T h e p art i e s c o l l e c t i v e l y u s e “ T X U ” t o r e f e r t o T X U ’ s t r an s m i s s i o n an d d i s t r i b u t i o nu t i l i t y, 1 wh ic h is c ur

re ntl y name d “ TX U E le c tr ic De liv e ry ,” but w a s p re vio us ly kn own by oth e r n a me s, including “ Oncor

Electric Deliver

y Company .” 

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

NO. 03-04-00742- CV

Nuc or St e e l, a div isi on o f Nuc orCo r por at ion , A ppe lla nt
v. P ubl ic Utility Com m ission of T exas, TXU Elect ric Com pany, T exas Indu strial Ene r gyCo nsum e r s, St e e r ing Co m m it te e of C it ie s Se r ve d by T XU Ele c tr ic Com pany, an d Of

fi ce of P ubl ic Utility Counsel, Appellees

F ROM THE DISTRICT CO URT OF TRAVIS COUNTY , 98TH JUDICIAL DISTRICT NO. GN104176 , HO NORAB LE JOH N K. DIETZ, JUDGE PRESI DING

O P I N I O N This is an appea l by

Nucor Steel of a c ontested ca se proc eedin g, held bef ore the Public Util i t y C o m m i ssion, reg ardingthe desig n of TXU E lectric Deliver y ’s transmission and 1 distribution rates. Nucor , an indus trial TXU customer located in a non-municipal ar ea, c laims that the rate desig n order ed by the C ommissi on unfairly imposes char g es on non-municipal c ustomers for c osts incurred wholly

within the municipa lity . Specifica lly , Nucor asser ts that TXU should not be per mitted to p as s along its “fra nchise c harg es” a s part of its base rate s for non-municipa l
c us tom e rs be c a

us e tho se c ha

rg e s are c a lc ulate d o nly

on sa le s o f e le c tr ic ity

to mun ic ipa l c us tom e rs .PURA is codif ied in title 2 of the Texas U tilit ies Code. Tex. Util. C ode Ann. §§ 11.001- 2 63.063 (West 1998 & Supp. 2004-05). 2 Appellee s—the Commis sion, TXU, the Te x as Industrial Energ y Consumers, an d t h e Steer ing Com mitte e of Citi e s Se rv e d by TX U El e c tr ic Com pa ny —c ounte r that it

is r e a so na

ble to c oll e c t th e se
c ha rg e s f ro m no n- m

u n i c i p a l c u s t o m e r s b e c a

u s e b o t h m u n i c i p a l and

no n- mun ic ipa l c us tom e rs be ne fi t from the pur

pose ser ved by the fra nchise c harg e, which is TXU’s ability to locate its elec tric lines
on mun ic ipa l stre e ts, a lle y s, and pu bli c ri g hts -o f- wa

y in or de r to pr ov ide e le c tr ic se rv ic e to a ll o f i ts
c us tom e rs . N ucor also c ha lle ng e s th e Com mis sio n’ s o rd e r o n th e g ro un ds that it imp ro pe rl y allocate s the fra

nchise c harg es base d on the volume of sale s, as measur ed in kilowatt hours, rather tha n o n th e sa le s re ve nu e , a s wa s his tor ic a lly do ne . Ap pe lle e s c on te nd that it wa s r e a so na ble to b a se the a llo c a tio n o n kWh be c a us e it tra c ks the 19 99 a me ndme nts to t he Pub lic Ut ili tie s Re g ulatio n A c t. 2 Nu c or ur g e s th is C ourt

to re ve rs e the Commis sio n’ s de te rm inatio n th a t th e fr anc his e char g es should be allocated base d on kWh and collected from all custom ers ( the “spre ad collec tion” method), on the g rounds that the orde r wa s arbitra ry and ca pricious, an a

buse of discr etion, and a violation of PURA. See Tex. Gov’ t Code Ann. § 2001.174(2) (West 2000) (standar ds for substantial
e vid e nc e re vie w o f c on te ste d c a se ); se e als o Tex. Util. Code Ann. §§ 33.008 (West Supp. 2004-05) (d is c u s s in g

f r a n c h is e c h arg es), 36.003 ( West 1998) (primary section Nuc or cla ims is vi olated, stating utilit y ’s rate s must be “just and rea sonable” ). Appellee s claim that the order shoul d b e a ff i rm ed beca use t he C ommissi on’s decisions on rate desig n matters are entitl ed to defe renc e and the order is supported by

substanti al ev i d en ce . We affir m the judgme nt of the district court upholding the Commi ssion’s order.The statute expressly lists the following as the ty pes of utilities upon which municipalities 3 m ay i mp o s e a

f r an c h i s e c h ar g e : e l e c t r i c u t i l i t i e s , t r a n s m i s s i o nan d

d i s t r i b u t i o nu t i l i t i e s , m u n i c i p a l l yow ne d u til iti e s, and

e le c tr ic c oo pe rativ e s. I n d isc us sing s e c tio n 3 3. 00 8, we wi ll r e fe r t o th e se specifie d utilit ies g ener ally as “e lectric utilit ies.”

3 BACK GR OUND I n 1999, the Texas L eg islature passe d Senate B ill 7 to deregulate aspe cts of the elec tric utiliti es industry , making s ev er al amendments to PURA. See Ac t of Ma y 27 , 1 99 9, 76 th L eg ., R.S., ch. 405, 1999 Tex. Gen. L aws 2543. The leg islative intent was to incre ase c ompetition b y e n d in g th e mo n o p o ly

h is to r ic a ll y

e n jo y e d b y a li mi te d nu mb e r o f

inv e s to r - o w n e d

u ti li ti e s . T e x. Ut il. Cod e Ann. § 3 9. 00 1 ( Wes t Supp . 200 4- 05 ). Th e uti lit ie s we re “ un bund le d” int o thr e e e nti tie s: po we r g e ne ra

tio n c omp anie s, tr ans mis sio n and dis tr ibutio n uti lit ie s, and re ta il e le c tr ic pro vi der s. Id . § 39.051(b) ( West S up p . 2 0 0 4 -0 5). Only the transmission and distribution uti lities remained
s u b j ect to tra ditional, cost-based r egulation after the start of c ompetition in J anuar y 2002. Id
. § 39.001. F oll ow ingthe 19 99 ame ndme nts , T XUa pp lie d to the Com mis sio n to e sta bli shc os tof-se rvice rate s for its newly unbundled transmission and distribution uti lity
. See id
. § 39 .2 01 (We st Supp. 2004-05) (re quiring utilit ies to file proposed ta riffs, includingtransmission and distribution utilit y char g es). Nuc or Steel and e ach of the ap p el l ee s p articipated in the proce eding s, which included a he aringat the State Of fice of Administrative He aring s, a motion for re hear ing to the Com mis sio n, and

an a pp e a l to the dis tr ic t c ourt
. At iss ue , h e re are the rate s c ha rg e d b y TX U’ s tr ans mis sio n a

nd dis tr ibutio n util ity under the 1999 statutory

provisions. Pursuant to P URA section 33.008, which was enac ted that y ear , a municipality

may impose a “f

ranc hise cha

rg e” on an el ec tric utility that provides distribution 3As a po int of c lari fi c a tio n, TX U’ s f

ra nc his e c ha

rg e s are ini tia lly

pa sse d a lon g to r e ta il 4 e le c tr ic pr ov ide rs (R EPs ), wh o th e n s hif t th e ult imate re sp on sib ili ty fo r pay me nt to the c us tom e rs . As on e su c h c us tom e r, Nu c or c ha lle ng e s th e me tho d in whic h T XUa llo c a te s a nd c oll e c ts the se c ha rg e s. 4 service within the municipality
. Id . § 33.008. The ter m “distribution service” includes utiliti es that provide both transmission and dis tribution service , and “service within the municipality ” includes uti lit ie s th a t se rv e c us tom e rs bo th w ith in a nd outsi de of

the mun ic ipa l bo rd e rs , b ut e xclu de s th os e that serve only non-municipal customers. Id . § 33.008(a) (1) ( excluding non-municipa l service from imp os iti on

of c ha rg e s) , ( h) (“ I n th is s e c tio n, ‘d istri butio n s e rv ic e ’ m e ans the de liv e ry of e le c tr ic ity to all retail customer s.”). Bec ause TXU is a transmission and distribution uti lity servingmunicipal and non-municipa l customers, it is subject t o the franchise charg es set forth in s ection 33.008. Id
.

The p u r p o s e o f th e c h ar g e is to r e im b u r s e th e mu

n ic ip a li ty f

o r a u ti li ty ’s “use of a municipal street, alley , or public wa y to deliver e lectric ity

to a re tail customer.” Id
. § 3 3
. 0 0 8 ( a )
. If
an elec tric utilit y locates its fa cilities a nd lines on municipal proper ty then, in exchang e, it must pay the municipality

a fr anchise char g e. The statute define s the cha rg e as a “re asonable and nec essar y operating e x pense of

eac h elec tric utility ” and mandates that it be included in the utility ’s “n onby passable de livery

char g es” pur suant to section 39.107. Id . § 33 .0 08 (c ); see also id. § 39.107(d) ( West Supp. 2004-05) ( elec tric utiliti es “sha ll bill a customer ’s re tail electr ic provider for nonby passable de livery

char g es”)
. 4 Section 33.008 specifie s how the cha rg e is to be calc ulated, but it is sil ent as to the methods by which utilit ies are to a llocate and collec t the char g es. Id . § 33.008(b). The formula f or calc ulating the fra

nchise c harg e beg ins by

dividing the “total franchise fee r evenue collecte d by theSection 182.025 was orig inally codified in 1981 a s part of the t ax co d e’s “Subtit le G: 5 Gross Recei p t s Taxes, Subchapter B : Utilit y Companies,” stating that “[a]n incorporated c ity or t o w nm ay m ak e a

r e a s o n a b l e l aw f u l c h a r g e f

o r t h e u s e o f

a c i t y s t r e e t , a l l e y, o r

p u b l i c w ay b y a public utilit y in the course of its business.” See Act of May 31, 1981, 67th L eg ., R.S., ch. 389, § 1, 19 81 Te x. Ge n. L a

ws 14 90 , 1 71 6. Th is s e c tio n w a s ame nd e d in 19 99 a s p art

of S enat e Bil l 7 to bring it into conformance with the newly -ena cted PURA sec tion 33.008. SeeAct of Ma y 27, 1999, 76th L eg ., R.S., ch. 405, § 56, 1999 Tex. Gen. L aws 2543, 2623. 5 mun ic ipa lity

in 1 99 8” by

“ the tot a l ki low a tt h ours of e le c tr ic ity

de liv e re d b y

the se uti li ti es to municipal customers in 1998.” Id
. Th is yie lds the 19 98 ra te -o f- re ve nu e c oll e c te d by a mun ic ipa lity from a utility , per kilowatt hour of elec tricity sold b y t h at utilit y

within the municipality . To deter mine the amount of the fra nchise charg e, thi s 1998 rate is then multi plied by the total number of kil ow a tt h ours of

e le c tr ic ity

so ld b y a uti lity to i ts m un ic ipal cus tome rs duri nga sp e c if ie d ti me period. Id . There fore , while the rate of the franchise charg e is derive d from the amount of reve nues historically

collecte d, the ultimate char g e is de pendent on the volume of ele ctricity sold within t he municipality . As a re sult, the revenue s collecte d by munic i palities from fr anchise char g es do not inc re a se and

de c re a se wi th t

he pr ic e of

e le c tr ic ity ; r athe r, the y

fl uc tuate ba se d o n th e vo lum e of sa le s,
as mea sured in kWh. See id
.

Hi sto ri c a lly , mu

nic ipa lit ie s w e re en ti tled to c oll e c t “ loc a l g ro ss r e c e ipt s taxes” (L GRTs) from e lectric utilit ies for the same purpose as the fr anc hise cha rg e—the utility ’s use of
mu n ic ip a l s tr e e ts a

n d r ig h ts
- o f

- w ay to r u n it s e le c tr ic lines. SeeTex. Tax Code Ann. § 182.025 (We st 2 00 2)
. As imp lie d b y its name , th e L GR T w a s h ist or ic a lly ba se d on the tot a l a mou

nt o f g ro ss 5
reve nues ea

rned by a utility for the sa le of e lectric ity within a muni cipality ; the historical method of allocation wa s “direc t” (a llocated only o n m unicipal sales) based on r evenue s, and the historica lNu co r, T XU , TI EC, and the Commissi on ag ree on these historica l fac ts and on the 6 leg islative intent behind section 33.008. 6 method of collec tion was “spre ad,” meaning that both municipa l a nd non-municipal customer s were responsible for

paying the ir portion of the L GRT. The legislature was c oncer ned that der egulation would erode the amount of L GRTs collecte d by

municipalities beca

use, in the new ly

unbundled marke t, reve nues would only acc rue on the sale o f tr an s mi s s io n an d d is tr ib u ti o n s e r v ic e s an d w o u ld n o lo n g e r a c c r u e o n th e s a le of g ener ation service s. To preve nt such reve nue erosion, the l eg islature enacted section 33.008, which modified the re venue- based L GRT into a volume-base d fra nchise char g e, ther eby

providing a more sta ble so ur c e of

c omp e ns a tio n f

or the mun ic ipa lit ie s. 6 I n October

2000 , an ALJ conducte d a conte sted ca se hea ring
. See ge nerally T e x. Go v’ t Co de Ann. § 2 00 1. 05 1- .0 62 (We st 2 00 0) (r ig hts and pr oc e dura l ru le s re g ard ing c on te ste d c a se he ari ng s) . O ne iss ue a dd re sse d d ur ingthat pr oc e e din g wa s th e me tho d b y wh ic h T XUsh ou ld allocate and collec t the fra nchise c harg es imposed on it by municipalities pursuant to section 33.008. See Tex. Util . Code Ann. § 33.008.

Reg ardingthe method of a llocation, TXU, T I E C , and the Commission st aff
rec ommended that the “ direc t” method be use d, that is, that the char g es be a llocated only on
m u n i c i p a l s a l e s , an d

t h a tt h e b a s i s o f

t h e a l l o c a t i o n b e t h e v o l u m e o f s a l e s w i t h i nt h e m u n i c i p a l i t y,
as m easur e d

in k Wh
. T h e y

u r g e d th a t t h is p la nw o u ld ma inta in th e h is to r ic a l p r a c ti c e o f d irec t allocation while updating the ba sis of the allocation—to be based on sales volume, in kWh, rather than on sales r evenue —in order to para llel section 33.008’s c alculation of the fra nchise c harg e. SeeTI EC supported sprea d collection in the alter native. 7 7 id . A lth ou g h N uc or

did no t di sp ute that a

dir e c t a llo c a tio n me tho d s ho uld be ma int a ine d, Nu c or

did
c ha lle ng e TX U’ s pr op os e d ba sis of the a llo c a tio n, c on te nd ing tha t the fr anc his e c harges sh ou ld
c on tin ue to b e a llo c a te d b a se d o n s a le s r e ve nu e rathe r t ha n o n kWh. Nuc or supp or te d it s
rec ommendation by arguing that, beca use the c alculation of f

ranc hise cha

rg es under

section 33.008 is depende nt in part on the 1998 re ven u e d at a, t h e his torical pra ctice of basing the allocation on
reve nues should not be alter ed.

Reg ardingthe method of c ollection, TXU , T I E C, th e Co mm is s io n s ta f f, and the Citi es
rec ommended that the fra nchise c harg es be c ollected f rom all customers, whe ther they be municipal
or non-municipal residents; this is the “spre ad” collection method. Nucor , as a non- municipal TXU 7 customer, c halleng ed this proposal and ur g ed that a dir ect method of collection be used, meaningthat only customers re siding within the municipa l b o u n darie s would be re sponsible for pay ing the char g e. The two proposa ls diverg e on the issue of whether non-municipal customer s benef it from the purpose f or which the char g e is imposed—TXU’s a bility to locate its elec tric fa cilities on municipal streets, a lle y s , and rig hts-of-wa y . Se e id . Arguing that all customers bene fit from the integ rate d elec tr ic g r id

an d th a t, h is to r ic a ll y , th e L G RT w a s c o ll e c te d f r o m a ll c u s to me r s , T X U , T I E C, the Commi ssion St aff

, and the Cities supported the spre ad col l ection method. Counteringthat the fra nchise c harg e only

benef its muni cipal customer s and that it constitutes an im proper tax by which
non-m unicipal customers a re f orce d to subsidiz e municipal proje cts, Nucor supported the dire ct collection method. Nuc or fur ther a rgued that the sprea d collection method violates PURA section8

36 .0 03 , w hic h r e qu ir e s th a t ut ili ty rate s b e “

jus t and re a so na ble ,” be c a

us e it unre a so na

bly discriminates ag ainst non-municipal customers. Se e id . § 36.003.

I n Marc h 2001, the AL J issued a proposa l for dec ision concluding , amon g other things, that (1) the cha

rg es should be alloca

ted using the “dire ct” method—ba sed on sales w ithin the municipality

rathe r than sy stemwide sales; (2) g iven the enac tment of section 33.008, the ba sis of the allocation should be the volume of sales, mea sured by

kWh, rather than the historical method of ba sin g the a llo c a tio n o n th e g ro ss s a le s r e ve nu e s; a nd (3 ) t he c ha rg e s sh ou ld b e c oll e c te d f ro m a ll
c us tom e rs , both wi thi n an d outs ide of the mun ic ipa lity —th e “ sp re a d” c oll e c tio n me tho d— be c a us e th e fr anc his e c ha

rg e “ c on tin

ue s to se rv e the e nti re ty

of the tr ans mis sio n a

nd dis tr ibutio n s y ste m, be ne fi ts a ll c us tom e rs in t he sy ste m and , c on se qu e ntl y , th e c os ts s ho uld be sh ared amon g a ll
c us tom e rs thr ou g h b a se rat e s. ” Th e AL J det e rm ine d th a t, p ur su ant t o s e c tio n 3 6. 00 3, it i s

“ re a so na ble , n ot u

nr e a so na bly pr e fe re nti a l, p re

jud ic ia l, o r d isc ri min a tor y ” fo r T XUto a do pt a direc t/spread plan ba sed on an e nerg y allocator
. Se e id
. On Oc tob e r 3 , 200 1, the Com mis sio n issu e d a fin a l ord e r statin g that its g oa l “ is t o ins tit ute , to the e xtent po ssi ble , a g e ne ri c rate de sign th a t w ou ld h on or the pr inc ipl e s o f c os t
causation, sim plicity , and equity t o customers.” The Commission determined that the AL J ’s
c on c lus ion

satis fi e d th is g oa l and

thu s a do pte d th e PF D, fi nd ingthat th e fr anc his e c ha rg e s “ sh ou ld be allocated using a dire ct allocation and employing the energ y allocator . . . [and] collecte d from all customers on TXU ’s sy stem.” The Com mission agr eed w ith the AL J ’s conc lusion that the direct
a llo c a tio n ba se d o n kWh and sp re a d c oll e c tio n me tho ds “ ho no rs the pr inc ipl e s o f e qu ity” be c a us e the “f ranc hise arr angem en t s er v es the e ntirety of the tra

nsmissi on and distribution sy stem [and]9

benef its all customers in the sy stem.” F urther, the Commi ssion concluded, a s a matter of law, that the direc t/spread methods comply with PURA sec tions 33.008 and 36.003. Nucor f iled a motion for rehe aringand then a

ppeale d the Commiss ion ’s o rd er to the district c ourt. In October 2004, the district court af

firmed the Commission’s order.
AN AL YSI S Nucor appea ls to this Court, claiming in a si ng le i ssue t hat t he final order should be
reve rsed be cause it was arbitra ry and capr icious, an abuse of discretion, and a

violation of section 36.003 for the Commission to per mit TXU to a llocate its fr anchise char g es using the direc t method based on kWh sale s and to c ollect these c harg es fr om municipal and non-municipal c ustomers using the sprea d method. Be cause the final orde r wa s supported by su b stantial evidenc e, we aff irm the jud g me nt.
Stand ard of Review

We reviewcommission procee dings unde r the substantial evide nce r ule. Id
. § 15.001 (West 1998). That standa

rd af fords g reat defe renc e to the Commiss ion’s decisions on topics that the leg islature has de termined a re w ithin the ag ency ’s discretion, such as rate desig n. Tex. Gov’t Code Ann. § 20 01 .1 74 . “ PUR

A g e ne ra lly

c on fe rs a uth or ity up on the PUC to r e g ulate and

su pe rv ise pu

bli c utilit ies, to f

ix and regulate rate s of public utilit ies, and to insure r ates, ope rations, and se rvice s [] are just and rea sonable to the consumers and to t he utilities.” Pu bli c Ut il. Com m’n v . G TE- So uth west, Inc ., 901 S.W .2d 401, 407 (Tex. 1995).10 Pursuant to the substantial evidence rule, we may not substitute our judg ment for that of the Commission and we ar e to re verse or remand t he case only if the C ommissi on’s dec ision (1) violates a c onstitut ional or statutory provision, (2) excee ds the ag ency ’s aut h ority , (3) wa s made throug h unlawful proc edure , (4) is aff ecte d by another

err or of law , (5) is not rea sonably supported by su bs tanti a l e vid e nc e wh e n c on sid e ri ng the re lia ble a nd pr ob a tiv e e vid e nc e in t

he re c or d a s a whole, or ( 6) is arbitra

ry or ca pricious or c hara cter ized by an abuse of discretion. Nucor challeng es the Commiss ion’s decision on g rounds (1), ( 5), and ( 6).

To preva il, Nucor be ars t h e burde n of over coming a pre sumption t hat the Commi ssion’s findings a

re suppor ted by substantial evidence
. Re lia nt En e rg y , I nc . v . P ub lic Ut il. Comm’n , 1 5 3 S
. W
. 3 d

1 7 4 , 1 8 4 ( T e x. Ap p . —

A u s t i n2 0 0 4 , n o p e t
. )
. T h e e v i d e n c e m ay a c tua lly preponde rate ag ainst the Co mm is sion’s finding a nd this Court m ust stil l uphold it i f enoug h evidenc e
su g g e sts that th e Com mis sio n’ s d e te rm inatio n w a s w ith in t he bo un ds of

re a so na ble ne ss, that is , if substantial evidence suppo rt s i t s deter mination. So uth weste rn Pu b. Se rv . Co . v . P ub lic Ut il. Comm’n , 962 S.W .2d 207, 215 (Tex. App.—Austin 1998, pet. denied). “ The true test is not whether the ag ency

rea ched t he cor

rec t conclusion, but whether some rea sonable ba sis ex ists in t he re cord for the action taken by

the ag ency .” City of El Paso v. Public Util. Comm’n , 883 S.W .2d 179, 185 (Tex. 1994). Althoug h the re cord ma y contain conf

licting e vidence , cre dibili t y is lent to the Commi ssion’s ultim ate r esolution of t hose conf licts when, as he re, “ the re cord, e valuated a s a whole, ref lects a pr ocess of

discussion, care ful consider ation, and compr omise.” Pede rnales Elec. Coop. v. Public Util. Comm’n , 809 S.W .2d 332, 341 (Tex. App.—Austin 1991, no writ).11

Rate Design PUR

A g ra nts the Com mis sio n a

uth or ity to “ e sta

bli sh and re g ulate rate s o f a

n e le c tr ic
u t i l i t y” an d

“ t o d o an yt h i n g . . . t h a ti s n e c e s s a r y an d c o n v e n i e n tt o t h e e x e r c i s e o f [ i t s r e g u l a t o r

y] po we r. ” Te x. Ut il. Cod e Ann. §§ 14 .0 01 , 3 6. 00 1 ( Wes t 19 98 ). Th e Com mis sio n h a s “ dis c re tio n to deter mine the method of rate desig n,” which is “ a complex problem that involves many fac tors.” Texas Alarm &Sig n a l A ss’n v. Public Util. Comm’n , 603 S.W .2d 766, 772 (Tex. 1980). The supreme c ourt has re

jected the notion that the Comm ission’s rate de sign decisions must be based on
a pr e c ise lis t of fact ors ; while the Com mis sio n mu st a dd re ss t he ra te c on sid e ratio ns se t f

or th i n PURA, such as sec tion 36.003’s require ment that rate s be “j u s t an d rea sonable,” it has discretion
over the particula

r fac tors to c onsider and the weig ht to be g iven to those fac tors. Citi es of Abilene v. Public Util. Comm’n , 854 S.W .2d 932, 949 (Tex. App.—Austin 1993), partiall y rev’d on other grounds , 9 09 S.W. 2d

49 3 ( 19 95 ); see also Tex. Util . Code Ann. § 36.003. Cost is not the onl y fac tor that is pe rtinent to the Commi ssion’s de cision; the Commi ssion may also consider the purpose f or which the se rvice is rece ived, the quantity rec eived, the time of

use, and the consistency and
re g ula ri ty of us e , a mon g oth e r f

a c tor s. Texas Alarm &Signal Ass’n , 6 0 3 S .W.2d at 772; se e als o Public Util. Comm’n v. AT& T Communications , 777 S.W .2d 363, 366 (Tex. 1989).

Rate desig n is the “distribution of t h e revenue re quirements amongthe var ious service s” provided by

the utility
. Texas Alarm &Signal Ass’n , 6 03 S .W .2 d a t 76 8 n .2 ; se e als o Michae l L ittle, Rate De

sign , 28 Ba

y lor L . Rev. 1083 (1976) (discussing overa ll goa ls of rate desig n). The rate desig n proce ss r elies on the Commi ssion’s “ informed judg ment and expertise and utilizes projec tions a

nd estimates in virtually

all are as.” GTE-Southwest, Inc ., 901 S.W .2d at 411; se e als oN u c o r a c kn o w le d g e s th a t t

h e s tatute is s il e n t o n this ma tt e r . N u c o r ’ s e xp e rt, D e n n is W. 8 Goins, testified that “ne ither Senate Bill 7 nor PURA indicate whether or how L GRT should be allocate d to rate classes in unbundled cost-of-servic e analy ses. Moreove r, t hey indicate only that the L GRT char g e must be included in nonby passable delivery char g es wit hout specify ing the form that anL G RT c h ar g e s h o u ld

ta k e
— f o r e xa mp le , a

u n if o r m c h a r g e a p p li c a b le to a ll c ustomers , [o r ] a char g e applica

ble only to customers . . . within the boundarie s of municipalities . . . .” 12 Southwestern Pub. Serv. Co. , 962 S.W .2d at 214 (log ical for C o m m i ssion to have discre tion over rate desig n based on c omplex ity of issues and pr ocedur es). When PURA is silent as to an aspec t of rate desig n, it demonstrates the leg islature’s intent to leave that decision within the Commis sion’s discretion. Reliant Energy, I nc ., 153 S.W .3d at 189. The que stions at issue here , which reg ard the proper methods for TXU to allocate a nd
c o ll e c t it s f

r an c h is e c h ar g e s a s p art o f it s c u s to me r s ’ b a s e r a te s , ar e r a te d e s ign matt e r s within the Commi ssion’s discretion. Rate design pr ocee dings a re f reque ntly char acte rized by

a utility ’s filing of a “stateme nt of

intent” to chang e its rates, which is then forma lly acte d on by

the Commiss ion. See Southwestern Pub. Serv. Co. , 9 6 2 S
. W
. 2 d a t2 19 ; see also Tex. Util . Code Ann. §§ 33.024, 36.102 (West 1998). As par t of dere g ulation, utili ties were require d to file “p ro p o sed tarif f” documents with the Commissi on for the pur pose of se tting new

rate s. Id
. § 39.201. Such filings a re ak i nt o s t at em en t s o f i n t en ti nt h at t h ey ch ar ac t er i z e t h e p ro ce ed i n gs as b e i n g f o r r at e d es i gn purposes. Fur

thermore , PURA doe s not spe cify the methods by which TXU’s fra n ch i s e c h arge s should be allocated and c ollected. Se e id . § 33.008 (spec ifying only the method of c alculatingthe char g es). Be cause these issues ar e rate desig n matters upon which t h e s tatute is silent, the

8 Commi ssion’s conclusions are entitled to gr eat de fer ence .At oral a rgument, the Cities defined “ cost -ca usation” as “ the Commiss ion’s policy of 9 allocatingcosts in a non-discr iminatory manner ; the Commi ssion has g reat discretion in this reg ard.” A t t h e h e ar i n g, a T I E C wi t n es s d ef i n edi tas “d i ct at [ i n g] t h at o n l y t h o s e c u s t o m er s wh o s e e n er gy usag e dete rmines the amount of the [franchise c harg e] should be require d to pay [i t] .” 13 Direc t Allocation Based on k Wh

Nucor claims that the fr anchise char g es ar e “dr iven by historical re venue sa les” a nd, th u s , it is in c o n s is te n t w it

h th e g o a l o f

c o s t- c a u s a ti o n to a ll o c a te th e m b a s e d o n“ p r e s e n t k

Wh 9 sales.” I nstead, Nuc or urg es, TXU should c ontinue to use “the historica l method of al l o ca ting fra nchise c harg es on the ba sis of g ross reve nues der ived by TXU.” Ap p el l ee s counter that the Commi ssion’s decision to allocate the fra nchise c harg es base d on kWh is supported by substantial evidenc e. At the SOA H he ari ng , TX U’ s e xpe rt , J. Mic ha e l She rb ur ne , te sti fi e d that th e be ne fi ts of bas ingthe a llo c a tio n o n kWh in c lud e that “ (1 ) i t ma int a ins the e xistin g rate str uc tur e , ( 2) it i s consistent with metering fac iliti es available for this ty pe of service , and (3) it eliminates cost shifting due to a c hang e in rate desig n.” Sherburne urg ed that the only basis for Nuc or’s proposa l was that it “would virtually

eli m inate any

allocation of [the cha

rg e] to [ Nucor ].” Sherburne a lso rebutted Nucor ’s proposal by

stating that it is “contr ary to TXU’s past allocation method . . . and is contra ry to the c le ar c os t c a

us a tiv e fa c tor .” Jef

fr y Pol loc k, an e xpe rt wi tne ss f or TI EC, te sti fi e d th a t, whil e he would h av e p r e f

e r r e d th at th e le g is latu

r e n o t h a v e mo d if

ie d th e c a lc u lati o n o f th e c h ar g e from being based on r evenue s to be ing based on volume (kWh), that chang e has be en made and, thus, the allocation of the char ge n eeds to be uniformly modified; “like it or not, it’s a kilowatt-hour ba sedNu c or a lso c ha lle ng e d th e sp re a d c oll e c tio n me tho d on the g ro un d that tr ans mis sio n- on ly 10 customers (suc h as Nuc or) sho u l d n o t b e re sponsible for the f ranc hise cha

rg es bec ause se ction 33.008 states that the char g es are to be calc ulated based on sale of “ distribution s ervic e.” G iven that the statute def

ines “dis t ri b u tion service” as “the delivery of ele ctricity

to all retail customer s,” howeve r, Nuc or conc eded a t oral ar g um en t t h at i t was included in this definition and there fore abandone d this arg ument. See Tex. Util . Code. Ann. § 33.008 (West Supp. 2004-05). 14 [ch arg e ].” Pol loc k a lso te sti fi e d that the dir e c t a llo c a tio n ba se d on kWh me tho d is c on sis te nt w ith
c os t- c a us a tio n p ri nc ipl e s. The re cord r efle cts substantial e v id e n c e u p o n wh ic h th e Co mm is s ion could deter mine th a t th e a ll o c a ti o n o f T X U ’ s f r an c h is e c h ar g e s s h o u ld b e b a s e d o n k Wh s a le s . F u rth e rmore, the statute is silent on the proper me thod of allocation, the Commi ssion’s c hosen method par allels the
c a lc ulatio n s e t f

or th i n s e c tio n 3 3. 00 8, the Com mis sio n ha s br oa d d isc re tio n o ve r r a te de sig n is su e s, and the r ecor d ref

lects that a “ proce ss of discussion, car eful c onsideration, and c ompromise”
occur red he re. G iven these f

acts, Nuc or has failed to show that the Commis sion’s order allocating the fra nchise c harg es base d on kWh was arbitra ry and ca pricious, cha

rac terized b y an abuse of discretion, or in violation of a statute or constitution. See P edernale s Elec. Coop. , 809 S.W .2d at 341. Nucor ’s cha lleng e to the dire ct allocation based on kWh is overruled. Spread Collection

Nucor claims that, bec ause f

ranc hise cha

rg es ar e incur

red on ly o n mu n ic ip a l sa les and non-municipal customer s do not benef it from the purpose served by the fra nchise c harg e, it was a

n abuse of discretion and a violation of section 33.006 for the Commi ssion to order that TXU c ollect its franc hise cha

rg es fr om both municipal and non-municipal customer s. Nucor ’s cha lleng e to the 10 sprea d collection method is primarily based on i t s cl ai m t h at the fr anchise char g e is a “ tax” that15

sh ou ld n ot be pa id by

no n- mun ic ipa l c us tom e rs wh o d o n ot b e ne fi t f ro m it s c oll e c tio n. Nu c or

c la ims that, by a llo wi ng TX U to co lle c t a po rt ion of the fr a nc his e c ha

rg e fr om n on -m

un ic ipa l c us tom e rs , the Commi ssion’s or der forc es non-municipal customers (such as Nucor ) to subsi d i z e muni cipal activities, resulting in “taxation without repr esentation.”

Appellee s counter that the fra nchise c harg e is not a tax but i s, i n s t ea d, akin to a “re ntal fee ,” which T XU pay s in ex chang e for the ability

to locate its elec tr i c l i n es on m unicipal streets, a lley s, and public rig hts-of-wa y . Appellee s urg e that ther e is substantial evidenc e in the
rec ord to support the Commiss io n ’ s deter mination that all customers bene fit from the purpose serve d by the c ha rg e and , h e nc e , th a t a ll c us tom e rs sh ou ld s ha re re sp on sib ili ty

fo r t he c os t. Much of the de bate ove r the nature of the char g e—w h et h er it is a tax or a r ental fe e —s te ms f

ro m th e us e of

imp re c ise no me nc latur e . H ist or ic a lly , the ph ra se “ loc a l gr os s r e c e ipt s ta x” w a s use d to des c ri be the mon e y tha t munic ipa lit ie s c ou ld c oll e c t f ro m ut ili tie s f

or loc a tin g the ir elec tric facilities on municipal property . This was set for th in the tax code. See Tex. Tax Code Ann. § 182 .0 25
. As of 19 99 , how e ve r, the le g isl a tur e de te rm ine d th a t it wa s mo re a

pp ro pr iate to r e fe r t o these fe es as “ fra

nchise c harg es” a

nd to include them in the utiliti es code . PURA section 33.008, titled “Fr anchise Charg es,” w as there fore enac ted, expressly stating that the purpose wa s “a
re a so na ble c ha rg e . . . f or the us e of

a mun ic ipa l stre e t, a lle y , o r p ub lic wa y to d e liv e r e le c tr ic ity

to
a re tail cus t omer” and that the “ fra nchise c harg es authorized by this section shall be consider ed a
rea sonabl e an d n ec es sary operating e x pense of

eac h elec tric utility

. . . .” Te x . Util. Code Ann. § 3 3. 00 8( a ), (c ). De sp ite thi s c le ar l e g isl a tiv e e xpre ssi on that the natur e of the fr anc his e c ha

rg e is a fe e , n o t a tax, ma

n y p arti e s c o n ti nu e d to u s e th e o ld te r mi n o lo g y , r e f

e r r in g to th e c h arg e as a n16

“L GRT.” But simply

callingthe cha

rg e an L GRT does not make it so. The le g islature dete rmined the fra nchise c harg e should not be l abele d as a tax and shoul d not appea r i n the tax code bec ause the char g e is not imposed like a tax. Util ities only incur the c harg e in exchang e for the use of municipa l streets, a lley s, and rig hts-of-wa y ; if a utility

do es n o t l o ca t e its elec tric fa cilities on municipal proper ty , it does not incur the cha rg e. Nuc or re cog nized this: its ex pert, De nnis W . Goins, testified that “while this assessment is commonly called a tax, t he ‘tax ’ nom enclature should not disguise the fundame ntal nature of this fee as a char g e for a spec ific purpose ,” and Nucor’ s motion for rehe aring urg ed that the “ underlying ba sis for the fe e” is “ a cha rg e to use c ity

streets a nd public way s.” Nucor also relies on City of

Houston v. Publi c Utility Commission to s up po rt its c la im that th e fr anc his e c ha

rg e is a ta x. 65 6 S. W.2 d 1 07 (T e x. Ap p. —Aus tin 19 83 , w ri t re f’ d n.r .e .) . T his Court in City of Houston held that there was substantial e vidence to affir m a Commiss ion order that deter mined, in the context of telephone r ates, that L GRTs should only be collec ted from municipal customers be cause “rur al” customers derive no benef its fr om the m. Id . at 108-09. Appe llees ar g ue that City of Houston does no t s u p p o rt Nu cor’ s claim. First, the c ourt mere ly held that the dire ct
c o l l e c t i o n w a s a “ r e a s o n a b l e m e an s w h i c h t h e C o m m i s s i o n c o u l d p e r m i s s i b l y a d o p t ” u n d e r t ho se circ umstances; it did not hold that direct c ollection was the only appropr iate method or that spread collection could ne ver be rea sonable. Id . at 110. Her e, the a ppellees contend that the statute is silent
a s to the me tho d o f c oll e c tio n, and Nu c or ha s o ff e re d n oth ingto s ho w th at th e sp rea d me tho d is impermissible. Second, City of Houston perta ined to telephone r ates. The court noted that it was
rea sonable to collec t the cha rg e fr om only

municipal customers be cause they wer e the “ predominant17

us e rs ” of the te le ph on e se rv ic e s; the same is no t ne c e ssa ri ly tr ue wi th e le c tr ic uti lit ie s b e c a us e so me of the larg e st ind

us tr ia l cus tom e rs —s uc h as Nuc or —a re loc a te d o uts ide of

the mun ic ipa l bo rd e rs . Id . at 11 1. F ina lly , th e a

pp e lle e s a sse rt

that th e le g isl a tur e , b y

e na c tin g se c tio n 3 3. 00 8 w ithe xpre ss lang uag e that the fra

nchise charg es ar e “ope ratingexpenses,” re jected the “tax” argument advanc ed in City of Houston
.

I n addition to rebutting N ucor’ s argument th at the fr anchise char g e is an “impermissible tax,” the appellee s offe red e vidence to support the sprea d collection method on the basis that all cu s t o mers should be re sponsible for the c harg es bec ause a ll customers bene fit from their purpose . Section 33.008 expressly states t hat franchise charg es are incurred by TXU to pay

for its abilit y to lo ca te elec tric lines on municipal stree ts, alley s, and rig hts-of-wa y . Tex. Util . Code Ann. § 33.008. Sherburne testified that all customers, whether located w ithin or out s i d e of the municipal border s, benef

it f rom TXU’s ability to loc ate its fa cilities in muni cipal ar eas be cause the elec tricity trave ls to all customers over a n integ rate d g rid and, ther efor e, all customer s should be responsible for

a portion of the c osts TXU incurs in providing transmission and distribution service over the se l ines. TI EC and the Citi es concurre d with Sherburne’ s assessment, base d on the notion that these lines d o n o t ab ruptly end at the municipa l border; r ather , they run continuously

from
mun ic ipa l lo c a tio ns to n on -m un ic ipa l are a s. Appellee s also urg ed that simplicity and consistenc y

are important fac tor s to c onsider in r a te de sig n a

nd that the sp re a d co lle c tio n metho d ser ve s both of the se g oa ls be c a us e it a pp lie s a
un if or m po lic y to a ll c us tom e rs and ma int a ins the his tor ic a l pr a c tic e of c oll e c tin g the fe e s f ro m bo thTex. P ub. Util. Com m’n, Ap pli c ati on of T

e x as Ut ili tie

s E lec tr ic Co mp an

yfor a R ate 11 In c re as e , Docke t No. 5640, 10 Tex. P .U.C. Bull. 659, 853 (F eb. 1985) (“A ll of TUEC’s c ustomers are se rv e d f

ro m an inte g rate d sy ste m; thu s all c us tom e rs be ne fi t fr om t he ri g hts of

the c omp any

to maintain its facilities on municipal proper ty
. Fur thermore , it is clea

r that customer

confusion and administrative burde ns to the company would incre ase by virtue of [char g ing dif

fer ent rates based on g eog raphy ].”).

TXI is not an appellee but was a pa rticipant below. 12 18 municipal and non-municipa l customers. P ointing to Docke t 5640, Sherburne testified that, since 11 19 84 , th e Com mis sio n h a s c on sis te ntl y a pp ro ve d th e se c ha

rg e s “as a

sy ste m c os t be c a

us e a ll customers, including[Nucor], rece ive the bene fits of the voltag e support, improved powe r fa ctor, and incr ease d eff

iciency that the devices provide” ; thus, for over t wenty y ear s, the fra

nchise c harg es have be en “r ecove red f

rom all of TXUcustomers, re g ardle ss of whe t h er the customer is located inside or outside of a taxi ng municipality ’s boundar ies.” The supreme c ourt stated in Te x as Alar m and Signal Association that, when a concept has historically

been “ widely

acc epted a s a prope r patte rn fo r r a te de sig n” it “ sh ou ld n ot b e dis c ard e d b y th e Commis sio n w ith out c on c re te data to support s uch a c hang e.” 603 S.W.2d at 768. The Cities argued that the Commission cannot alter i t s h i s t o r i c a l p r a c t i c e o f

s p r e a d c o l l e c t i o nw i th o u ta

g e o g r a p h i c a l l y b a s e d

c o s t
- o f

- s e r v i c e s tu dy, which Nuc or fa iled to provide.

Moreove r, the a

ppellees claimed that Nuc or’s proposa l for a dir ect c ollection method would be proble matic. Ray mond Stanley , an expert for Texas I ndustries (TXI ), testified that the 12 direc t collection method would adver sely aff ect municipal customers by shifting costs to them that
we re h i s t o r i c a l l y p a i d b y n o n - m u n i c i p a l c u s t o m e r s . S h e r b u r n e t e s t i f i e d t h a t N u c o r ’ s p r o p o s a l “ is
c on tr ary to e ff or ts t o c re a te sim

ple , eas y to u

nd e rs tand c ha rg e s a nd bil lin g me c ha

nis ms f or REP s. For TXU, this sug g estion would require approximately 400 differ ent rate s, one for eac h of the c itiesBe y ond such g ener al asser tions, nothi ng in the rec o rd establishes the e x act c ollection 13 me tho ds us e d b y

Re lia nt. 19 in which it provides a distribution servic e. This is obviously not simpl e, would cr eate confusion and is c ontrary to the ‘historical prec edent’ as stated above.” Nucor ’s expert, Goins, acknow ledg ed that the d ir e c t c o ll e c ti o n me th o d w o u ld “ r e qu ir e id e n ti f yin g e a c h c la s s ’ L G RT c o s t r e s p o n s ib il it y and developingsepar ate L GRT cost-re cover y fac tors by

class for eac h taxi ng jurisdiction,” but claimed this was a re asonable approa ch beca use it is the one used by

Reliant Energ y . Sherburne responde d 13 that, j us t be c a

us e on e uti lity

c ho os e s to a llo c a te or

c oll e c t c os ts a

c e rt a in w ay

do e s no t me an th a t a ll utilit ies are bound by

that decision. He further testified that, due to the diff ere nces in utilities, the C o m m i s s i o nh a s n o t e d

t h a ta l l o c a t i o nan d

c o l l e c t i o nm e t h o d s s h o u l d b e d e t e r m i n e d o na u t i l i t ysp e c if ic ba sis and

ne e d n ot b e sta

nd ard ize d amon g uti lit ie s. Wit h these c om p et ing vie ws befor e it, the Commiss ion ultim ately deter mined that TXU’s f ranc hise cha

rg es should be collec ted from a ll customers bec au s e the purpose of the char g e—TXU ’s ability

to locate its elec tr ic f

a c il it ie s o n

mu n ic ip a l p r o p e r

ty

— b e n efits both municipal and non-municipa l customers. The Commission concluded t h at the spre ad collec tion method complied with PURA sections 33.008 and 36.008. We must not substitute our judgme nt f or that of the Com mis sio n, and

its or de r s ho uld

be a ff ir me d if the re c or d d e mon str a te s a ny re a so na ble ba sis for it. City

of E l P as o , 883 S.W .2d at 185. The re cord e vidence s that the leg islature intended the fra nchise c harg e to be a

renta l fee or an ope ratingexpense, not a tax, and that all cust o m er s d erive a bene fit from the ser vice f or wh ic h th e c ha

rg e is i mpo se d. Th e re c or d a lso de mon str a te s th a t im ple me nti ngNu c or’ s d ir e c t-20

c oll e c tio n pro po sa l wou ld be “ pr ob le matic ,” a s found by the Commis sio n, be c a

us e it w ou ld r e su lt in differ ent rates based on g eog raphy and would substantially

deviate f rom the historical prac tice of
c oll e c tin g the c ha

rg e s f ro m a ll c us tom e rs , b oth

wi thi n a nd outsi de of

the m un ic ipa lity . T hu s, substantial evidence exis ts upon which the Commission could determine that the f ranc hise cha

rg es should be collec ted from a ll customers, and Nuc or fa iled to demonstrate that the order was
c ha ra c te ri zed by an a bu se of dis c re tio n, wa s arb itr ary and c a pr ic iou s, or

wa s in vio latio n o f a

statut e or constitution. See P edernale s Elec. Coop. , 809 S.W .2d at 341. Nucor ’s cha lleng e to the collec tion method is overrule d.
CO NC LU SION

The Commission i ssued a f inal order adopting the AL J ’s p ro posal for de cision
c o n c lu d in g th a t T X U ’ s f

r an c h is e c h ar g e s s h o u ld

b e a ll o c a te d

u s in g th e d ir e c t me th o d b a s e d o nk Wh and collec ted using the sprea d method as par t of its base rates from a ll customers. This order was aff irmed by the district court. B eca

use the re cord de monstrates substantial evidenc e to uphold the Commi ssion’s determinations on these r ate de sign matters over which the Com mission i s aff orded dis c re tio n, we a ff

ir m th e jud g me nt o f t

he dis tr ic t c ourt
.

J an P. Patterson, J ustice Be fore Chief J ustice L aw, Justi ces Patter son and Pury ear Affir med Filed: June 23, 2005