would acc rue to the be nefit of the c onsumer. Patricia Ga

bel, et al., Utility Rates, Consumers, and the New York State Public Servic e Commission , 39 Al b. L . Rev . 707 , 7 54 (1 97 5) ; see Daily Adve rtiser v
. Trans-La, Div. of A tmos Energy Corp. , 612 So. 2d 7, 22 n. 23 (L a . 1 99 3) ; se e als o Ra ilr oa d Co mm ’n of T e x . v . Ci ty of F or t W or th , 576 S.W .2d 8 9 9 , 9 0 2 (T ex . C i v . Ap p . — Au s t i n1 9 7 9 , wr i t

re f’ d n . r. e. ) ( ci t i n g Montana Consu me r C o unsel v. Public Serv. Comm ’n , 541 P.2d 770 (Mont. 1975)); Fowle r, 6 St. Mary ’s L .J . at 578. 12 r u i no f ano t h e r w i s e h e a l t h y u t i l i t y. Id . PG A c la us e s p e rm it f

luc tuatio ns in the uti lity ’s c os ts t o 13 be pa sse d thr ou g h dir e c tly to its c us tom e rs a s c os t a dju stm e nts in s ub se qu e nt util ity bil ls. El iza

be th Warren, Regulated Industries’ Automatic Cost of Servic e Adjust ment C lauses: Do They Incre ase or De c re as e Cos t to theCon su me r? , 55 Notre D ame L
. Rev. 333, 336 (1980). Thr oug h a PGA cla use, then, a utilit y can track its customer c harg es more c losely to its current c ost of fuel without
c on tin ua lly havin g to f

ile fo r r a te inc re a se s ( or

de c re a se s) and

a me lio ra te the re g ulator

y la g pr ob le m. See P ublic Serv. Co. of N. H. v. Fe deral Energy Regulatory Comm’n , 600 F.2d 944, 947 ( D.C. Cir. 1979); Gulf Power Co. v. Florida Public Serv. Comm’n , 487 So. 2d 1036, 1037 (Fla. 1986)
.

Gene rally , implementation of PGA clause s is an exercise by a reg ulatory commission of its r a te ma

k in g , a s o p p o s e d to r

u le ma k in g , p o w e r , an d PG A c la u s e s a r e g e n e r a ll y a d o p te d in a rate making proce eding as an integ ral pa rt of a utility ’s over all rate structure
. See P ublic Serv. Co. of N. H. , 600 F.2d at 947 (desc ribing such cla uses as pa rt of “utility ’s filed rate”) ; Scates v . Arizona13

Corp. Comm’n , 578 P.2d 612, 616 (Ariz. 1978); In re P et i tion of All ied Power &Light Co. , 321 A. 2 d 7 , 1 0

- 1 1 ( V t. 1 9 7 4 ) ; T r ig g , 1 0 6 U
. Pa
. L
. Re v . a t 9 9 6
. I n s o me ju r is d ic ti o n s , reg ulatory commis sions are statutorily authorized to implement such clause s; in others, the regulatory commission im plements such cla uses pursuant to its plenary ra t em aking authority
. Se e Da ily Adve rtiser v . Trans-La, Div. of Atmos Energy Corp. , 612 So. 2d 7, 23 (L a. 1993). A s alrea dy noted, such cla uses have been judicia lly

rec og nized and approve d in Texas, and we have also described the adoption of a P GA as beingpart of a rate making proce eding
. Sa n A nto nio In de p. Sc h. Di

st. , 550 S.W .2d at 266-67 & n.2; High Plains Nat ural Gas Co. , 613 S.W .2d at 48; City of F or t W or th , 576 S.W .2d at 902.
Ente x’ s a pp ro v e d rate

and its PG A c lau se We nex tco n s i d er

t h e r el at i o n s h i p b et we en t h e P GA cl au s e h er e a n d Entex’s approved
rate . G UR

A d e fi ne s a

“ rate ” a s (A ) any c omp e ns a tio n, tari ff

, c ha rg e , f are , to ll, re nta l, o r c l a s s if

ic a tio n th a t is dir e c tly or indirec tly

demande d, observe d, char g ed, or co l lected by a g as utility

for a se rv ic e , p ro du c t, o r c omm od ity de sc ri be d in the de fi nit ion of g a s utili ty in t his section; and (B ) a rule , regulation, prac tice, or c ontrac t af f ectingthe compensation, tariff, c harg e, far e, toll, rental, or c lassification.
Tex. Util. Code Ann. § 101.003(12) ( West S upp. 2005). Throug h this langua g e, the leg islature has
re c og nize d th a t a

rate may c on sis t no t me re ly

of a fi x ed doll ar a

mou nt b ut m ay

ins te a d b e a

ru le “af fec ting” the cha

rg e, a te rm contemplating the use of va riables. Se e id . § 101.003(12)( B)
.F or the sake of

sim pli c ity , w e re fe r o nly

to t he te rm s and

numbe rs us e d in th e sampl e rate 14 schedule repr oduced a

t Appendix A. The pric e of g as is divided into four bra ckets: for the first 400 cubic fee t of g as, the 15 c us tom e r i s c ha

rg e d a se t pr ic e of

$9 .1 9 ( the min imu

m mo nth ly

bil l) ; th e ne xt 2,6 00 c ub ic fe e t c os t $.6536 per 100 c ubic fe et; the next 7,000 cubic feet cost $.5412 per 100 cubic feet; and, finally , any a mou nt o f g a s mo re tha

n the ini tia l 10 ,0 00 c ub ic fe e t w ill c os t th e c us tom e r $ .5 20 8 p e r 1 00 c ub ic fee t. Th e PGAc la

us e a lso inc lud e s a

pr ov isi on

fo r t he a mou nt c ha rg e d to va

ry a c c ordingto 16 c ha ng e s in g ro ss re c e ipt s ta xes, a pr a c tic e that ha s b e e n c omm on in j ur isd ic tio ns that pe rm it the us e of PGA cla

uses. See Trig g , 106 U. Pa. L . Rev. at 982-87. 14 The ap p ro v ed ra t e sche dules in this case amount to a rule providing a thre e-step proce ss for computing a customer ’s monthly g as cha rg e. Se e id .; see also Appendix A. Fir st, the 14 rate schedule sets eac h customer a minimum monthly

bill, $9.19. Second, the r ate sc hedule de fines the price of g as per

100 cubic fee t of g as. Collectively , these pric es may be ter med the “r ate ba se” 15 beca use they set the base from which the actua l c ustomer char g e will va ry acc ording to the terms of the third part of

the rate sche dule, the PGA cla use. The thi rd component, the PGA clause , states that the “ne t monthly

rate per unit sold is predicated upon a pr ice of natura l ga s purcha sed for resa le” at $4.5705 per Mc f. As a re sult, the actual c ustomer cha rg e for g as would be the amount set by the 16 base r ate, a djusted for the deviation of the cost of g as to E ntex from the assumed purcha se price of $4.5705 per Mc f.

This “ rule” fits squarely

within the statutory

definition of “r ate.” See Tex. Util . Code Ann. § 101.003(12)( B) . We thus conclude that a n Entex gas r ate consists of its e ntire rate schedule , which may

resul t i n d i ffering customer c harg es month-to-month. See 16 Tex. Admin. C ode § 7 .3 15 (a ), (c )( 8) (2 00 5) (f or mul a may c on sti tut e rate ; r a te a dju stm e nt p ro vis ion mus t be p art of rate filing) ; cf. Chevr o nTexaco E xploration & Prod. Co. v. Fede ral Energy Re gulatory Comm’n , 38715

F. 3 d 8 9 2 , 8 9 5 (D
. C
. C i r. 2 0 0 4 ) ( qu o t i n g Tra ns weste rn Pi pe lin e Co. v . F

e de ra l E ne rg yRe gu lator y Comm’n , 897 F.2d 570, 578 ( D.C. Cir. 1990)) (unde r F eder al Natur al Gas A ct, FE RC may approve “a ta riff c ontaining a

rate ‘for mula’ or a

rate ‘rule’ ” instead of a spec ific number) ; Pierce, 97 H arv. L . Rev. at 349 n.29 (r ates g ener ally may consist of fixed values and va riable c omponents).
The Commissio n’

s a utho rit y ov e r the ra te The re g ulatory

authority , whether

the Commiss ion or a municipality , “shall ensur e that eac h rate a g as utilit y or two or more g as utiliti es jointly make, de mand, or re ceive is just and
re a so na ble .” Te x. Ut il. Cod e Ann. § 1 04 .0 03 (We st 19 98 ). Ra tes mus t be e sta bli sh e d s o a s to permit the utilit y “a rea sonable opportunity to ear n a re asonable return on the utilit y ’s invested capital use d and useful in pr oviding service to the public in excess of its reasona ble and ne cessa

ry
o p erating e x penses.” Id
. § § 1 0 4
. 0 5 1 , . 0 5 3
. “ A g a s u ti li ty ma y n o t d ir e c tl y

o r in d ir e c tl y

c h ar g e, demand, collect, or rec eive from a person a gre ater or l esser compensation for a se rvice provided or to be provided by

the utility

than the compe nsation presc ribed by the applica

bl e s ch ed u l e o f rates filed.” Id . § 104.00 5. Finally , the Commiss ion “may require the examination and audit of the
a c c ounts of

a g a s o r m un ic ip all y own ed utili ty ” and may ins pe c t “ the pa

pe rs , b oo ks , a c c ounts , documents, and other business rec ords of a gas util ity within its jurisdi ction.” Id
. §§ 102.202, .203.

The utilities code does not de fi n e “e x am ination” or “ audit,” so we may rely on definitions list ed in commonly used dictionarie s to disc ern the plain meaningof terms in the statute. See P owell v. Stover , 1 6 5 S. W. 3 d 3 2 2 , 3 2 6 (Tex. 2005); Te x as De p’ t of Pr ote c tiv e & Re

gu lator y Servs. v . Mega Child Care, Inc. , 14 5 S.W. 3d 17 0, 19 6 ( Te x. 20 04 ); Sh esh un off v . S he sh un off , 172 S.W .3d 686, 695 n.8 (Tex. App.—Austin 2005, pet. filed). An “examination” is “ an inspec tion” or16

“ana ly sis.” American H

eritage Dictionary 456 (1973). An a udit is a “forma l examination of an individual’s or org anization’s acc ounting r ecor ds, financia l situa ti o n , o r complianc e with some other set of standa

rds.” Black’

s Law Dictionar

y 1 2 6 ( 7 th e d
. 1 9 9 9 )
. I t ma y inv o lv e “ an a d

ju s tm e n t or
corr ection of a ccounts.” American H eritage Dictionary 86. The leg islature has c harg ed the Commission t o ensure “compliance with the ob lig a tio ns of

g a s u til iti e s” in G UR

A a nd to r e g ulat e “ uti lity

rate s, op e ra

tio ns , a nd se rv ic e s a s a
su bs tit ute fo r c omp e tit ion ,” Te x. Ut il. Cod e Ann. § 1 04 .0 01 , a nd ha s sp e c if

icall y enu mer a te d it s power to conduct examinations and audit the utiliti es. Id . §§ 102.202, .203. The PGA c lause, a s part of the rate, is a

n important and vary

ing fac tor in the char g e to the utilities customers, and the amount char g ed to customers ultimately depends, unde r the term s o f t h e P GA clause , on the price of g as purc ha se d. PGAc la

us e s are me re ly

re c ou pme nt d e vic e s d e sig ne d to pe rm it u til iti e s a do ll ar - f o r - d o ll ar r e c o v e r

y o f f lu c tu a ti o n s in f

u e l c o s ts
. T h e c u s to me r is h ar me d by the implementation of such cla uses only if such clause s are manipulated or abused, thus e ncoura g ing the promulg ation of rate charg es t hat are neither just nor rea sonable to the ratepay er. See F ow le r, 6 St
. M ar y ’ s L
. J. a t5 78 -8 1; s ee also In re Niagara Mohawk Power Corp. , 507 N.E.2d 287, 291 (N.Y
. 1987). These c riticisms are met, howe ver, w hen the r eg ulatory body revie ws cha

rg es re couped by a utility throug h a PGA cla

use and de termines that s u ch ch arge s were “just and re asonable .” A
nece s s ar y co ro llary

to such revie w is the power to take cor

rec tive action whe n the utility has mis a pp lie d th e te rm s o f i ts r a te s. I n o the r w or ds , a n a lle g a tio n th a t a

uti lity ha s ma nip ulated its purc ha se s to art if

ic ia lly ra ise the c os t of f

ue l di ff e rs in n o s ub sta

nti a l w ay fr om t he c la im that a

uti lity char g ed customer s a price g reater than a n approve d fix ed rate. As the Ohio Supreme Court17

observe d, “the require ment of fairne ss w hich compels adjustment in r ates to compe nsate utilities for
e sc a la tin g fu e l c os ts a lso c omp e ls r e tr os pe c tiv e re c on c ili a tio n to ex clu de cha rg e s id e nti fi a

bly resulting from unre asonable computations or inclusions.” Ohio Power Co. v. Public Utils. Comm’n , 376 N.E.2d 1337, 1338-39 ( Ohio 1978).

I n response , E n t ex p o ints out t hat althoug h GURA and PURA shar e a c ommon leg islative history , the leg islat u re ga ve the Commission ex press a uthority in PURA to review and
rec oncile the prudenc e of the fue l costs of e le c tri c utilit ies, see Te x. Ut il. Cod e Ann. § 3 6. 20 3 ( Wes t 1998), y et included no suc h provision in GURA reg ardingg as utiliti es. Entex would have us infer that th e le g isl a tur e did no t int e nd to e mpo we r the Com mis sio n to re vie w and re c on c ile g a s u til iti e s’ fu e l c os ts. Ho wever, the le g isl a tur e e na c te d th e pr ov isi on g ra nti ngthe Com mis sio n a

uth or ity to revie w and r econc ile the prude nce of fuel c osts at a time when it had pr ohibited the P UC from allowing elec tric utili t i es t o u s e automatic fuel cost adjustment cla uses like PGAs. Id . § 36.201 (We st 1 99 8) ; see also Entergy Gulf States, Inc. v. Public Util. Comm’n of Tex. , 173 S.W .3d 199, 206 (T e x. Ap p. —A us tin 20 05 , pe t. fi le d)
. B y c on tr a st, Te xas c ourt s b y that ti me ha d a

pp ro ve d th e us e of PGA cla

uses by g as utiliti es. See H

igh Plains N

atural Gas Co. , 6 13 S.W. 2d a t 48 . A g a ins t th is leg al bac kdrop, the leg islature under standably provided a method for timely revie w and adjustment of an elec tric utilit y ’s fuel costs as an a lternative f or fue l fac tor adjustment clause s while including no such provision reg ardingg as utiliti es. See T e x. U ti l. Co d e A n n . § 3 6
. 2 0 3 ( d ) . Thus, we f ind
un ins tr uc tiv e En te x’s c omp ari so n w iththe e xpre ss p ow e rs g ive n to the PUC
. As we have dis c us se d, wh e n a PGAc la us e is a pp ro ve d, the po we r t o r e vie w p a st purc ha se s and

or de r r e fu

nd s is ne c e ssa

ry to en sure c omp lia

nc e wi th t he a pp ro ve d r a te . We fi nd

it18

rea sonably

nece ssary

for the Comm ission to have the power to reviewpast g as purc hases a nd order ref unds as par

t of its ex press a

udit power to ensur e complianc e with the appr oved rate and its implied po we r t o appro ve PGAc la us e s. Se e id . § § 1 04 .0 05 (a ), (c ) ( Com mis sio n ma y or de r r e fu

nd wi th int e re st i f i t f

ind s th a t ut ili ty vio la te d te rm s of its fi le d r a te ); see also City Pub. Serv . Bd. , 53 S.W .3d at 316 (Te x . 2001); Lakeshore Util. Co. , 16 4 S.W. 3d a t 37 8. Othe rw ise , th e Com mis sio n’ s a uth or ity would be re duced to the ministerial task of verify ing the utilit y ’s ar ithmetic, and having the ge nera l power s to reg ulate rates and ensure c ompliance tog e the r wi th the jur isd ic tio n to e xami ne and a ud it the utiliti es would “be hollow and meaning less.” See Texas Bl d g . Owners & Managers Ass’n v

. Public Util. Comm’n of Tex. , 11 0 S.W. 3d 52 4, 53 2 ( Te x. Ap p. —A us tin 20 03 , p e t. d e nie d) ; Pu bli c Ut il. Com m’n o

f Te x . v . Ci ty of A us tin , 728 S.W .2d 907, 915 (Tex. App.—Austin 1987, writ ref’ d
n. r. e .) ; see also In re Redi-Flo Corp. , 384 A.2d 1086, 1097 (N.J. 1978) (court could not be satisfied that PGA cl ause itself w as “just and r easona ble” if c lause ope rate d fre e fr om reg ulatory board’ s supervision and without periodic sy stematic re view more compre hensive than “ monitoring” ).
File d rate

do c tri ne Entex nex t argues t hat t he powe r to conduc t a re troac tive prudenc e re view violates the filed ra

te doctrine . We disag ree . The “filed rate doctrine” applies when state law cre ates a state ag ency and a statutory scheme under which the ag ency deter mines rea sonable ra

tes for the service provided. Arkansas La. Ga s Co . v . H

all , 4 53 U. S. 5 71 , 5 79 (1 98 1) ; Keogh v. Chicago &Northw estern Ry

. , 260 U.S. 156, 16 3 ( 19 22 ); se e als o Tex. Util. Code Ann. § 104.005(a) (codify ing f iled rate doctrine) . The doc trine ho lds that a tar if

f fi le d with and

a pp ro ve d b y

an a dmi nis tr a tiv e a g e nc y un de r a statut or y sc he me is19

presumed r easona

ble unl ess a litiga

nt proves other

wise. Southwestern Elec. Power Co. v. G rant , 73 S.W .3d 211, 216 (Tex. 2002)
. I t c oncomitantly prohibits reg ulated utilities from “cha rg ing r ates for their ser vices other than those prope rly filed with the appr opriate r eg ulatory authority .” Entex v

. Railroad Comm’n of Tex. , 18 S.W .3d 858, 862-63 (Tex. A pp.—Austin 2000, pet. denied) (quoting Southwestern Bell Tel. Co. v. Metro-Link Telec om, Inc

. , 919 S.W .2d 687, 692 (Tex. App.—Houston [14t h Dist.] 1996, writ denied) ). A tar iff filed w ith and approve d by an administrative a g ency under a statutory

scheme is presumed reasona ble unl ess a litigant proves otherwise. Grant , 73 S.W .3d at 21 6; see W

estern Union Tel. Co. v. Esteve Bros. & Co. , 256 U.S. 566, 572 (1921); W egoland, Ltd. v. NY NEX Corp. , 2 7 F .3 d 17 , 18 (2 d Ci r. 19 94 ); Metro-Link Telec om , 9 19 S.W. 2d a t 69 1. Thus , under the doctrine f

iled tariff s g overn a

utilit y ’s relationship with its customers and have the forc e and ef fec t of law until suspended or se t aside. Grant , 7 3 S. W.3 d at 21 7; see Keogh , 260 U.S. at 16 2- 63 ; Carter v. AT& T Co. , 3 65 F .2 d 48 6, 49 6 (5 th Cir . 1 96 6) ; Metro-Link Telec om , 919 S.W .2d
a t 69 2. Ad dit ion a lly , r e g ulate d u til iti e s c ann ot v ary a tari ff’s ter ms with in div idu a l c us tom e rs , dis c ri min a te in p ro vid ingse rv ic e s, or c h a r g e r a t e s o the r t ha n th os e pr op e rl y

fi le d w iththe a

pp ro pr ia te regulatory

authority
. Maislin Indus. v. Primary Stee l, Inc. , 4 97 U. S. 1 16 , 1 26 (1 99 0) ; Arkansas La. Gas , 4 5 3 U
. S
. a t57 7; Me t r o -L i nk Telec om , 9 19 S.W. 2d a t 69 2. A util ity ’s ob lig a tio ns to i ts customers c annot exceed its duties under the filed tar iff. See Tex aco, Inc . v. Central Power & Light Co. , 95 5 S.W. 2d 37 3, 37 7 (T e x. Ap p. —Sa n An ton io 1 99 7, pe t. d e nie d) ; Central Power & Light Co.
v . R om e ro , 948 S.W. 2d 76 4, 76 7 (T e x. Ap p. —Sa n Ant on io 1 99 6, wr it d e nie d) ; see also Arkansas La. Gas , 453 U.S. at 577-78.20 The c onsiderations under ly ing the doctrine a re the prese rvation of th e reg ulatory ag ency ’s primary

jurisdiction over re asonable ness o f ra t es and the ne ed to insure that r eg ulated companies c harg e only

those rate s of w h i ch t h e re g ulatory ag ency has bee n made c og nizant. See C o n co rd v. F ed er a l E n er g y R eg u l a t o r

y Co mm’n , 9 55 F .2 d 6 7, 71 (D .C. Cir . 1 99 2) ; City of Cl eve land

v. Fede ral Pow erComm’n , 525 F.2d 845, 854 ( D.C. Cir. 1976). A re g ulatory ag ency cannot retroa ctively

alter the cost-adjustment mec hanism, nor ca n it rejec t calculations on the theory that the method of c alculation itself is not just or reasona ble, bec ause the rate rule is the filed rate. See , e.g. , ChevronTexac o , 387 F.3d at 896. H oweve r, the filed-r ate doctrine does not prec lude a r eview b as ed on the c harg e that a utility misapplied its rate. See E ast Tenn. Natur al Gas Co. v. Fede ral Energy R egulatory Comm’n , 631 F.2d 794, 800 n.10 ( D.C. Cir. 1980).

As we ha ve ex p lained above , the Commiss ion’s authority to conduct a r etroa ctive
re vie w o f g a s p ur c ha se s d oe s n ot i nv olv e re tr oa c tiv e ly c ha ng ing the te rm s o f E nte x’s a pp ro ve d r a te schedule . I nstead, the Commission is attempting to revie w gas purchase s that resulted in cha ng es to the amount s ch ar ged t o Entex’s customers under the terms of its PGA clause . The City ’s underlying c laim, the basis for the Commi ssion’s action, amounts to one of abuse of the PGA clause , a var iable in Entex’s approved r ate; the proc eeding s conce rn the a lleg ed misapplication of Ente x ’s rate s rather

than an attempt to change t h e t er ms of the rates. I n other wor ds, the Commis sion’s revie w is not an attempt t o o rd er Entex t o calc ulate its char g es diffe rently ; rather , it would be order ing Entex only to calc ulate it s char g es correc tly
. Thus, we conclude that the filed rate doctrine d o es n o t p re v en t re gu l at o ry

re v i e w o f a l l e g e d l y i mp r u d e n te x p e n d i tu r e s a

u t o m a t i c a l l y

p a s s ed t hro u gh to the rate pay ers throug h a PGA cla use.21

Rule ag ain st re tro ac tiv era te making Finally , Entex argu es t hat the author ity to conduct a r etroa ctive re view of g as purcha ses would violate the r ule ag ainst retroa ctive ratemaking . We disag ree . F un dame nta l in the uti lity rate makin g pr oc e ss i s th e pr inc ipl e , te rm e d th e ru le a g a ins t retroa ctive ratemaking , that utilit y rate s are set for the future a nd not the past. Railroad Comm’n of Tex. v. Lone Star Gas Co. , 656 S.W .2d 421, 425 (Tex. 1983). Utiliti es code sections 104.110 and 104.151 codify

the rule a g ainst retroa ctive ratemaking for g as rate s. Rates set by the Commiss ion

“ c o n s ti tute th e le g a l r a te s o f th e g a s u ti li ty

u n ti l c h an g e d ” in

th e ma n n e r p r o v id e d b y G U RA
. T e x. Ut il. Cod e Ann. § 1 04 .1 51 (b ). I f, a ft e r a he ari ng , th e Com mis sio n f ind s a ra te un re a so na

ble , it sh a ll “ente r an or der e stablishing the rate s the gas uti lity shall char g e or apply for the se rvice in question.” Id . § 104.110(a) (1). The new r ate “ shal l be obser ved ther eaf

ter until chang ed.” Id . § 104.110(b). The rule ag ainst retroa ctive ratemaking is often misunderstood and misapplied. See State v. Public Util. Comm’n of Tex. , 883 S.W .2d 190, 199 (Tex. 1994) (citing Stefan Kr ieg er, The Gho st of Regula tio n P as t: Cur re nt A pp lic ati on s o

f th e Ru le Ag

ain st R e tro ac tiv e Ra te ma k ing in P ublic Utility Proceedings , 1 9 9 1 U
. I l l
. L
. R e v . 9 8 3 , 9 8 8 ( 1 9 9 1 ) )
. I t p r o h i b i t s a p u b l i c uti lit y commission from setting futur e rates to allow a utility to rec oup past losses or to ref und to consumers excess utilit y

profits. Id
. “R es t at ed , t h e r u l e p ro h i b i t s a u t i l i t y

co m m i s s i o nfr o m m ak i n g a
re t ro s p ec t i v e i n qu i ry

t o d et er m i n e w h e t h e r a p r i o r r at e w as re as o n ab l e a n d i mp o s i n g a s u rc h ar ge when r ates we re too low or a ref und when r ates were t oo high.” Id . T hat is , th e ru le a g a ins t retroa ctive ratemaking only require s that natural g as compa nies, the Commi ssion, a

nd courts abideThe rule ag ainst retroa ctive ratemaking g ener ally protec ts the utilit y from beingsubject 17 to later de cisions by

a re g ulatory ag ency that the age ncy ’s earlier decision in approving a rate was “unsound.” See P ublic Util. Comm’n of Cal. v. Fe deral Energy Regulatory Comm’n , 894 F.2d 1372, 1383 (D.C. Cir. 1990)
. I n the context of PGA clause s, this reasoning cannot a pply —no regulatory authority has eve r consider ed the c ircumstance s under whic h Entex m ade its g as purc hases. 22 b y an adminis trative de termination that a pa rticular r ate is just and re asonable
. S e e East Tenn. Natural Gas Co. , 631 F.2d at 800.

The Commission’s attempt to revie w Ent ex’s g as purc hases, whic h direc tly aff ecte d t h e a m o u n t s c h ar g e d

t o E n t e x’ s c u s t o m e r s , an d t o o r d e r r e f u n d s t o c o mp e n s a t e f

o r a lle g e dly imprudent purcha ses may well be retroac tive in effe ct, but it is not retroa ctive ratemaking . As we have a lrea dy

discussed, the Commission i s not attempting to disturb the determination that Entex ’s
rate sc he du le s are jus t and re a so na ble . R ath er, the Com mis sio n’ s r e vie w w ill on ly c on c e rn its
a pp lic a tio n o f t

he a pp ro ve d r ate s—

havin g be e n g ive n th e be ne fi t of inc lud ingPGAc la

us e s in its
rate s, En te x will be su

bje c t to re vie w o f g a s purc ha se s to e ns ur e that it did no t mi sa pp ly its fi le d r a te schedule . The Commission i s not modify ing the rate
.

The rule ag ainst retroa ctive rat em aking does not prohibit the Commi ssion from
or de ri ng a uti lity to hon or its rate sc he du le wh e n th e rate sc he du le its e lf inc lud e s a

va ri a ble te rm . 17 A customer char g e deter

mined by the application of a PGA clause cannot be dec lare d rea sonable or jus t u nt il a ft e r i t ha s b e e n im ple me nte d. Thus , a

re g ulator y a g e nc y c an id e nti fy

ov e rc ha rg e s o nly throug h retrospe ctive ana ly sis. As the D.C. Circuit e x plained when c onsidering a similar problem
un de r t he F e de ra l N a tur a l G a s Ac t, “ Th e a lle g e dly re tr oa c tiv e c ha ng e s he re are no t r e tr oa c tiv e a t a ll; they simply implement an exist ing r ate sy stem that re q u i re s periodic a djustments.” East Tenn.23

Natural Gas Co. , 6 31 F .2 d at 80 0 n .9 ; se e als o Co nc or d , 9 5 5 F
. 2 d

at 75; B o s t o n Edison Co. v. Fede ral Energy Re

gulatory Comm’n , 856 F.2d 361, 370 ( 1st Cir. 1988). En te x off e rs tw o c a se s f

ro m ot her st ate s to su

pp or t it s argume nt t

hat th e po we r t o
or de r r e fu

nd s a ft e r c on du c tin g re tr oactive re vie w o f g a s p ur c ha se s v iol a te s th e ru le a g a ins t retroa ctive ratemaking
. See M atanuska E l ec . A s s ’n v. Chugach Elec. Ass’n , 53 P.3d 578 (Alaska 20 02 ); W isc on sin Po we r & Lig

ht Co. v . Pu bli c Se rv . Com m’n of W is. , 511 N.W.2d 291 (Wi s. 1994). Matanuska conce rned a

fuel surc harg e included a s an esti ma te in its rate, subject to quar terly true-up pr oc e e din g s. 53 P.3 d at 58 1. Va ri anc e s b e tw e e n th e e stimat e d a nd a c tua l c os ts w e re take n in to
a c c o u n t w h e n c a lc u lati n g th e n e xt qu arte r ly f u e l s u r c h ar g e f

il in g . Id
. P ar to f i t s fu el s u rc h ar ge
e sti ma te inc lud e d a

lin e -l os s est imate to ac c ount fo r the a mou nt of e ne rg y los t thr ou g h th e pr oc e ss of g ener ation and tra

nsmissi on. Id
. C h u gac h h adu s ed a 5
. 2 1 9 % l i n e l o s s fa ct o r i ni t s ra t e f i l i n gs with the re gulatory

ag ency , but later re view re veale d that its own internal documents showe d the actua l line loss factor to be substantially lower. Id
. at 582. Chug ach c orre cted its err or whe n filing future ta riffs but re fused to issue re funds. Id . The Alas k a Supreme Court held that, whe n initial estimates ar e later shown to be inaccurate, previously set rate s cannot be chang ed to cor rec t for the
err or. Id . at 585. I t found confir mation in t h at approa ch bec ause of the extensive review

the regulatory

ag ency employ ed whe n setting the rate and acc epting the line loss factor. Id
. Chugach does not aid our a

naly sis here; we are not consideringan estimate l at er found to be inac curate, a
numbe r t hat c ou ld h a ve be e n v e ri fi e d b e fo re imp le me ntat io n, bu t th e pr ud e nc e of g a s p ur c ha se s, which we re not re adily

subject to revie w until after the y occur red.24 I n dict a , the Matanuska court re lied on W isconsin Power & Light , a ca se that considere d fuel a djustment clauses conta ined in wholesale elec tricity rate s. Id . at 586 (re viewing W isconsin Power & Light , 5 1 1 N. W
. 2 d at 295-97). T he Wisconsin Supreme Court held that
o rd er i n g a r ef

u n d fo r i mp ru d en tfu el p u rc h a s e s v i o l at edt h e r u l e a gai n s tre t ro ac t i v e r at em ak i n g. W isconsin Power & Light , 511 N. W.2 d at 297 . I n p art , th e c ourt fo un d th a t th e re g ulator

y a uth or ity
a c tua lly ha d pe rf

or me d au dit s dur ing the pe ri od su bje c t to la te r re vie w an d so cou ld not re vis it i ts deter mination in la ter proc eeding s. Id . at 296. The a g ency had, in fa ct, often a

pproved r ates on interim bases so that it could re view fue l costs and orde r re funds af ter that re view. Id . A s a

re su lt, the c ourt he ld that, havin g “ a pp ro ve d [the uti lity ’s ] rate s, inc lud ingthe uti lity ’s e xpe c te d c oa l c os ts, 14 times, the [age ncy ] cannot now claim that the [utili ty ] m ust return this money .” Id . at 297.

W isconsin P ower & Light

dif fe rs sig nif

ic antl y fr om t his c a se . E nte x’s PG A c la us e
was a pproved a s part of its rate. As fue l costs chang ed, someti m es as freque ntly as eve ry month, there was no require ment to r ece ive approva l f rom a regulatory authority to a lter the amount char g ed to customers. Instead, the c harg es cha ng ed ac cordingto the terms of the f iled rate
. T o t h e e xt e n t th a t W

isconsin Power & Light could be inter

prete d broadly

as pr oh ibi tin g a s re tr oa c tiv e rate makin g in Wisc on sin any re fu nd ba se d on a re vie w of fu e l pu rc ha se costs passed throug h to customers t h ro u gh fu el adjustment clause s, we de cline to adopt that
re a so nin g he re . Ins te a d, we fi nd pe rs ua siv e the dis se nti ng op ini on to that c a se , a rguin g that, b e c a

us e “rates ca lculated unde r the fue l adjustment clause g o into effe ct wi t h o u t ad v an ce a pproval by

the [reg ulatory ag ency ], the utilit y cannot validly expect that char g es thus collecte d are insulated fromAs the Rhode I sland Supreme Court has observed, the “ specte r of r etroa ctive ratemaking 18 mus t no t be vie we d a s a

ta lis manic inh ibi tio n a g a ins t th e a pp lic a tio n o f pr inc ipl e s ba se d u po n e qu ity and common sense .” Roberts v. Narragansett Elec. Co. , 470 A.2d 215, 217 (R.I . 1984)) See Fitchburg Gas & Elec. Light Co. v. Departme nt of Telecomms. &Energy , 801 N.E.2d 19 22 0, 23 0- 31 (M a ss. 20 04 ); Daily Advertiser v. T rans-La, Div. of Atmos Energy Corp. , 612 So. 2d 7, 23 (L a . 1 99 3) ; MGTC Inc. v . Public Serv. Comm ’n of W yo. , 735 P.2d 103, 107 (Wy o. 1987); Equitable Gas Co. v. Pennsy lvania Pub. Util. Comm’n , 5 26 A. 2d 82 3, 83 0-3 1 ( Pa . Co mmw . Ct
. 19 87 ); Gulf Power Co. v. Florida Pub. Serv. Comm’n , 4 87 So. 2d 10 36 , 1 03 7 ( F la . 1 98 6) ; Pu bli c Serv. Comm’n of Md. v. De lmarva Power &Light Co. , 400 A.2d 1147, 1153 (Md. Ct. Spec. App. 19 79 ); Southern Cal. Edison Co. v. Public Util. Comm’n , 576 P.2d 945, 954-55 (Cal. 1978). En te x ap pe ars to m a ke an a dd iti on a l a rgume nt—

tha t th e pe ri od to be su

bje c t to re vie w i s 20 not limit ed in a way that will pass constitutional muster as an e x ception to the rule ag ainst retroa ctive rate making
. See Te x. Con st. art
. I , § 16 ; Southwestern Bell Tel. Co. v. Public Util. Comm’n of Tex. , 615 S.W .2d 947, 956-57 (Te x . App.—Austin 1981), writ r ef’d n.r.e. , 622 S.W .2d 82 (Tex. 1981). But see Fitchburg Gas & Elec. Light Co. , 801 N.E.2d at 232 (re jecting simil ar a

rg ument under the Un ite d St a te s and

Ma ssa c hu se tts c on sti tut ion s) . We e mph a size that ou r h old inghe re is t

hat th e ru le does not apply to r etroa ctive revie w of g as purc hase c osts under a PGA c lause. The Commi ssion’s revie w is theref

ore not a n “exception” to the r

ule. 25 retroa ctive modification.” Id . at 299 (Abr ahamson, J., dis senting ). Many other c ourts h a

v e re ache d 18 simil ar c onclusions. We have c oncluded that t h e prope r cha rac terization of the Commiss ion’s 19
re vie w r e c og nize s th a t in c re a se d c on su me r c ha rg e s r e su lti ngfr om g a s p ur c ha se s w e re no t pr od uc ts of rate makin g . We the re fo re ho ld t hat th e y c ann ot b e re nd e re d invio la ble by the ru le a g a ins t
re t ro ac t i v e r at em ak i n g. 2026

Conclu sion concernin g retroactive re views of gas purchases

After car eful re view of Ente x ’s ar g ume nts , w e h a v e c o n c luded that the Commissi on’s claimed a uthority to conduct re troac tive revie ws of g as purc hases and to or der r efunds ha s statutory
s u p p o rt an d d o es n o t v i o l at e ei t h er t h e fi l ed ra t e do ct ri n e o r t h e r u l e a gai n s tre t ro ac t i v e r at em ak i n g. We overrule Entex’s first issue. Expe nse r e im bur se m e nt

I n it s se c on d is su e , E nte x a rgue s that re tr oa c tiv e re vie w of its g a s p ur c ha se s is no t a

“ rate makin g pr oc e e din g ” in wh ic h the Com mis sio n c ou ld re qu ir e it to r e imb ur se the City fo r i ts c os ts for pa rticipating in the revie w. See Tex. Util . Code Ann. § 103.022. We ag ree . “The g as utility

in a rate making proce eding shall reimburse the g overningbody of the municipality

for the r easona

ble cost of the se rvice s of a p er s o n en gaged under [the statute] to t he extent the applicable r eg ulatory authority deter mines rea sonable.” Id . § 1 0 3
. 022(b). As note d above, t h e u t i l i t i e s c o d e d e f

i n e s “ r a t e ” b r o a d l y: (A ) any c omp e ns a tio n, tari ff

, c ha r g e , fa re , to ll, re nta l, o r c la ssi fi c a tio n th a t is dir e c tly or indirec tly

demande d, observe d, char g ed, or c o l l ected by a g as utility

for a se rv ic e , p ro du c t, or c omm od ity de sc ri be d in the de fi nit ion of g a s u til ity

in t his section; and (B ) a rule , regulation, prac ti ce, or contra ct af

fec ting the c ompensation, tariff , char g e, far e, toll, rental, or c lassification.
Id . § 101.003(12). A “proc eeding ” is a hear ing, inve stigation, inquiry , or other pr ocedur e for finding fac ts or making a dec ision under GURA. Id
. § 101.003(11). The term includes a denial of r elief or dismiss al of a

complaint. Id
.27 Under GURA, a util ity ’s rates may be cha ng ed in only

two way s—by

petition of the utilit y or by a rate-se tting authority , such as the Commission or the City
. See id
. §§ 104.102, .151. A p ro c e e din g tha

t c ha ng e s th e a mou

nt c ha rg e d c us tom e rs may

be a ra te mak in g p ro c e e din g in cir c u ms ta n c e s w h e r e th e p r o c e e d in g is f u n c ti o n a ll y e qu iv a le n t o f th e p r o c e d u r e s f o r notice and hear ing de scribed in subc hapter s C and D of the utiliti es code
. See Southwestern Pub. Se rv. Co. v. Public Util. Comm’n of Tex. , 962 S.W. 2d 20 7, 21 9- 20 (T e x. Ap p. —A us tin 19 98 , p e t. d e nie d) ; see als o Tex. Util . Code Ann. §§ 104.103-.151. “[N]ot all matters that have a potential ef fec t on rates
are rate making proce eding s. Only matters dire ctly

resulting in chang ed rates constitute rate making proce eding s.” Southwestern Pub. Serv. Co. , 962 S.W .2d at 220. The r equire ment that a ratemaking proce eding be the re sult of some sort of application to chang e the amount of money a utility can char g e its customers ensures “that the proceeding is one directly devoted to setting r ates a nd is not one per iphera lly

related to rate s.” Id . at 219. The City argues that the proc eeding s at issue in Southwestern Public Servic e Co. , 962 S.W. 2d a t 21 7- 20 , a

re su bs tanti a lly

ide nti c a l to tho se a t is su e in t hi s case and

sh ou ld e nti tle it t o reimburse ment of its expenses. I n Southwestern P u b l i c S ervice Co. , we c onsidered the issue of whether fuel re conciliation proc eedings in the c ontext of ele ctricity regulation were “ratemaking proce eding s.” Id . T he utili ty in t hat c a se so ug ht r e vie w t o r e c on c ile its fu e l e xpe ns e s w he n it s “pre deter mined customer r ates” resulted in over - or unde r-r ecove ry of its fuel ex penses. Id . at 210. We held that those rec o n cil iation proce eding s were the func tional equivalent of r atemaking proce eding s beca

use the a ctual amount of the rate was fix ed in an earlier pr ocee ding. Id . at 219-20. The purpose of the re conciliation proc eeding , in other wo rd s, was to cha ng e the r ates that ha d noThe C i t y ’s p et ition to t he Commissi on to eng ag e in re troac tive revie w of Entex’s g as 21 purc ha se s r e fl e c ts th is di stinc tio n. Th e City did no t c e de its jur isd ic tio n to se t r a te s. I ns te a d, it alleg ed only

that (1) Ente x ’s g as purc hases we re unreasona ble; (2) Entex ’s allocation of purc hased g as discriminated ag ainst residential and small c ommercia l c ustomers; (3) its tar iffs wer e false a nd mi s l ea d i n g (b u t did not request that new rate s be set); a

nd (4) the PGA c lause include d improper char g es. 28 provision f

or allowing a pass-throug h for costs related to va riations in the cost of fue l. Se e id . As we have explained above , the PGA clause s in this ca se are an integ ral part of the approve d rate . No pa rt y is atte mpt ingto m od if

y the c la us e s the mse lve s, on ly to re vie w co mpl ianc e wi th t he rate . T hu s, the proc eeding s at issue in Southwestern Public Servic e Co. ar e n o t s i m i l ar to those we are consideringhere
.

We have a lrea dy

conclude d that the issue prese nted here is one conc erningalleg ed misapplication of Entex’s approved r ates, not the setting of Entex’s rates. The City is not seeking 21 to a djust the formula contained in the PGA clause or to chang e Entex’s rates. It is merely reque sting a review of ga s purcha ses to ensure that the customer c harg e complies with Entex’s approve d rate
. As a re su lt, the se pro c e e din g s are no t “ ra te makin g pr oc e e din g s, ” and the City is n ot e nti tle d to reimburse ment for its costs for its par ticipation in the review . We sustain Entex ’s sec ond issue.
CO NC LU SION We ha ve conclude d that the Commi ssion ha s the authority to r eview Entex’s past ga s purcha ses when the costs associate d with those purcha ses wer e passe d throug h to Entex ’s customers throug h the application of the PGA clause s in Entex ’s filed rates and that the Commission has the po we r t o o rd e r r e fu

nd s if it d e te rm ine s th a t E nte x’s g a s purc ha se s we re imp ru de nt. We h a ve a lso deter mined that the C ommissi on’s ex erc ise of t hose powers do not violate t he filed rate doctrine or29

the rule a g ainst retroa ctive ratemak i n g, and we thus affirm the judg ment of the district cour t
conce rning those issues. Howeve r, we have a lso found that a prude nce r eview is not a r atemaking pr oc e e din g fo r p ur

po se s o f util iti e s c od e se c tio n 1 03 .0 22 (b ), and the re fo re the City is no t e nti tle d to
rec over its expenses incurr ed while pa rticipating in those proce eding s. Acc ording ly , we r ever se the judgme nt of the district court in par t and re nder judg ment that the City is not entitled to its ex penses under utilities code se ction 103.022(b).

Bob Pembe rton, J ustice Be fore Chief J ustice L aw, Justi ces B . A. Smith and Pemberton Affir med in Part; Reverse d and Rende red in Part Filed: F ebrua

ry 24, 2006AP P ENDIX A EN TEX RA TE SHE ET RESIDENTI AL SERVICE RATE SCHE DULE NO. R-1446-2 AP P LIC AT ION OF SCH ED UL E

Th is s c he du le is a

pp lic a ble to c us tom e rs re c e ivi ngg a s f or us e s u su a l in

a ho me throug h a sing le meter

servinga s i n gle family

dwelling and its relate d structure s. Natura l ga s supplied here under is for the i ndividual use of the c ustomer at one point of de livery and shall not be re so ld o r s ha

re d w ithoth e rs . NE T M ON THLYRA TE

First 400 cubic f

eet or less $9.19 Next 2,600 cubic f

eet .6536 per 100 c ubic fe et Next 7,000 cubic f

eet .5412 per 100 c ubic fe et Over 10,000 cubic f

eet .5208 per 100 c ubic fe et M IN IM UM M ON THLYBILL $9.19 P AYMENT Bills shall be re ndere d on a monthly basis and ar e d u e an d p ay able within ten (10) da y s f ro m th e date of

bil l. P UR CH ASE D GAS A DJ UST M EN T P RO VI SION

The a bove net monthly

rate per unit sold is predicated upon a pr ice o f natura l ga s purcha sed for

resa le her eunder

of $4.5705 per

Mcf. To the extent that ENTEX’s price of natura l ga s to be purc hased ( adjusted to corr ect a ny prior var iations from ac tual costs) for re sale he reunde r inc re a se s o r d e c re a se s, sa id ne t monthly ra te sh a ll be a dju ste d up or dow n to re fl e c t (i) c ha ng e s in such cost of g as per unit sold and (ii) chang es in g ross rec eipts taxes re sulting from such incre ases or decr ease s in the net monthly rate . For purposes of c alculatingsaid adjustment, it shall be proper for EN TEX to deter

mine its cost of g as fr om its several suppliers a nd the g ross rec eipts tax es to be paid on the basis of a

logic al g eog raphic al ar ea. I f ENTEX r ece ives any

ref unds of any

incre ased c ost of purcha sed g as that have been passed on unde r this provision, a ref und shall be made to customers ser ved by this rate sche dule.