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

444 444 444 444 444 444 444 444 444 ON MOTION F OR REHEARING

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Appellan ts , Ce nt e r P oin t E ne r gyHou st on El e c tr ic , LL C a nd Te xa s G e nc o, LP // Cr os s A ppe lla nt s, G ulf C oa stCo ali ti on o f Cit ie s, Hou st on C ounc il fo r He alt h and Edu cation, City of Hou ston, Coalition of Cities, State of T exas, Off ice of P ubl ic Utility Counsel, Public Utility Counsel, and Texas Ind ustrial En ergy C onsu m ers

v. App e lle e s, G ulf C oa stCo ali ti on o f Cit ie s, Hou st on C ounc il fo r He alt h and Edu cation, City of Hou ston, Coalition of Cities, State of T exas, Off ice of P ubl ic Utility Counsel, Public Utility Counsel, Texas Ind ustrial En ergy C onsu m ers, Oc c ide nt al P owe r M ar ke ti ng, LP , a nd C oa lit ion of C om m e r c ialRa te pay e r s // Cr os sappellees, Of

fi ce of P ubl ic Utility Counsel, P ubl ic Utility Counsel, Center P oint Ene r gyHou st on El e c tr ic , LL C, Te xa s G e nc o, LP , a nd R e lia nt Ene r gySe r vic e s, LLC

F ROM THE DISTRICT CO URT OF TRAVIS COUNTY , 250TH JUDICIAL DISTRICT NO. GN50043 9 , HO NORAB LE JO HN K . DIETZ , JUDGE PRESIDI NG

O P I N I O N Our opinion and j u d gm en t issued on Dec ember 20, 2007, are withdrawn, a nd the following opinion is subs tituted.

This appea l conce rns the tra nsi t i o n o f Texas’s ene rg y industry from a r egulated marke t to a competitive one. When it approve d the s witch t o a competitive marke t, the leg islature contemplated the possibili ty that the switch mig ht sa ddle forme rly regulated utilities with costs t hat2

the y wo uld have re c ov e re d und e r re g ulatio n bu t wo uld be un a ble to re c ov e r in a c omp e tit ive mark e t. As a re s u l t , t h e le gi s l at u re en ac t eds t at u t es au t h o ri z i n g u t i l i t i es t o re co v er t h es e c o s t s i np ro ce ed i n gs called tr ue-up pr ocee dings he ld before the Public Utilit y Commi ssion (the “Commission”). Th e uti lit ie s invo lve d in

thi s c a se e sti mate d th e c os ts t hat th e y wo uld no t be a ble to

re c ov e r d ue to d e re g ulatio n a

nd fi le d a n a pp lic a tio n w ith the Com mis sio n se e kin g re c ov e ry fo r t ho se costs. Howeve r, the C ommissi on deter mined that not all of the re levant re quirements had be en satisfied whe n the utiliti es made their ca lculations and, there fore , perf ormed its own estimate of the utili ti e s ’ u n r e c o v e r e d c o s ts
. T h e to ta l a mo u n t d e te r mi n e d b y th e Co mm is s io n w a s le s s th an the amount that the utiliti es orig inall y re q u es ted. In addition to producing its own estimation, the Commi ssion also made seve ral re ductions to the utili ties’ re cover y . Although the Commi ssion allowed the utilities to recove r for various construction projec ts that they had starte d, it deducted the

va lue of c e rt a in t a x be ne fi ts g ive n to the uti lit ie s. Th e Com mis si on als o r e du c e d th e uti lit ie s’

rec overy beca use it conclude d that the utiliti es had r ec o v er ed some of their c osts through othe r means. F inally , althoug h the Commi ssion a llowed the utilit ies to r ecove r the re quested amount for

cre dit s t h at the Commiss ion had pre viously order ed them to g ive to their customer s, it denied

re c ov e ry fo r i nte re st o n th e c re dit s. The district c ourt aff

irmed the majority of the Commi ssion’s order but r ever sed the order and incre ased the utilit ies’ re cover y in two respec ts. First, the district court c oncluded that the utilit ies should rec over f

or the inter es t o n the cr edits that they wer e orde red to g ive. Second, the district court conc luded that the Commi ssion’s de cision to unde rtake its own estimate of one of the utilit ies’ costs wa s inappropriate and further conclude d that the utiliti es should rec over the amount3

orig inally reque sted. We wi l l aff

irm the judg ment of the district cour t in part and re verse and

re mand in p art
. STATUT ORY F RAMEWORK To g ive context to the merits of t his case , we will desc ribe the statutory framework g overningthis case. This appe al conc erns the utilit y marke t’s transition f rom a re g ulated industry to a competitive, der egulated mar ket. See Tex. Util. Code Ann. §§ 39.001-.910 (West 2007). Prior to dere g ulation, utili ties operated as monopolies but wer e re g ulated by the Commiss ion and wer e

“ p r o h ib it e d f

r o m c h ar g in g mo n o p o ly p r ic es.” R eli ant Energy, I nc. v. P ublic Util. Comm’n , 101 S.W .3d 129, 133 (Tex. App.—Austin 2003) ( “Reliant I” ), rev’d in part sub nom., CenterPoint Energy, I nc. v. P ublic Util. Comm’n , 1 43 S.W. 3d 81 (T e x. 20 04 ); se e Re lia nt En e rg y , In c . v . P ub lic Util. Comm’n , 153 S.W .3d 174, 182 (Tex. App.—Austin 2004, pet. denied) ( “Reliant II ”). “ [E] ach reg ion of the state w as serve d by a sing le ver

tically integ rate d utilit y ,” Citi es o f Co rp us Chr ist i v. Publi c Util. Comm’n , 188 S.W .3d 681, 684 (Tex. App.—Austin 2005, pet. filed), whic h meant that t h e u t i l i t y

“produc ed, tra

nsported, and r etailed e lectric ity ” for the re g ion, Re lia nt I

, 101 S.W .3d at 133.

I n 1999, the leg islature enac ted statutes that initiated the transition to a competitive reta il-service industry

. See Ac t o f M ay 2 7, 1999, 76th L eg ., R.S., ch. 405, 1999 Tex. Gen. L aws 2543 (c urre nt version at Te x . Util. Co d e Ann. §§ 39.001- .910). The le g islature conclude d that the “pr oduction and sale of ele ctricity ” wa s not an undertaking ne cessitating the utiliz ation of m onopolies or t he “r egulation of rate s, operations, and service s” and that it was in the4

pu bli c int e re st t o a llo w c us tom e r c ho ic e and c omp e tit ion

to d e te rm ine the pr ic e s f

or the se se rv ic e s. Te x. Ut il. Cod e Ann. § 3 9. 00 1( a ); see also In reTXU Elec. Co. , 67 S.W .3d 130, 132 (T ex . 2 001) (P hil lip s, C.J., c on c ur

ri ng ). Ac c or di ngly , th e uti lit ie s c od e wa s ame nd e d to a llo w f or re ta il competition starting January 1, 2002, and to protec t the interests of the citizens of Texas during the tr ans iti on . T e x. Ut il. Cod e Ann. § 3 9. 00 1( a ); s e e a ls o I n r e TXU Elec. Co. , 67 S.W .3d at 132 (Philli ps, C.J ., concur

ring ). The tra nsition t o a compe titive r etail marke t involved sever al cha ng es to how utiliti es provided elec tricity

. Significa ntly , the forme rly

integ rate d utilit ies wer e re quired to “unbundle ” and divide into three sepa

rate entities: (1) re tail electr ic provider s, (2) powe r-g ener ation companies, a nd (3 ) tr ans mis sio n- and -d istri bu tio n u til iti e s. Te x. Ut il. Cod e Ann. § 3 9. 05 1( a )- (b ); see also In re TXU Elec. Co., 67 S.W. 3d a t 13 2 (P hil lip s, C.J., c on c ur ri ng ); Reliant II

, 153 S.W. 3d a t 18 2. Start ingin 2002, the unbundl ed power-g ener ation companies owned and operated “the ge nerating plants,” In re TXU Elec. Co. , 67 S.W .3d at 132 (Philli ps, C.J ., concur ring ), and provided “wholesale g ener ation service s in competition with ot her g ener ators ente ri n g the marke t,” Citi es o f Co rp us Chr ist i , 18 8 S. W.3 d at 68 4. Th e tr ans mis sio n- and -d istri bu tio n util iti e s own e d a nd ma int a ine d “ the ‘w ir e s’ used to tr ansport elec tricity from the power g ener ation companies to a ll [retail elec tric providers] and reta il consumers in the utility ’s g eog raphic are a.” Id. a t 68 5. Th e re tai l ele ctr ic pr ov ide r s old “ele ctricity

to end-use c ustomers” a

nd provided “ customer se rvice .” In re TXU Elec. Co. , 67 S.W .3d

a t 13 2 ( P hi ll ip s, C. J ., c on c ur ri ng ). I n a dd iti on , n e w e le c tr ic ity pr ov ide rs we re a llo we d to be g in competing with the reta il electric providers a sso ci at ed with t he for mer integ rate d utilit ies. See Tex. Util . Code Ann. § 39.102(a )-( b).As part of the t ransition to dere g ulation and competition, the leg islature spec ified that fr om 1 2002 to 2007, retail ele ctric pr oviders we re r equire d to char g e their r esidential and small commer cial customers a

rate that was 6% less than the price in e ffe ct in 1999 under re g ulation. Tex. Uti l. Code Ann. § 3 9. 20 2 ( Wes t 20 07 ); CenterPoint Energy, Inc. v . Public Util. Comm’n , 143 S.W .3d 81, 87 (Tex. 2004). This rate w as terme d the price to beat in the re tail market. 5 Af te r t he de re g ula tio n p ro c e ss was compl ete d, th e po wer-gen erat io n and r e ta il e le c tr ic marke ts would be subject to the “nor mal forc es of c ompetition” and “c ustomer choices , ” but t he transmission-and-distribution utilit ies would rema in regulated by the Commiss ion. Id. § 39.001(a) ;

se e Citi es o

f Co rp us Chr ist i , 188 S.W .3d at 685. However, the dere g ulation proce ss is lengthy , and the Com mis sio n re ta ine d part ia l re g ulator y po we rs ov e r pow e r g e ne ratio n an d th e sa le of e le c tr ic ity afte r January

2002. See, e .g. , Tex. Util . Code Ann. § 39.202 (a llowing Commission som e contr ol over pr ices c harg ed by

utilit ies). Dur ing the transition, aff i l i at ed re tail electr ic provider s were

re qu ir e d to c ha

rg e a “ pr ic e to b e a t” rate to t

he ir re sid e nti a l and

sma ll- bu sin e ss c us tom e rs . Id. 1 Prior to dere g ulation, utili ties were allowed to re cover from their c ustomers the p ru d en t costs they

incurre d when a cquiringpower -g ener ation assets. Reliant II , 1 5 3 S. W. 3 d at 18 3 n .5 ; Re lia nt I

, 101 S.W. 3d a t 134. Th e Com mis sio n all ow e d the uti lit ie s to re c ov e r t he se c os ts over time b y i ncorpor ating the costs into the rate s that it approved. Reliant II , 153 S.W .3d at 18 3 n .5 ; Re lia nt I

, 1 01 S.W. 3d

a t 13 4. As a

re su lt, uti lit ie s ma de sig nif ic ant i nv e stm e nts in g ener ation-re lated asse ts with the ex pectation of eventua lly rec overingtheir costs. See Cities of Cor pu s Ch ris ti , 188 S.W .3d at 685.

Recog niz ing that this t y

pe of r eimbursement would not occ ur under dere g ulation, uti lit ie s e xpre sse d th e ir

c on c e rn that un de r de re g ulatio n the y wo uld be un a ble to re c ov e r t

he c os ts for their investments be cause competition w ould dr ive the rate s too low. Reliant II , 153 S.W .3d atFor example, a utility

may be unable to r ecoup e x penses a fter building a par ticular ty pe of 2 po we r- g e ne ratio n a sse t if

, d ue to m ark e t c on dit ion s, i t i s p o ssi ble to g e ne rate e le c tr ic ity mor e c he a

ply by using a n alternative fuel. In re TXU Elec . Co. , 6 7 S

. W

. 3 d 1 3 0 , 159 (Tex. 2001) (He cht, J ., dissenting)

. The larg est component of these stranded costs is “ attributable to inve stm en t s i n nuclea r 3 power plants.” Citi es of C orpus Chris ti v. Public Util. Comm’n , 188 S.W .3d 681, 685 (Tex. App.—Austin 2005, pet. filed). 6 18 3 n .5 ; Re lia nt I

, 101 S.W .3d at 134. Be cause new utilit ies enter ing the marke t w ould not have 2

“ e mb e d d e d g e n e r a ti o n - r e late d c o s ts , ” th e y c o u ld s e t p r ic e s b e lo w th e “ le v e l a t w h ic h incumbent utilit ies could rec over their investments.” Citi es o f Co rp us Chr ist i , 188 S.W .3d at 685. There fore , 3 the incumbent utili t i es wo u l d either ha ve to cha rg e rates that wer e not competitive or a bsorb the added e x pense. Id

.

To preve nt the possibili ty

that utilit ies would have to absorb the costs, the leg islature provided a

method by which a utilit y could recover its “strande d costs” or those c osts repre senting t he “portion of the net book value of [t he] utility ’s g ener ation assets not yet rec overe d t h ro u gh depre ciation that has be come unr ecove rable in a der egulated mar ket.” Re lia nt I

, 101 S.W .3d at 134; see also Tex. Util . Code Ann. §§ 39.001(b)( 2) (finding that it is in public interest to “allow utili ties with uneconomic g ener ation-re lated asse ts . . . to recove r these r easona ble excess costs over

marke t of those asse ts”), .251(3) (def ining g ener ation assets as “ all assets associate d with the production of

e le c tr ic ity , in c lud ingg e ne ratio n p lants ” ), .2 51 (4 ) ( de fi nin g mark e t va lue a s “ the va lue the a sse ts

wo u l d h ave if boug ht and sold in a bona fide third-par ty transac tion or transac tions on the open marke t”), .251(7) (def

ining stra nded costs as “ the positive excess of the ne t book value of g ener ationTh e fu ll d e fi nit ion of “ str and e d c os ts” re a ds a s f oll ow s: 4 (7) “ Stranded c ost” means the positive e x cess of the net book value of

g ener ation a sse ts o ve r t

he mark e t va lue of

the a ss ets , takingint o a c c ount a ll o f t he e le c tr ic utilit y ’s g ener ation ass e ts, any above ma rket purc hased pow er c osts, and any defe rre d debit related to a utilit y ’s discontinuance of the a pplication of Statement of F inancial Acc ounting Standard s No. 71 (“A ccountingfor the E ffe cts of Certa in Ty pes of Re g ulatio n” ) f

or g e ne ratio n- re late d a sse ts i f r e qu ir e d b y the pr ov isi on s of this chapte r. F or purpose s o f S ection 39.262, book value shall be established a s of Dec ember 31, 2001, or the date a marke t va lue is e stablished thr o u gh a m arket valuation method under

S ec t i o n 39.262(h), whic hever is earlier , and shall include stranded c osts incurred unde r Section 39.263. Tex. Util . Code Ann. § 39.251(7) (West 2007). 7 assets over

the marke t value of the assets”) , . 2 5 2 (providing that utilit y is entitled to recove r 4 stranded c osts); 16 Tex. Admi n. Code § 25.263(g ) (2007) (spec ifying what consti t u tes “ne t book value” ). Al tho ug h th e le g isl a tur e a llo we d a uti lit y t o r e c o v e r s t r a n d e d c o s ts, the re we re e xpre ss lim itatio ns imp os e d o n th is r ig ht. Th e uti lity wa s re qu ir e d to mit ig a te the a mou nt o f s tr and e d c os ts it incurs from purc hasing elec tricity and “pr oviding e lectric g ener ation service ,” Te x . Util. Code Ann. § 39.252(a ), and w as re quired to “pur sue commer cially rea sonable mea

ns to reduce its potential

s t ra n d ed costs,” id. § 3 9

. 2 5 2 ( d )

. I n a d d it io n , th e Co mm is s io n w a s a u th o r iz e d to c o n s id e r “the utilit y ’s eff

orts [t o reduc e its potential stra nded costs] when dete rmining the amount of the utility ’s stranded c osts.” Id. ; see also 16 Tex. Admin. Code § 25.263(e) (4) (2007) (stating that Commiss ion may adjust net book value of aff iliated power -g ener ation company ’s g ener ation assets if utility has fa ile d to un de rt a ke re a so na ble a c tio ns to r e du c e its po te nti a l stra nd e d c os ts) ; Re lia nt I

, 101 S.W .3d at 149 (noting that terms of sec tion 39.252 impl iedly contemplate a llowing a djustments to book value, whic h is the only

other c omponent of stran d ed co s t s b esi des marke t value). F inally , theSe c tio n 3 9. 25 4 r e a ds , in re le va nt p art , a s f

oll ow s: 5

8 utilit ies code specifies that “[a]n electric utility , toge ther with its affiliated r etail elec tric provider and its affiliated tra

nsmissi on-and- distribution ut ility , may not be per

mitted to overrec over stra nded costs.” Te x . Util. Code Ann. § 39.262(a)

.

To foster the rec overy

of strande d costs, the C o m m i s sion used a computer model

c a lle d th e “ Exc e ss C os t O ve r M ark e t” mod e l ( “ ECO M” ) t o p re dic t wh e the r uti lit ie s wo uld a c tua lly incur stra nded costs in a der egulated mar ket. See I n re TXU Elec . Co. , 67 S.W .3d at 160 (He cht, J ., dissenting) . The model a ccounte d for va rious fac tors, including f

uel costs, i n its calculations. Citi es of C or pu s Ch ris ti , 188 S.W .3d at 686. Ba sed on this model, the Commi ssion prepar ed a r eport for the Texas Senate in 1998 that predic ted the amount of strande d costs that utilit ies would likely incur in the dere g ulated mar

ket (“ 1998 ECOM Report”). Re lia nt I , 101 S.W. 3d a t 134 n.3 . How e ve r, in its report, the Commission di d caution that the amount predic ted was only an estimate a nd that the amount of strande d costs that would actua lly result, if any , might be sig nificantly differ ent than the estimated amount. In re TXU Elec . Co. , 67 S.W .3d at 160 (He cht, J ., dissenting)

.

To minimi ze the impact on consumer s and utiliti es, the leg islature devise d a thre estep prog ram for

the re cover

y of stranded costs. The fir st step beg an in September 1999 and ende d Dec ember

31, 2001. Duringthis step, t h e re t ai l electr ic rates cha rg ed by utilit ies wer e fr ozen. Tex. Util. Code Ann. § 39.052. In addition, the L eg islature provide d various methods for utilit ies to “mitigate ” their stra

nded costs in orde r to lessen the impac t on consumers r esulting f rom strande dcost rec overy

and to minimiz e the de lay in the benef

its resulting from competition. Id. §§ 39.254, .256; see also In re TXU Elec. Co. , 6 7 S. W.3 d at 16 0- 61 (H e c ht, J., d iss e nti ng ). F or e xamp le , to 5Ea c h e le c tr ic ut il ity that w a s r e po rt e d b y

the c omm iss ion

to h a ve po sit ive “ e xce ss c os ts o ve r m ark e t” (E CO M)

. . . f or the a mou nt o f s tr and e d cost s befo re fu ll r e ta il competition in 2002 . . . must use these tools to reduc e the net b o o k value of , otherwise r efe rre d to as “a cce lerate” the c ost recove ry of, its stranded c osts each year . A n y p o s it iv e d if

f e r e n c e . . . s h a ll b e a

p p li e d to th e n e t b o o k

v a lu e o f g ener ation a sse ts. Tex. Util . Code Ann. § 39.254 (West 2007).

9 mitigate the ir strande d costs, utilit ies could transf er de prec iation away

from tra nsmissi on-anddistribution assets to gene ration asse ts. Tex. Uti l. Code Ann. § 39.256.

The sec ond step beg an on the f irst day of compe tition, J an u ary

1, 2002, and ende d Dec ember

31, 2003. See id. §§ 39 .0 01(b) (1) , . 20 1( a ), (b )( 3) , ( g ), (h ); In re TXU Elec . Co. , 67 S.W .3d at 133 (Phillips, C .J ., concur ring ). Duringthis stage , company -spec ific up d ates were inputted into the EC OM model to asce rtain the status of stra nded -c ost recove ry . See Tex. Util . Code Ann. § 3 9. 20 1( h) ; C i t i es o f C o r p u s C h r i s ti , 1 8 8 S.W .3d at 686. I f the ECOM model ca lculations predic ted that utiliti es would have stranded c osts even af ter e mploy ing the various mitigation te c hn iqu e s a va ila

ble in the fi rs t sta g e , the Com mis sio n wa s a uth or ize d to se t a nonby pa ssa ble “compe tition t ransition char g e” to a llow the ut iliti es t o rec over these costs by collecting a fe e fr om

eac h customer obtainingpower . See Te x. Ut il. Cod e Ann. § 3 9. 20 1( b) (3 ); In re TXU Ele c. Co. , 67 S.W. 3d

a t 13 3 ( Phi lli ps , C. J., c on c ur ri ng ); Citi es of Co rp us Chr ist i , 1 88 S.W. 3d a t 68 6- 87 . T his char g e wa s intended to make up the differ ence b et wee n the book value a nd the marke t value of a power-g ener ation plant and, ther efor e, allow utilities to recove r the a dditional ex pecte d stranded costs. In re TXU Elec . Co. , 67 S.W .3d at 133 (Philli ps, C.J ., concur ring ). The a ffiliated powe rg ener ation companies a

nd providers w ould bill t he cha rg e t o the transmission-and-distribution10

utilit ies, which we re al l o we d t o pass throug h the cha rg e “to r etail customers” by including the

am o u n t o f t he cha

rg e in their “ ‘wholesa le’ rates.” Id. at 160 (He cht, J ., dissenting) . The c harge

c on sti tut e d on e of a numbe r of “ no nb y pa ssa ble de liv e ry c ha

rg e s” pa sse d thr ou gh to cus tome rs . Tex. Util . Code Ann. § 39.201(b)

.

When the st ra n d ed -c o s tes t i m at es we re updated, the e stimates “unexpectedly ref lected that the utiliti es would have no stranded c osts.” Re lia nt I , 101 S.W .3d at 13 5

. As a re sult, the Commi ssion ordere d utilit ies to cea se stranded cost mitigation ef forts, “to re assig n the depr eciation tr ans fe rr e d fr om tr ans mis sio n and dis tr ibutio n a sse ts ba c k to tho se a sse ts, and to re tur n mo nth ly ‘excess mitigation cre dits’ to retai l p ro v i d er s .” Id. ; see I n re TXU Elec . Co. , 67 S.W .3d at 161 (He cht, J ., dissenting)

.

The third step be g an in 2004 and is the s tep relevant i n this appea l. Tex. Uti l. Code A n n . § § 3 9

. 2 0 1 , . 2 6 2 ( c )

. D u r in g th is s ta g e , th e Co mm is s io nw a s r e qu ir e d to c o n d u c t a “ tr u e - up p ro ce eding ” to deter

mine a fina l calculation of a utility ’s strande d costs, if any

. Id. § § 3 9 .201( l ), .262(c)

. The purpose of the proce eding was to rec oncile the a ctual strande d costs incurre d with the previous estimates made by the Commiss ion. See id. §§ 39.201( l ), .2 62 (c ); see also 16 Tex. Admin. C o d e § 2 5

. 2 6 3 (a ) ( 2 0 0 7 ) ( s p ec i fy i n g p u rp o s e o f t ru e - u p p ro ce ed i n g). As p ar to f t h e p ro ce ed i n g, “ea ch tra nsmissi on and distribution util ity , its affiliated e lectric pro v i d er, a nd its affiliated powe r g e ne ratio n c omp any” we re re qu ir e d to “ joi ntl y ” fi le f

i n a l i z e d s t r and e d c os ts a

nd re c on c ile tho se c os ts with the estimated strande d costs. Tex. Util . Code Ann. § 39.262(c ).

One of the most important aspec ts of the true-up proce eding was the de termination of t he actual “market value of a utilit y ’s gene ration asse ts.” Re lia nt I , 101 S.W .3d at 143. The c odeI t is a lso po ssi ble to obt a in a ne g a tiv e numbe r whe n d oin g thi s r e c on c ili a tio n. Th is c ou ld 6 happen be cause the utility overr ecove red f

or strande d costs during the first step or be cause marke t c on dit ion s h a ve inc re a se d th e mark e t va lue of the a sse ts o ve r the bo ok val ue o f t he a sse ts. Reliant Energy, Inc. v. Public Util. Comm’n , 101 S.W .3d 129, 137 (Tex. App.—Austin 2003), rev’d in part sub nom., CenterPoint Energy , 143 S.W .3d 81. 11 lis ts s e ve ra l a lte rn a tiv e me tho ds by wh ic h an a ff ili a te d p ow e r- g e ne ra

tio n c omp any

c ou ld c a lc ulate the mark e t va lue of

its g e ne ratio n a sse ts f

or the purp os e of

c a lc ulatin g its str and e d co sts . T e x. Ut il. Cod e Ann. § 3 9. 26 2 ( h ) ( 1 ) -( 4) . T he se va luatio ns uti lize “ sto c k p ri c e s and anti c ipate d in c ome str e a ms in a competitive mar

ket.” Citi es o

f Co rp us Chr ist i , 188 S.W .3d at 687 (c iting Te x . Util. Code Ann. §§ 39.201(l), .262(h) , (i)).

The true -up ca lculation obtained wa s the “fina l, controlling c alcu l at ion of ea ch utilit y ’s s t ra n ded costs.” Id. at 692. The utility ’s ac tual stranded c osts were deter mined by

su btr a c tin g the a c tua l ma

rk et val ue of

the uti lity ’s g e ne ra

tio n a sse ts f

ro m th e bo ok

va lue of tho se

a sse ts. Te x. Ut il. Cod e Ann. §§ 39 .2 51 (7 ), .2 52 (a ), .2 62 (c ), (h ), (i ). I f the numbe r ob ta ine d in thi s calc ulation was a positive number , then the utility was e ntitled to recove r that amount in stranded

c os ts. Re lia nt I

, 101 S.W .3d at 136. 6 The stra

nded-c ost true-up was only one of sever al t rue- up calc ulations that had to be perf ormed a s part of the transition to competition. See Tex. Util. Code Ann. § 39.262(d) -(g ). The utilit ies code establishes “two parallel true -up trac ks—one for stranded c osts and one for the seve ral other true -up items.” Re lia nt I , 101 S.W .3d at 141. These non-strande d-cost ca lculations also can “re sult in either cre dits or bills t o t h e transmissi on and distribution util ity from its aff

iliated p o we r g ener ation company or re tail electr ic provider .” Id. a t 1 3 6 ( c it in g T e x. U ti l. Co d e Ann. § 39.262(d)- (g )).A utility ’s final fue l ba lance is the differ ence betwee n the estimated cost of fuel that was 7 use d to s e t th e u ti li ty ’ s r a te s f o r th e f in a l p e r io d o f r e g u lati o n an d th e a c tu a l c o s t o f f u e l f o r that period. Re lia nt I

, 1 01 S.W. 3d

a t 13 7; see Tex. Util . Code Ann. §§ 39.202(c ), .262(d) (West 2007).

12 One of the non-stranded-c ost true-ups releva nt to this case involves the ca lculation of a utilit y ’s “c apac ity -auc tion awar d.” As pa rt of the tra

nsition t o a compe titive market, utiliti es

wer e re quired to a u ct i on off e ntitlements to som e of the ir g ener ation assets. See Tex. Util . Code Ann. § 3 9. 15 3( a ). Th e c a pa c ity -a uc tio n a wa rd c on sti tut e d th e dif

fe re nc e be tw e e n th e pr ic e that a utilit y was pre dicted by

the ECOM model to obtain for selling its power in t he wholesa le marke t during the sec ond step of der egulation and the price actua lly obtained at a uction during the first y ear s of der eg ulation. See 16 Tex. Admin. Code § 25.263(i), ( l ) ( 2 0 0 7 )

. A f t e r d e t e r m i n i n g t h e c a

p a c i t yauction aw ard, the fig ure w as netted w ith another tru e- u p aw ar d called the final fue l balance

. 7 Tex. Util . Code Ann. § 39.262(d)

.

Once the var ious calculations were made, they wer e all considere d when de termining whether a utility was e ntitled to recove r for costs. See 16 Tex. Admin. C ode § 25.263( l )(1) (2007). I f t he tr ue -u p b a la nc e wa s p os iti ve and

g re a te r t ha n th e pr oje c ted c os ts, the uti lity wa s e nti tle d to

rec over the amount calc ulated. B ased on the actua l stranded costs calculated, the Commissi on was authorized to alter the period of time dur ing which a utility may collect the c ompetition transition char g e or alter the amount of the char g e. Tex. Util. Code An n . § § 39.201( l ), .262(c ), (d) (1), ( g ); 1 6 Tex. Admin. C ode § 25.263( l )(2) (A) ( 2007); Re lia nt I , 1 0 1 S

. W

. 3 d

a t1 3 7 ; se e als o Tex. Util . Code Ann. § 39.201(b) (spec ifying nonby passable de livery

char g es).

BACK GR OUND Ce nte rP oin t E ne rg y

Ho us ton El e c tr ic , L L C ( “ Ce nte rP oin t” ); Re lia nt E ne rg y Re ta ilAl tho ug h o nly Ce nte rP oin t and

Ge nc o a pp e a le d th e jud g me nt o f t he dis tr ic t c ourt , w e wi ll 8 re fe r t o t h ei r i s s u es o nap p ea l as t h e J o i n tAp p l i ca n t s ’ i s s u es fo r e as e o f r ea d i n g. 13 Service s, L L C (“Reliant”) ; and Texas Genc o, L P (“Ge nco”) (cumulatively “Joi nt Applicants”) are 8 the unbundled components of the former ly integ rate d Reliant Energ y : CenterPoi n t i s the tr ans mis sio n- and -d istri buti on uti lity , Re lia nt i s th e a ff

ili a te d r e ta il e le c tr ic pr ov ide r, and Ge nc o is the power -g ener ation company . I n Marc h 2004, they filed a joint application for a f inal true-up pr oc e e din g to d e te rm ine the ir re c ov e ry fo r s tr and e d c os ts a

nd no n- str and e d c os ts, inc lud ingthe ir capa city -auc tion awar d. See Tex. Util . Code Ann. §§ 39.252(a ), .262(c ), (d) (2).

I n addition to the J oint Applica nts, se vera l othe r parties a lso intervened in the tr ue-up proce eding . The interve ning parties wer e the Of fice of Public Utilit y

Counsel (“Utility

Counsel”),

see Tex. Util . Code Ann. § 13.003 (West 2007) (de scribing power s and duties of Utility Counsel), and seve ral c oalitions of interested pa rties that either

wer e within CenterPoint’s service are a or purc ha se d e ne rg y fr om Ce nte rP oin t, inc lud ing the City of Ho us ton , th e Coa lit ion

of Citi e s, the Gu lf Coast Coaliti on of Cities, the Houston Council for Hea lth and Educat i o n , the State of Te x as, and Texas I ndustrial Energ y

Consumers. For the sake of cla rity , we will re fer

to these coa litions as the “Customers.”

Stranded Costs

I n th e ir a pp lic a tio n, the Joint

Ap pli c ants a sse rt e d th a t th e y we re e nti tle d to $2 .4 54 bil lio n in

str and e d c os ts and

$5 39 .4 mil lio n in

int e re st o n th e str and e d- c os t awa rd . F or e a se of dis c us sio n, we wi ll on ly lis t the sp e c if ic str and e d c os ts re qu e ste d that are re le va nt to thi s a

pp e a l. First, the Joint Applicants re quested $470 milli on in r ecove ry for cre dits that the Commi ssion had14

pr e vio us ly or de re d the m to g ive to the ir c us tom e rs and $1 80 mil lio n in int e re st on tho se cre dit s. Second, the Joint Applicants soug ht $147 mill ion for va rious construction proje cts that they had beg un prior to der egulation and for va rious land purc hases that they made t o secur e locations for future pow er pla

nts. Af te r c on du c tin g a

he ari ng , th e Co mm is si on iss ue d it s f

ina l tr ue -u p o rd e r i n Dec ember 2004. I n its order, the Commission authoriz ed the r ecove ry of the $470 million that had been a war ded as c redits and a lso allowed the Joint Applicants t o rec over the $147 mill ion spent on pr e -d e re g ulatio n c on str

uc tio n p ro

je c ts. Ho we ve r, the Com mis sio n ma de sig nif ic ant r e du c tio ns to the Joint Ap pli c ants ’ r e qu e ste d r e c ov e ry . F ir st, it d isa llo we d r e c overy for th e $1 80 mil lio n in interest that had b ee n cre dited to the utilit ies’ customer s. Second, the Commission reduced the

aw ar d b y $ 1 4 6 m i l l i o nt o a c c o u n tf o r v ar i o u s t a x b e n e f

i t s g i v e nt o t h e J o i n tA p p l i c a n t s . F i n a l l y, be c a us e the Com mis sio n b e lie ve d th a t th e Joint Ap pli c ants re c ov e re d s ome of the ir str and e d c os ts throug h the ca

pacity -auc tion process, the Commi ssion further r educe d the strande d-cost true -up

awa rd by $378.4 milli on. I n its order, the Commi ssion also made two alternative holdings re g ardingthe J oint Ap pli c ants ’ e sti mate of

the va lue of the ir

g e ne ra tio n a sse ts, wh ic h th e y

we re re qu ir e d to c a lc ulate as par t of the re cover

y proce ss. Under its primar y holding, the Commi ssion c oncluded that the J oint Applicants’ valuation of their assets was not va lid be cause they did not comply

with all the statutory

re qu ir e me nts . F or

thi s r e a so n, the Com mis sio n p e rf or me d it s own va luatio n o f t he Joint Ap pli c ants ’ assets. See T ex . P u b

. Util. Com m’n, Application of CenterPoint Energy Houston LLC , Reliant Energy R etail Service

s LL C, and Texas Ge nco LP to DetermineStranded Costs and Other True-Up15

Balances Pursuant to PURA § 39.262 , Docke t No. 29526, at 18 (De c. 17, 2004) ( Orde r on Re he ari ng ) (“ or de r” ). I n its a pp ra isa l, t he Com mis sio n c on c lud e d th a t th e mark e t va lue of the a sse ts

w a s a p p r o x i m a t e l y $ 5 0 9 m i l l i o n h i g h e r t h ant h a te s t i m a t e d b y t h e J o i n tA p p l i c an t s . C o n s e qu e n t l y, the Commiss ion d et er m i n ed that the Joint Applicants’ stra nded costs we re le ss than the amount reque sted and reduc ed their r ecove ry acc ording ly . After

making the re ductions previously discussed

and a ft e r u til izin g its ow n ma

rk et val uation , th e Com mis sio n c on c lud e d th a t th e Joint Ap pli c ants

we re e nti tle d to re c ov e r $ 1. 22 2 b ill ion in s tr and e d c os ts a

nd $1 21 mil lio n in i nt eres t unde r i ts p ri m ary h o l d i n g. Un de r i ts a lte rnativ e ho ldi ng , th e Com mis sio n a ssume d th a t th e Joint Ap pli c ants satisfied the ne cessa

ry statutory require ments but made an a dditional redu ct i o n to the J oint Applicants’ r ecove ry

that it didn’t make in its primary holding. Th e C ommissi on deducte d approxima t ely

$508 milli on from the Joint Applicants’ r ecove ry to acc ount for business pra ctices that the Commiss ion believed we re c ommercia lly unrea sonable a

nd f or the tax benefit re sulting fr om this unreasona

ble behavior. After

making all th e re l ev an t reduc tions, the Comm ission concluded that th e Joint

Ap pli c ants we re e nti tle d to re c ov e r $ 94 5 mi lli on in str and e d co sts plu s $ 68 mil lio n in interest under

its alternative holding

. The c hart be low details the re levant strande d-cost re cov er y reque sted by

the J oint Applicants and the various modifications made by the Commiss ion in its primary and alter native ho ldi ng s:The c harts included in this o p i n i o n ar e mea nt to provide an ove rview a nd context to t he 9 numbers and calc ulations at i ssue i n this case . They are not meant to provide a n acc urate descr iption of the fina l true-up r esults. 16 

### Strand ed C osts Calculations in M illions of Dollars 9 Joint App licants Com m ission ’s Com m ission ’s Request P rim ary Alter nate

Hol ding Hol ding Net B ook Value D eter

mination Mitigation Credits $470 $470 $470 Mitigation Credit Intere st $180 $0 $0 Construction Cost s $147 $147 $147 Other $4,565 $4,565 $4,565 Total $5,362 $5,182 $5,182

Marke t Value De termination Utiliz ing D iffer ent Methods $2,908 $3,417 $3,159 No n- re du c e d Stra

nd e d Co sts NB V-MV $2,454 $1,765 $2,023 Deduc tions Tax Bene fits $0 $146 $146 Stranded Costs Recover ed in Capac ity Auctions $0 $378 $378 Com me rc ia lly

Unre a so na

ble Be havior a

nd Tax Bene fits $0 $0 $508 Other $0 $18 $46 Total Deduc tions $0 $542 $1,078

Ne t Str and e d Co sts SC-Deductions $2,454 $1,222 $945 I ntere st $539 $121 $68 Stranded Cost Rec overy Net SC + I ntere st $2,994 $1,343 $1,01317

Capacity Auction

I n th e ir a pp lic a tio n, the Joint

Ap pli c ants als o reque ste d $ 1. 35 7 b ill ion fo r d e fi c its sustained from the c apac ity auctions. Howe ver, in its order , the Commiss ion reduc ed the r equeste d

aw ard. The Commiss ion concluded that the capa city -auc tion calculation per formed by the J oint Applicants wa s invalid beca use they failed to satisfy

the nec essar

y statut o ry re q uirements. See Tex. Util. Code Ann. §§ 39.153, .262(d)( 2). As with the asset valuation, the Commissi on perf ormed its own e sti mate of

the c a pa c ity -a uc tio n a wa rd and de du c te d $ 44 0 mi lli on

fr om t he Joint Ap pli c ants ’ reque sted rec overy . Although the Commi ssion reduce d the reque sted awa rd, it did allow the Joi nt Appl ic an ts to r e c o v e r $ 1 6 8 mi ll io n in in te r e s t o n th e aw ar d to a c c o u n t f o r th e f a c t th a t the J oint Applicants had be en depr ived of the predic ted capa city -auc tion a war d for a specific period of time. The c hart below details the rele vant capa city -auc tion r ecove ry reque sted by the J oint Applicants and the various modifications made by the Commiss ion in its primary and alter native ho ldi ng s: 

### Capacity A uction C alculations in Millions of D ollars Joint App licants Com m ission ’s Com m ission ’s Request P rim ary Alter nate

Hol ding Hol ding Capac ity Auction Auction Results $1,357 $1,357 $1,357 Deduc tions Noncompliance $0 $440 $440 Other $0 $26 $26 Capac ity Auction True -up Cap. Auct. - D ed. $1,357 $891 $891 I ntere st $0 $168 $168 Capacity Auction Rec overy CA True- up + Intere st $1,357 $1,059 $1,05918

Joint App licants’ Appeal

After the order was issued, the J oint Applica nts a ppeale d the dec ision to t he district court. See Tex. Util . Code Ann. § 15.001 (West 2007) (statingthat party to proce eding befor e Commi ssion is entit led to judi ci al review). The Customers and the Utility Counsel also appea led the orde r, conte nding that the Commi ssion erre d in severa l respec ts.

After revie wing the C ommissi on’s order, t he dis trict court iss ued it s judgme nt. The district court af

firmed the ma

jority of the Commission’s order , including the decision of the Commi ssion to p er form its own assessment of the value of J oint Applicants’ assets, but re verse d on two g rounds. The dist rict court’s reve rsal increase d the amount of stra nded costs that the Joint Applicants we re e ntitled to rece ive. Specific ally , the judg me nt concluded that the Commi ssion erre d by (1) pr eventingthe joint applicants from c ollecting$180 milli on in i n t erest on the cre dits and (2 ) d isa llo wi ng$4 40 mil lio n f ro m th e c a

pa c ity -a uc tio n tr ue -u p. Ac c or din g ly , the Joint

Ap pli c ants ’

re c ov e ry wa s in c re a se d b y

tho se a mou

nts
. Th e Jo int Ap pli c ants , th e Cus tom e rs , th e Ut ili ty Cou ns e l, a nd the Com mis sio n a ll appea l the judgme nt of the district co urt. See id. §§ 15.001 (stating that any party to Comm ission proce eding may

appea l), 39.262(j) (spec ifying that final orde r by Commi ssion is subj ect to judicial revie w); Tex. Gov’t Code Ann. § 2001.171 (W est 2000) (e x plaining that after exhausting administrat i v e re m edies, party ag g rieve d by

final ag ency

decision is entitled to judicial revie w of de cision).

STA ND AR D O F RE VI EW The prope r standar d of re view to utiliz e in this case is co m p l icated by the fa ct that

m an y o f t h e i s s u es ar e m u l t i fa ce t ed , re qu i r i n g t h e ap p l i ca t i o no f v ar i o u s s t an d ar d s i nac h i ev i n g a19

final re solution. I n light of t h i s fact and for eff iciency , we will attempt to summarize the various standards that will be employ ed in this appea l.

Se ve ra l of the iss ue s ra ise d in th is a pp e a l in vo lve statut or

y c on str uc tio n, wh ic h is a question of law that is re viewed de novo. See Bragg v. Edwards Aquifer Auth. , 71 S.W .3d 729, 734 (T e x. 20 02 ); US

A W as te Se rv

s. of H ou sto n, In c . v . S

tra y ho rn , 1 5 0 S. W.3d 491, 494 (Tex. App.—Austin 2004, pet. denied). I n construing a statute, we must ascer tain the leg islature’s intent in enac ting the statute. Fleming Foods of Tex. v . Rylander , 6 S.W .3d 278, 284 (Tex. 1999). I n making this de termination, courts should look to the plain meaning of the words used i n the statute. See F

ireman’s Fund County Mut. I ns. Co. v. Hidi , 1 3 S. W. 3 d 7 6 7 , 7 6 8

- 6 9 ( T e x. 2 0 0 0 )

. We presume that ever

y word was deliberately chosen and that excluded words were left out on purpose. US A W as te Se rv s. , 150 S.W .3d at 494. When det er m i n i n g l egis lative intent, the entire act, not isolated portions, must be considere d. Jones v . Fowler , 969 S.W .2d 429, 432 (Tex. 1998). We may also consider

the “objec t sought to be attained” by enac ting the statute, the “c ircumstance s under which the statute w as enact ed , ” t he “c onsequenc es of a particula

r construc tion,” and the int e rp re ta tio ns of

the statut e ma de by

an a g e nc y . T e x. Go v’ t Co de Ann. § 3 11 .0 23 (We st 2 00 5) ; see City of Austi n v. Southw estern Bell Tel. Co. , 92 S.W .3d 434, 442 (Tex. 2002). Moreove r, so long

a s the int e rp re tatio n is re a so na ble and c on sis te nt wit

h the statut e , we g ive se ri ou s c on sid e ra tio n to

an age n cy ’s interpre tation of a statute. Continental C as. Co. v. Downs , 8 1 S. W. 3 d 8 0 3 , 807 (T e x. 20 02 ); see Southwestern Be ll Tel. Co. , 92 S.W .3d at 441-42. T h i s i s particula rly true whe n the statute conc erns a complex subj ect matter
. Railroad Comm’n v. Coppock, 215 S.W .3d 559, 563 (T e x. Ap p. —Aus tin

20 07 , p e t. d e nie d) ; se e als o U SA W as te Ser vs. of Ho us ton , I

nc . v . S tra y ho rn ,20

150 S.W .3d 491, 494 (Tex. App.—Aust i n 2 0 04, pet. denied) (re cog nizi ng that leg islature intends to p r o v i d e a g e n c i e s w i t h c e n t r a l i z e d e xp e rt i s e i n r e g u l a t o r y ar e a s w i t h l ar g e d e g r e e o f l a t i tu d e in

acc omplishi ng regulatory functions). How ever , courts do not def er to a dminist rative inter

pretations reg ardingquest i o n s t hat ar e not within the ag ency ’s expertise or that de al with nontechnica l questions of law. US

A W as te Se rv s. , 150 S.W .3d at 494-95. S e v e r a l i s s u e s a l s o i n v o l v e d e t e r m i n a t i o n s r e g ar d i n g t h e C o m m i s s i o n ’ s a u t h o r i t y. As an a g ency , the Commiss ion is a cre atio n o f t h e l egi slature a nd, there fore , “has no inhe rent authority .” Public Util. Comm’n v. City Pub. Serv . Bd. , 53 S.W. 3d 31 0, 31 6 ( Te x. 20 01 ). F or thi s

rea son, the Commi ssion possesses only those power s “expressly

confe rre d upon it.” Id. Howeve r, when c onfer

ring a powe r upon an a g ency , the leg islature also “impliedly intends that the ag ency have

w h a te v e r p o w e r s a

r e r e a s o n a

b ly n e c e s s ar

y to f u lf il l it s e xp r e s s f

u n c ti o n s o r d

u tie s.” Id. But a

n ag ency may not “exercise w hat is eff

ectively a new power , or a power contra dictory to the statute, on the theory

that such a pow er is expedient for a dminist rative pur poses.” Id. Finally , sever al of the issues que s t ion whether many of the Commission’s actions

wer e ade quately

supported by

the evidence presented. We reviewthese ty pes of que stions under a substantial-evidenc e standa rd. Tex. Util. C ode Ann. § 15.001 ( West 2007) (stating that j u d icial revie w of a g ency

action is under substantial- evidenc e standa rd); Tex. Gov’ t Code Ann. § 2001.174 (West 2000) (allowingcour t t o reve rse a g ency deter mination if it i s not supported by substantial evidenc e)

. U n d e r th is s ta n d ar d , w e ar e p r o h ib it e d f r o m s u b s ti tuti n g o u r ju d g me n t f o r the Commi ssion’s “as to the we ight of the evid en ce o n questions committed to age ncy discretion.” Citi es of Abilene, San A n g el o, & Vernon v. P ublic Util. Comm’n , 146 S.W .3d 742, 748These sa me methods are also descr ibed i n the admini strative code

. See 16 Tex. Admin. 10 Code § 25.263 (2007). 21 (T e x. Ap p. —Aus tin

20 04 , n o p e t.) (c iti ngTe x. Go v’ t Co de Ann. § 2 00 1. 17 4) . In ma kin g thi s deter mination, we are not asked to verify whether “the a g ency

rea ched the corr ect c onclusion, but whether some rea sonable basis exis ts in the record for the ag ency ’s ac tion.” Id. I n fac t, the evidenc e

may a c tua lly pr e po nd e rate a g a ins t th e Co mmi ssi on ’s fi nd ingand be up he ld a s lo nga s th e re is enoug h evidenc e t o sug g est that the Commissi on’s “de termination was within the bounds of

rea sonablene ss.” Id.

DI SCU SSIO N The Com m ission ’s P rim ary Mar ket Valuation Marke t Valuation

Be fore addre ss i n g t h e v ar i o u s p ar t ies’ arg uments reg arding

the Commiss ion’s primary marke t valuation, we will revie w t he various methods by which a utility

may calc ulate its stranded costs. The utilities code list s four primary marke t-based va luation methods and one a lternative method for utilities to calculate the marke t value of g ener ation assets— a n ec es s ary step for

c a lc ulatin g str and e d c os ts. The lang uag e of the statute place s the burde n of prope rly calc ulating 10 the marke t value of the assets on the utilit y . Section 39.262 of the utiliti es code mandates that “for the purpose of fi n alizing the strande d costs estimate,” “ the af filiated powe r g ener ation company sh all ” ca lculate the ma

rket va lue of the g ener ation assets by using one of four methods: (1) the saleof-a ssets method; (2) the stock- valuation method; (3) the partial-stoc k-valuation method; or (4) the exchang e-of

-asse ts method. Tex. Uti l. Code Ann. § 39.262(h) (emphasis added) ; 16 Tex. Admin.22

Cod e § 25 .2 63 (f

)( 1) (2 00 7) ; see also Tex. Gov’t Code Ann. § 311.016 (West 2005) (e x plaining that when c onstruing statutes, courts should interpre t “shall” a s imposing duty ). The alternative method is found i n subsection 39.262(i). See Tex. Util . Code Ann. § 39.262(i); 16 Tex. Admin. Code § 25.263(f) (2) (2007). Unde r this method, the marke t value of the g ener ation assets is a scer tained by perf

orming an additional ECOM calc ulation using “ updated company -spec ific inputs.” Tex. Util. C ode Ann. § 39.262( i).

Under the sale- of-a ssets m ethod, the mar ket value is de termined by the “total net

va l u e r e a l i z e d

f r o m t h e s a l e ” o f

t h e a s s e t s i f

t h e y h a v e b e e ns o l d

i na “ b o n a f i d e t h i r d -p a rt y transac tion unde r a competitive offe ring .” Id. § 39.262(h)( 1). The e x chang e-of -asse ts method ap p l i es w h en gen er at i o nas s et s h av e b ee nt ra n s fe rr ed“i na b o n a f i d e t h i rd -p ar t y

ex ch an ge tr an saction.” Id. § 39.262(h)( 4). Unde r this method, the marke t value of the assets that we re transfe rre d may

be dete rmined by

an indepe ndent appr aisal of the a ssets. Id. I f some or all of the g ener ation assets have be en tra nsfer red to “ one or more aff

iliated or nonaf filiated cor

porations,” the ma

rket va lue of t h o s e t ra nsfer red a ssets can be deter

mined by

us inge ith e r t

he sto c k- va luatio n me tho d or the pa rt ia l- sto c k- va luatio n me tho d. B oth me tho ds us e the a ve ra g e c los ingpr ic e of the stoc ks of

the c or po ratio n o r c or

po ratio ns po sse ssi ngthe a sse ts t o deter mine the marke t value of those a ssets. Id. § 39.262(h)( 2), (3)

.

Th e Joint Ap pli c ants c ho se to em plo y the pa rt ia l- sto c k- va luatio n me tho d. A p art y may use this method wh en a utilit y or its affiliated pow er- g ener ation company has transf

err ed g ener ation assets to a c orporation and “at least 19 perc ent, but less than 51 per cent, of the common

s t ock” of the cor poration “is spun off

and sold to public investors throug h a national stock23

exchang e.” Id. § 3 9

. 2 6 2 (h )( 3 ). Un d er t h i s m et h o d , t h e m ark et v al u e i s d et erm i n edb y t h e a v er age daily closing price of the stock “ over 30 consec utive tradingday s.” Id. The 30-da y period is chose n by the Com mis sio n, bu t it mus t occ ur wi thi n 120 da y s o f t he date on wh ic h th e a ff

ili a te d u til iti e s f

ile their joint application to rec over stra nded costs. Id. ; see id. § 39.262(c) (mandating joint filing)

. Be cause the amount of stock spun off under this method ca

n rang e fr om 19% to 51%, it is poss ible that less than half of the corpor ation’s stock will be publicly trade d and, there fore , that the cor poration’s majority

stockholders will have complete c ontrol over the actions of the corpor ation. The effe ct of this control m ight increa se the va lue of the stock pr ivately held, re ndering the ave rag e closingprice of the publicly -trade d stock an inacc urate measure of the true va lue of the sto c k. F or

thi s r e a so n, the uti lit ie s c od e a uth or ize s th e Com mis sio n to a pp oin t a pa ne l of e xpe rt s to determ i n e wh ether

this effe ct, ca lled a contr ol premium, is present. Id. § 3 9. 26 2( h) (3 ); Re lia nt I , 101 S.W .3d at 144 (e x plaining that “control pre mium is the additional value that a block of shar es obtains by

virtue of the f

act that it ca

rries w ith it t h e p o wer

to control the cor

poration”) . I n other words, the panel deter

mines the differ ence betwee n the actua l va lue of the stock and the amount that it i s p ub lic ly

tr a de d f or . I f the pa

ne l de te rm ine s that a c on tr ol pr e mium e xists , the Com mis sio n s ha ll adopt the pane l’s deter

mination of the actua l value of the stock but cannot “ incre ase the marke t value by a contr ol premium g reater than 10 pe rce nt.” Tex. Util. C o d e An n . § 39.262(h)( 3). The deter mination of the Commis sion “based on t h e fi n d i ng of the pa nel conc lusively

establishes the value of the common stock.” Id. Over a y ear befor e the f

inal true-up pr ocee ding, Ce nterPoint distribut ed a little over 19% of Ge nco’s stock to CenterPoint’s shareholder s. Aft er d i stributing the stock, Cente rPoint24

deter mined the marke t value of G enco’ s g ener ation assets by using the partial-stoc k-valuation method. By

utiliz ing this method, CenterPo i n t d et er m ined that the mar ket value f

or Ge nco’s g ener ation assets wa s $2.907 billi on.

Be cause the m ajority of Genco’s stocks we re ow ned by CenterPoint and not trade d publicly , the Commiss ion appointed a pa nel to deter

mine if a control premium exis ted. See id. The pa ne l de te rm ine d th a t a

c on tr ol p re mium e xiste d a nd tha t Ce nte rP oin t’ s v a luatio n did n ot a c c ur a te ly ref lect the a ctual value of Genco’s stock. The panel deter mined that the actual value of the stock wa s approximately

17% hig her tha

n its trade value

. See id. § 39 .2 62 (h )( 3) (r e qu ir ingCom mis sio n to adopt deter

mination of panel but prohibiting it fr om increa sing va lue of stock by more than 10% ). Ultimately , howeve r, the Commission concluded that the par t ial-stock-va luation method could not be employ ed b ecause less than 19% of Ge nco’s stock ha d actua lly sold on a

n a t i o n a l s toc k e xch ang e de sp ite the fa c t th a t 19 % h a d b e e n d istri bu te d to Ce nte rP oin t’ s st oc kh old e rs . I n an attempt to find an a lternative method for deter mining marke t va lue, the Commissi on revie wed other e stimates for Ge nco’s mar ket value, including the repor t by the control-pr emium panel. Af ter perf orm i n g i t s own ana ly sis, the Comm ission concluded that the mar ket value of

the assets wa s highe r than the a

mount origina lly

calc ulated by

the J oint Applicants. Be ca u s e o f this, the Commi ssion reduce d the J oint Applicants’ stranded-c ost rec overy to an amount that was le ss than the amount that they

orig inally

reque sted. The district cour t affir med the Commissi on’s use of a n alternative method for e stimating the va lue of the generation assets and its re duction to the J oint A p p l i c an t s ’ r e c o v e r

y. The Joint Applicants Failed to Satisf y the Re quirements of the Partial-Stock- Valuation Method I n their first issue on appe al, the J oint Applica nts c ontend that the Commi ssion erre d25

wh e n it c on c lud e d th a t th e pa

rt ia l- sto c k- va luatio n me tho d c ou ld not be e mpl oy e d. Un de r t his method, the marke t va lue of g ener ation assets is de termined by using the aver ag e tra ding pr ice of the stock of the c orporation or corpor ations possessing the assets if “at least 19 perc ent, but less than 51 pe rc e nt, of the c omm on sto c k o f e a c h c or

po ratio n is sp un off

an d s old t o p u b l i c i n v es t o rs t h ro u gh

a natio na l st oc k e xch ange.” Te x. Ut il. Cod e Ann. § 3 9. 26 2( h) (3 ) ( e mph a sis a dd e d) ; se e als o Black’ s Law Dictionar

y 974 (6th abridg ed ed. 1991) (defining “spin-off ” as something that occur s when pa rt of cor poration’s a ssets and stocks ar e tra nsfer red to ne w cor

poration). I n Aug ust 2002, CenterPoint transfer red a ll of its genera t i o n assets to Genc o. Six mon ths late r, Ce nt erP oint d istri bu te d o r s pun o ff a pp ro xima te ly

19 % o f G e nc o’ s sh are s to CenterPoint shareholde rs. Afte r the initial distributi on, the stocks wer e li s t ed o n the New York Stock Ex chang e and w ere sold to publi c investors star ting in J anuar

y 2003. The stocks c ontinued t o b e s o l d to public investors throug h the time of the true -up applica tion in March 2004. S

ee 16 Tex. Admin. C ode § 25.263 (2007) (time for f iling true -up application). Although Ce nterPoint did spin off 19% of Ge nco’s stock, not al l o f t hat stock wa s subsequently

trade d on a national stock e x chang e. F or example, some of the distributed stock wa s place d into the retireme nt acc ounts of various CenterPoint employ ees a nd was not sold on a stock exchang e. Dur ing the true-up proce eding , sever al employ ees te stified that they rec eived stocks f

rom the spin-off and did not sell the stocks by the time of the proce eding . As a re sult, less than 19% of the stock ac tually

changed o wn ership in t he stock mar ket. For this reason, the Commission conclude d that the par

tial-stock-va luation method could not be used. The Joint Applicants ave r that subsec tion 39.262(h)(3) doe s not require that all 19% of t he spun-off s tock be sold on a national stock exchang e. See Tex. Util. Code Ann. § 39.262(h)( 3).26

Rather, they

asser t that the require ments that stock (1) be spun off and (2) sold on a national stock

ex ch an ge r ef

er t o t wo s ep ar at e e v en t s . S t at edd i ff er en t l y , wh i l e t h e J o i n tAp p l i ca n t s ac kn o wl ed ge that a t le a s t 1 9 % o f th e s to c k h a d to b e s p u n o f f , th e y d o n o t b e li e v e th a t a ll o f th e spun-off stoc k

mus t su bs e qu e ntl y

be so ld in a st ock mar

ke t. R a the r, the y

a sse rt that th e “ so ld” re qu ir e me nt i s satisfied as longas some of the stock was trade d in a stock exchang e. Similarly , they contend that the word “sold,” when rea d in the contex t of t he statute, mer ely means that the stock must be of fer ed for sa le, not that it also be purchased, and refer to various def initions of the wor d “sell” to support this assertion. See, e .g. , W ebster’s New Collegiate Dictionary 1051 (1st ed. 1973). The Joint Applicants also insist that interpre ting the pa rtial-stock-va luation method

a s r e qu ir ingthat a ll 1 9% of the distri bu ted st ock be so ld i n a sto c k e xch ang e is t anta

mou nt t o dem an d i ng an “unw orkable and impossible require ment that defe ats the entire purpose of the

v al u at i o n s t at u t e. ” E s s en t i al l y , t h ey ar gu e t h at al t h o u gh m ark et v al u e i s d et erm i n edt h ro u gh av er age closing price s, many

stock holders choose to reta in owner ship of t heir stock r ather than sell it and that this retention play s a key role in establishing the true marke t va lue of stock. I n other words, they

argue that th e ra

pid sa le of sto c ks c an le a d to de fl a te d sto c k p ri c e s b ut t hat st oc k r e te nti on

he lps to

c re a te a hig he r s toc k p ri c e by

pr ov idi nga

sta bil izin g e ff

e c t and by de mo ns tra tin g that th e sto c k is

a de sir a ble inv e stm e nt. F ur

the r, the y a sse rt that th e be ne fi t ob ta ine d thr ou g h r e te nti on wo uld c e a se to exi st if all of the spun-off stock has t o b e sold prior to the true- up. Moreove r, they insist t hat

a lth ou g h n ot a ll 1 9% wa s so ld, e no ug h o f t he sh are s wer e so ld a

nd re so ld t o e sta

bli shan a c c ur a te marke t value. Specif

ically , they note that althoug h 15.2 milli on share s were orig inally distributed, Genc o stocks wer e tra ded 37.8 million ti mes betwee n J anuar y 2003 and Marc h 2004. Finally , they

asser t that a rig id require ment that a utility not only spin off 19% of its stock but that 19% also beI n te s ti mo n y g iv e n b e f o r e th e Co mm is s io n , o n e o f th e Jo in t A p p li c an ts ’ w it n e s ses and 11 other witnesse s stated that the dis t ri bution to the CenterPoint st ockholder s was not a “ sale” as re qu ir e d b y

the pa rt ia l- sto c k- va luatio n me tho d. Th e ne c e ssi ty of a c omp le te d sal e to a

thi rd pa rt y was a lso discussed in the portion of the 1998 ECOM rep o rt d iscussing possible methods for calc ulating ma

rket value. One possible method was ca lled a “spin-down” and involved tr ansfe rring g ener ation assets to an a ffiliated c ompany and distributing stocks of the af filiate to ex i sting sh are ho lde rs . U nd e r thi s me tho d, the uti lity ’s mana g e me nt d e te rm ine s th e ini tia l va lue of the a sse ts. As a re sult, “a true initial mark e t val uatio n” wo uld no t occ ur be c a us e the a sse ts w e re no t pu bli c ly trade d or off

ere d to third p ar t i es. On the c ontrary , the re port stated that the true value would be established af

ter some time had pa ssed and a fter “ the new sha res a re tra ded on stock mar

kets.” 27 pu bli c ly tr a de d w ou ld effect iv ely requi re a uti lity to s pin of f m or e tha

n 1 9% of sto c k in or de r t o g ua ra nte e th at at le a st 1 9% is tra de d, wh ic h th e y ur g e wo uld

le a d to sig nif

ic ant t a x pe na lti e s. Specifica lly , they

argue that CenterPoi n t and Genc o would not have be en able to file a joint tax return if more of G enco’ s stock had bee n distributed. See 26 U.S.C.A. § 1504 (West 2002) (def ining “af filiated cor

poration” a s one in which pa rent c orporation owns 80% of cor poration’s stock)

. When it int erpr eted the rele vant statutory lang uag e, the Commission determined that the phra se “sold

. . . throug h a national stock exchang e,” as used in the statute, mea ns that the stock must actually

be tra ded through a national stock exchang e (i.e . offe red f or sale a nd purcha sed) a

nd not just offere d for sa le. F ro m th is, the Com mis sio n r e a so ne d th a t at lea st 19% of the sto c k mu st 11 be sp un of f a nd su bs e qu e ntl y

tr a de d in a natio na l stoc k exch ang e in o rd e r t o s a tis fy the re qu ir e me nts of the statute. We b e lie ve that the Com mis sio n’ s int e rp re tatio n is c or re c t f or se ve ra l r e a so ns . F ir st, the use of the word “and” without the i nsertion of a new subject i n the phra se “spun of f and sold” ind ic a te s th a t bo th p hr a se s a pp ly to the langua g e imm e diate ly pr e c e din g the m: “ a t le a st 1 9 p e rc e nt, b u t l es s t han 51 per cent, of the common stock is.” See T e x. U ti l. Co d e A n n . § 3 9

. 2 6 2 ( h ) ( 3 ). Ex plained anothe r wa

y , the statute re quires that (1) at least 19% of the stock be spun of f and ( 2) at least 19% of

the stock be sold.The J oint Applicants also argue that a spi n-off on its own can c onstitut e a sa le under the 12 utilit ies code . I n support of this a ssertion, they ref er to two fede ral case s in which cour ts held that a spin-off

of stock constituted a sa le under the fe dera l Securities a n d E x ch ange A ct. See Securities & Exc h. Comm’n v. Datronics Eng’rs, Inc

. , 490 F.2d 250, 253 (4th Cir. 1973) (holding th a t sp in- of

f o f s toc k s a tis fi e d d e fi nit ion of “ sa le ” or “ se ll” in f

e de ra l se c ur iti e s a c t) ; S

e c u r it ies & Exc h. Comm’n v. H

arwyn Indus., Corp. , 326 F. Supp. 943, 953-55 (S.D.N.Y. 1971) (e x plaining that s p in

- o f

f tr e a te d a s s a le r e qu ir in g r e g is tr a ti o n )

. H o w e v e r , th e c a s e s r e li e d o n by the J oint Ap pli c ants are ina

pp lic a ble to t he pr e se nt c a se . T he statut or y sc he me a t is su e in t

ho se c a se s h a s a focus on r equiringfull disclosures in sec urities transac tions, se e Nas h v . F ar me rs N e w W or ld L ife Ins. Co. , 570 F.2d 558, 562 n.8 ( 6th Cir. 1978), not on de termining the marke t value of g ener ation assets, see Tex. Util . Code Ann. § 3 9

. 2 6 2 (h ), (i) (West 2007). See also Rathborne v . Rathborne , 683 F.2d 914, 920 n. 21 ( 5th Cir. 19 8 2 ) (s t ati ng that conclusion in Datronics that di str ibutio n to stockholders c onsti tu

te d s a le a p plied in enforc ement ac tion by Securities and E x chang e Commissi on but did not apply

to private damag e ac tion). Moreove r, whe n enac ting the sta t u t e, t h e leg islature incorpora ted the re quirements that stock be “spun off and sold.” Te x . Util. Code Ann. § 39.262(h)( 3). B eca

use both c oncepts wer e included, we must presume that the leg islature intended that the phra ses impose two distinct r equire ments and wer e not mere duplicates of one a nother. See US A W as te Se rv s. of H ou sto n, In c . v . S

tra y ho rn , 150 S.W .3d 4 91, 494 (Tex. App.—Austin 2004, pet. denied) (noting that courts should presume that ever y word in statute was included for rea son). 28 Second, ther e are other definitions of the word “ sold” that do not mean simply to offer for sa le. For

example, “sell” c an also mea n “to g ive up (prope rty

) to anothe r fo r m o n ey

or other valuable consideration.” W ebster’s New Collegiate Dictionary 1051 (1st ed. 1973). Ke e pin g in 12 mind that the word “sold” is the pa st tense of “ sell,” plug g ing this definition into the statute leads to the conclusion that to satisfy the partial-stoc k-valuation r equire ments, at least 19% of the stock must have bee n purcha sed by public investors prior to the true -up proc eeding

. We believe that this construc tion of the statute more acc urate ly ref lects the leg islative intent than the J oint Applicants’ interpre tation. T his c onstruction comports with the use of the w ord “sold” in other provisions of the utiliti es code . For example, under the sa le-of- assets method for de te rm ini ngmark e t va lue , a uti lity may e sta bli sh the mark e t va lue of g e ne ratio n ass e ts if t he a sse ts h a v e b e e n“ s o ld

. ” T e x. U ti l. Co d e A n n . § 3 9

. 2 6 2 ( h ) ( 1 )

. Wh e nth e w o r d “ s o ld ” is r e a d

in th e c o n te xt of the re mainder of

the sentenc e, it become s clea r that “sold,” a s used in this subsection, does notTestimony g iven to the Com mission s upports this propositi on as we ll. Bef ore the 13 Commi ssion, one of the Customers’ e x perts testified that the a mount that Genco stock tra des for on the stock marke t w ould be artificia lly reduc ed if a n insufficient leve l of stock was r elea sed for trade

. 29 mean to off

er f or sale. T he re levant portion of the provision provides as follows: “the total net value realized fr om t he sa le e sta

bli sh e s t he ma

rk e t va lue of

the g e ne ra

tio n a sse ts so ld .” Id. (empha ses adde d).

This interpretation is also consist ent with the emphasis plac ed on esta blishing an

acc urate marke t value appa rent in the e ntire marke t-valu ati on subsection. Jones v . Fowler , 96 9 S. W .2 d 42 9, 432 ( Te x. 19 98 ) ( pr ov idi ngthat w he n c on str uin g statut e s, c ourt s sh ou ld l oo k to

e nti re a c t) . E a c h ma

rk e t va luatio n me tho d li ste d in su bs e c tio n 3 9. 26 2( h) re qu ir e s th a t c e rt a in minimum con d i t i o n s b e met befor e the utility may employ the method. Tex. Util. C ode Ann. § 39.262(h). For ex am p l e, a utility may employ the sale- of-a ssets method only if its ge neration assets ar e sold “in a bona fide third-pa

rty transac t i o n u nder a

competitive offe ring .” Id. § 39.262(h)( 1). Simi larly , the exchang e-of -asse ts method may

be employ ed only

if the g ener ation assets ar e tra

nsfer red “ in a bona f

id e t h ird-par

ty exchang e tra

nsaction.” Id. § 39.262(h)( 4). Mo re ov e r, un de r t

his me tho d, the mark e t va lue of the a sse ts may be de te rm ine d by of fe ri ngthe a sse ts fo r s a le if the of fe r i s ma de in a

wa y g ua ra nte e ing“ br oa d pu

bli c no tic e of the of

fe r a nd a re a so na ble opportunity

for other parties to bid on the asset.” Id. These r equire ments are desig ned to ensure that

an ac curate marke t value for the g ener ation assets i s ca l cu l at ed in orde r to comply with the

overr iding mandate prese nt thr oug hout the statutory scheme : that a utility

be allowe d to rec over but not overre cover

its stranded costs. See, e .g. , id. §§ 39.252, .262(a)

. 13 Given the strongleg islative directive that market c alculation s b e b ased on r eal mar ket forc es, it seems log ical to conc lude that the leg islature fully intended that a l ar ge portion of the30

company ’s stock— at lea st 19%— actually trade on a public stock e x chang e to ensure that an

acc urate marke t value is obtained. See id. § 3 9. 25 1( 4) (d e fi nin g “ mark e t va lue ” a s v a lue of a sse ts if they had bee n boug ht and sold in “bona fide third-par ty transac tion” or “on the open mar ket”)

. Mo re ov e r, the Joint

Ap pli c ants ’ i nterp re tatio n w ou ld l e a d to unre a so na ble re su lts

. Se e Lowev . R iv e ra , 60 S.W .3d 366, 369 (Tex. App.—Dallas 2001, no pe t.) (stati n g that statutes sh ou ld not be c on str

ue d in manne r that lea ds to ab surd re su lts ). Un de r t he ir int e rp re tatio n, the statut e

wo u l d b e s at i s fi edi f 1 9 % o f t h e s t o ckwa s s p u n o ff an d o ff

er edfo r s al e o na p u

b l i c s t o ckex ch an ge bu t on ly a fe w s toc ks a c tua lly

so ld thr ou g h the e xch ang e . Es se nti a lly , un de r t he Joint Ap pli c ants ’ interpre tation, the marke t value fr om the sale of a handful of stoc ks—or eve n one shar e—could be used as a valid basis for deter mining stranded costs. This doe s not comport with the utilit ies code ’s ins ist ence on

uti lizin g , to the e xten t po ssi ble , a c tua l c omp e tit ive mark e t f or c e s and re a so na ble business prac tices to deter mine marke t value. We a lso dis a g re e wi th the Joint Ap pli c ants ’ a sse rt ion

that it wo uld be imp os sib le to comply with the require ments of the par tial stock v al u at i o n . Al though it may be diffic ult to have at least 19% of the spun-off stock actua lly sell on a stock e x chang e if only 19% is spun off, utilities

can attempt to assure complianc e with the statute by spinning off more than the minimum amount require d. I n fac t, un d er t h e p artial-stock-valuation method, a utility may spin off betwe en 19 and 51% of the stoc k. Tex. Util. Code Ann. § 39.262(h)( 3). By spinning off more than 19% , the J oint Applicants could have obtained w hateve r bene fit might ar ise from c erta i n stock holders re taining their stock and still complied with the statute by selling 19% of the stock on a nat ional stock exchang e.

Fur thermore , spinning off

more than 19% is not the only way the statute could have be e n s a tis fi e d. Th e Com mis sio n a rgue s th a t the Joint Ap pli c ants c ou ld a lso have c ho se n to c omp lyAs pa rt of ve rt ic a l un

bund lin g , u til iti e s w e re re q u i r e d to fi le bu sin e ss- se pa ra tio n p lans wi th 14 the Commiss ion. When filing their plan, the J oint Applicants sugg ested an i n i tial public offer ing as a me ans of c omply ing w ith the partial-stock- valuation method. In addition, during the true- up proce eding , one of the ir witnesses testified that a n initi al p u b l i c o ffering would have satisfied the require ments of the valuation method. I nit s o r d e r

a p p r o v in g th e Jo in t A

p p li c an ts ’ b u s in e s s - s e p ar ati o n p la n , th e Co mmission 15 no te d th a t th e Joint App lica nts we re g oin g to e sta

bli shthe mark e t va lue of

the ir g e ne ratio n a sse ts by having “an initial public offe ring of appr ox imately 20% of . . . [Genc o’s] co m m on stock.” Tex. P ub. Util. Com m’n, Reliant Energy, I nc. Business Separation Plan Filing Package , No. 21956 (Orde r on Rehea

ring ) (Ma y 29, 2001). As support for the ir asser tion that the market would not have rea cted f avora bly to an initial 16 public offe ring , the J oint Applica nts r efe r to the testimony

of one of their witnesses statingthat the ener g y marke t in 2002 would not have supported a public offe ring

. 31 wi t h t h e s t at u t e b y

d i s t ri b u t i n g t h e s t o ckt h ro u gh an i n i t i al p u b l i c o ff er i n g. See W

alden v. Affiliated 14 Com pu te r S e rv s. , 97 S.W .3d 303, 327 (Tex. App.— Ho u s t o n [14t h Dist.] 2003, pet. denied) (e xpla ini ngtha

t i ni ti al pu bl ic of

fe ri ng“ is the c omm on ly

us e d te rm

fo r t he fi rs t of fe ri ngof e qu ity

se c ur iti e s o f a

n is su e r t o th e pu

bli c purs ua

nt to a re g istra tio n s tate me nt” ). Un de r t

his me tho d, pu

bli c investors would purcha se Ge nco stock from an underwriter shortly afte r the initial offe ring is made. Be cause the sale w ould involve a transf er to public investors without first g oing thr oug h CenterPoint share holders, the Commi ssion c ontends that the par tial-stock-va luation require ments would be met

as long as more than 19% of the stock wa s purcha sed in the initial offer

. I n other wor ds, no more 15 tha n the de sir e d amou

nt o f s toc k w ou ld n e e d to be dis tr ibute d b e c a us e the sto c k is so ld d ir e c tly to public investors.

Alt h o u gh t h e J o i n tAp p l i ca n t s ac kn o wl ed ge t h at an i n i t i al p u b l i c off ering would have satisfied the ne cessa

ry require ments, they insist that the marke t c onditions during2003 would not have a llowed a succe ssful public offe ring

. Essentially , they argue that an off eringof 15.2 million newly issued stocks would have de flated the value of the stock. 1632 Even if the va lue of the stock w ould have be en tempora rily l o we re d, the J oint Applicants appe ar to c oncede that the value w ould have stabili zed over tim e at a value simil ar to that fo un d b y sp inn ingof

f t he sto c k f ir st a nd the n off e ri ng it fo r sa le on a sto c k exch ang e . T his un de rc uts the ir a sse rt ion that it wo uld have be e n impo ssi ble to sa tis fy the pa rt ia l st oc k v a luatio n. I t a lso se e ms to i nd ic a te th at th e y

c ou ld h a ve satis fi e d th e pa rt ia l st oc k v a luatio n w ith ou t ha vin g to d istri bu te signific antly

more than 19% of Ge nco’s stock, there by obviating their tax conce rns. I n addition, the fac t that the utilit ies code allows the partial stock valuation to be used for spin-offs of a

mounts much larg er tha n 19% of a

utilit y ’s stock indicate s that the partial- stock valuation provision wa s not

enac ted solely

to allow aff

iliated utilit ies to file j oint tax returns. Mor eover , we must assume that when the le g islature chose the ra ng e of va lues that would satisfy the spin-off re q u irement of the partial stock va luation, it was awa re that utili ties might incur neg ative tax consequenc es if they wer e require d to distribute more than 19% of the stock. See Te x. Ut il. Cod e Ann. § 3 9. 26 2( h) (3 ). As a result, we c annot conc lude that the leg islature cr afte d the spi n -o ff require ments so as to preve nt potential neg ative tax consequenc es for the utiliti es who c omplied. Fr om the numerous methods for calc ulating ma

rket val u e desc ribed in the utilities

c od e , w e c an in fe r that it wa s the le g isl a tur e ’s int e nt to a ff or d the uti lit ie s dis c re tio n to c on sid e r t he ir unique circ umstances and the rele vant marke t c onditions whe n deciding which method to use. I t was wi t h i nt h e u t i l i t i e s ’ d i s c r e t i o nt o c o n s i d e r an d t r a d e o f f t h e r e l a t i v e b e n e f

i t s an d c o s t s ( e . g . t a xe s) wh e n s e le c tin g a

va luatio n metho d. Th is s c he me do e s n ot, ho we ve r, e na ble uti lit ie s to pa

rt ia lly comply with the mandatory

require ments in order to avoid a potential business cost. We must also assume that when the leg islature enac ted this statute, it wa s awa re of the possibilit y

that the re cipi en t s o f a stock spin-off may hold onto their stocks for a n extendedThis conclusion is further supported by

the testimony

of var ious witnesses befor e the 17 Commi ssion stating that the small tradingvolu m e o f Ge n co st ock ac tually depre ssed the value of Genc o’s stock. 33 period of time a

nd that stock that is sold on a stock exchan ge m i gh t b e re s old prior to the true- up proce eding

. I n light of this, the leg islature still require d a utility to spin off and sell at lea st 19% of the re le va nt s tock t o co mpl y

wi th t he pa rt ia l- sto c k v a luatio n me tho d. F or thi s r e a so n, we a lso disag ree with the J oint Applicants’ asser tion that the subsequent r eselling of the Ge nco stock in the stock marke t satisfied the leg islative g oal of e stablishing an a ccur ate mar ket value. 17 For all the re asons pre viously g iven, t he Commissi on’s interpre tation requiringthat

a min imum pr op or

tion of a ut ili ty ’s tot a l st oc k b e so ld i n th e sto c k ma rk e t in or de r t o a c c ur a te ly determin e ma

r k e t v a lu e is c o r

r e c t an d c o n s is te n t w it

h th e r e le v an t s tatuto r

y la n g u a g e . T he Joi nt Applicants fa iled to comply with this m inimum requirement. Ac cording ly , the Commiss ion

corr ectly deter mined that the partial-stoc k method could not be used to c alculate the marke t value of the g ener ation assets. The Commission Had the Authority to Cons ider Other Valuation Methods

The Utili ty

Co u n s e l a n d th e Cu s to me r s a gree that the re quirements of the partial-stoc k method wer e not complied wit h but criticize the C ommissi on’s decision to estimate the marke t value of t he gene ration assets by a method not spec ifically listed in the util ities code. F irst, the Customers

asser t that the Commi ssion should not have a llowed the Joi nt Applican t s t o re cover any stranded costs beca use they failed to mee t their burden of establishing a viable mar ket value. E ssentially , the Cus tom e rs a sse rt

that th e burd e n o f p ro vin g str and e d c os ts i s on the uti lit ie s and ins ist tha t if a uti lityThe Customers a lso r efe r to la ng uag e in the Commi ssion’s order in whic h the Commiss ion 18 state d th a t it

wa s p os sib le to co nc lud e that by fa ili ngto e sta

bli sha mark e t va lue , th e Joint

Ap pli c ants wer e not entitled to rec over f or their stra

nded costs. 34 fa ils to s a tis fy

thi s b ur de n, it s ho uld

no t be awar de d s tr and e d c os ts. See Tex. Util . Code Ann. 18 §§ 39.252 (stating that utilit y is a llowed to r ecove r its “ver ifiable” stranded c osts), .262(h) (r equiring uti lity to “ c a lc ulate its str and e d c os ts” ); see also id. § 3 9. 00 3 ( e sta bli sh ing that in c on te ste d c a se s, burden of proof “ is on the incumbent elec tric utility ”). Howeve r, this a ssertion ignor es the clea r leg islative mandate that utili ties be allowe d to rec over the ir strande d costs. See, e .g. , id. §§ 39.001(b)( 2) (“ in public interest to . . . allow utiliti es

. . . to r e c o v e r ” s tr an d e d c o s ts ) , . 2 5 2 ( “ u ti li ty

is a ll o w e d

to r e c o v e r

a ll o f it s n e t, verifiable,

no nmi tig a

ble str and e d c os ts”). I n fac t, a n e nti re su

bc ha pte r o f t he uti lit ie s c od e is d e dic a te d to descr ibing the pr ocess of stranded- cost rec overy . See id. §§ 39.251-.265 (e ntitled “Recove ry of Stranded Costs Throug h Competiti on T ransition Charg e”) . Although the Utility Counsel and the Customers corre ctly

point out that the util ities code plac es the burde n of deter mining mar

ket value on the utiliti es, id. § 39.262(h), nothingin the code indica tes that the failure of a utility to satisfy one of the marke t-valuation require ments should result in an automatic denia l of the rig ht to recove r any str and e d c os ts. Con str

uin g the uti lit ie s c od e in thi s mann e r wo uld ru n a fo ul of the statut or

y sc he me g ov e rn ingthe tr ans iti on to a c omp e tit ive e ne rg y mark e t and e ns ur ing that a fo rm e r r e g ulate d u til ity not be disadvanta g ed throug h the transition.

I n the alter

native, the Customers ar gu e an d t h e Util ity Counsel ag ree s that after concludingthat the par

tial-stock method co u l d n o t b e utiliz ed, the Commission shoul d have use d one of the other pe rmissible valuation methods to calculate marke t value. See id. § 39.262(h), ( i).35 We disag ree . Afte r consider ing the possibili ty of utiliz ing one of the other listed

me tho ds , the Com mis sio n c on c lud e d that no ne of the oth e r me tho ds lis te d in the uti lit ie s c od e c ou ld have be en employ ed in this case be cause their re quirements we re not met. The stock-valuation method require s that more than 51% of the c ommon stock of a tra nsfer ee c orporation be “spun off and sold to public investors.” Id. § 39.262(h)( 2). Howeve r, as discussed ear lier, less than 19% of Genc o ’ s s to c k w a s a c tu a ll y s p u n o f f an d s o ld

. T h e e xc h an g e - o f

- a s s e ts me th o d c o u ld a ls o not be

e mpl oy e d be c a

us e Ge nc o did no t tr ans fe r any of its g e ne ratio n a sse ts “ in a bona fi de t hi rd- pa rt y exchang e tra

nsaction.” See id. § 39.262(h)( 4). Simi larly , the Commiss i o n al so conclude d that the two methods proposed by the Cus tom e rs and

the Ut ili ty

Couns e l—t

he sa le -o f- a sse ts me tho d a nd the a lte rn a tiv e me tho d f

ound in

su bs e c tio n 3 9. 26 2( i) —c ou ld n ot b e e mpl oy e d. Sub se c tio n ( i) re a ds , in re le va nt p art , a s f

oll ow s:
Unless an elec tric utili ty o r i t s a f f i l i a t e d p o w e r g e n e r a t i o nc o mp an y combines all of its re ma ini ng

ge ne ra tio n a sse ts i nto on e or mo re tra ns

fe re e c or po ra tio ns as descr ib e d in [th e s to c k

- v a lu a ti o n me th o d an d p arti a l- s to c k

- v a lu a ti o n me th o d ], the elec tric utility

shall qu antify

its stranded costs for

nuclea r asse ts using the ECOM method . . . . using updated company -spec ific inputs . . . .

Id. § 3 9

. 2 6 2 ( i) ( e mp h a s e s a d d e d )

. T h e tr an s f e r o f a s s e ts is a n e c e s s ar

y c o mp o n e n t o f th e market valua t i o n s o b t ai n edb y

u s i n g ei t h er

t h e s t o ck -v al u at i o nm et h o d o r t h e partial-stock-va luation method. Although the J oint Applicants d i d n o t satisfy the other r equire ments nece ssary for these two

me tho ds , n a me ly

the sa le of

a su ff ic ie nt n umb e r o f s tock s in

a pu bli c sto c k e xch ang e , th e y did transfe r all their g ener ation assets to Genc o. I n light of this, the Commissi on conclude d t hat the ECOM model could not be used to estimate ma rket va lue. This deter

mination is reasonable and consistent with the rele vant statutory lang uag e, and w e ag ree that is what the leg islature intended.36 Th e sa le -o f- a sse ts p ro vis ion re a ds , in re le va nt p art , a s f

oll ow s:

I f, a t any tim e a ft e r D e c e mbe r 31, 19 99 , an e le c tr ic uti lity . . . h a s sold some or all of its ge neration assets . . . in a bona fid e t h i rd -par ty transac tion under a c ompetitive offe ring , the total net value r ealized from the sa le establishes the marke t va lue of the g ener ation assets sold.

Id. § 39.262(h)( 1) ( emphasis added). The Customers a rg ue that in J uly

2004 CenterPoint entere d into a binding a g ree ment to sell its g ener ation assets to a third party during the true- up proce eding and that the Commi s s i o n s h o uld have use d the amount offe red to a scer tain the value of

the g e ne r a t i o n a s s e t s b e c a

u s e t h e o f f e r e d p r i c e w a s i n t h e r e c o r d b e f o r e t h e C o m m i s s i o n . F u rt h e r , in light of the statutory lang uag e st ating that the sale of assets “at any

time after

Dec ember

31, 1999,” may be used to establish marke t value, see id. , they ask this Court to take judicial notice of the fac t that Genc o was actua lly sold f or the amount offe red afte r the Commi ssion issued its final orde r or, alternatively , to remand the case in order f or the Commission t o take notice of the c ompleted sale. I n related contentions, the Utility Counsel argues that the fa ilure of the Commiss ion to use the sale pr ice of Genc o to e stablish mar ket value allowed the J oint Applicants to overre cover f o r s tr an d e d c o s ts in v io lati o n o f th e le g is lati v e p r o h ib it io n. See id. § 39. 26 2( a ). Es se nti a lly , it argues that the Commis s i o n ’s m arke t value estimate w as much lowe r than the sa le price , which allowed the Joint Appli cants to re cover more for stranded c osts than they

would have be en allowe d to if the sale- of-a ssets method had bee n employ ed.

The sale -of- assets method re quires that the g ener ation assets be “ sold ” p ri o r to the stranded- cost rec onciliation. Id. § 3 9

. 2 6 2 ( h ) ( 1 )

. A l t h o u g h s u b s e c t i o n ( h ) ( 1 ) d o e s r e f

e r t o a sa le

occur ri n g “a n y t ime afte r De cembe r 31, 1999,” the Commi ssion concluded that the w ord “sold,” meani ng a complete d act, ne cessa rily limit s consideration of a sale f or marke t-valuation purpose sTh e Com mis sio n als o expr e sse d a des ir e fo r ke e pin g a va luatio n fin a l whe n it de c ide d to 19 limit its e stimate of the marke t va lue of Ge nco to the same time interval that would have been use d if the par tial-stock-va luation method had bee n complied with. This decision was no doubt base d on the desire to neither re war d nor punish t h e J o i n t Applicants for their fa ilure to comply

with the valuation re quirements by denying the m any

benef its or saddling the m with any draw backs r esulting from cha ng es in the marke tplace oc curr ing a fter the time orig inally selec ted for the valuation. I n its briefs, the Commissi on also asser ts that to employ t h e s al e- of-a ssets valuation 20 method, there must be evidence that the s ale occurr ed “in a bona fide third-pa rty transac tion under a compe titive offer ing.” Tex. Util . Code Ann. § 39.262(h) (1) (West 2007)

. Howeve r, it contends that littl e evide nce w as of fe re d t o prove that the offe r wa s made unde r the re quired c ompetitive circ umstances a

nd that, there fore , the method could not prope rly be employ ed. Th e app are nt p ur

po se be hin d th e c omp e tit ive sh ow ingis t o p re ve nt t he po ssi bil ity

that a utilit y will r ecove r more throug h the strande d-cost true -up than it is entitled to by employing a

low estimate of the va lue of its g ener ation assets. In other wor ds, t h e s al es price obtained throug h a c omp e tit ive mark e t e nv ir onme nt, un lik e a tw o- pa rt y tr ans a c tio n, is l e ss l ike ly to s ig nif ic antl y un de re sti mate the va lue of the a sse ts. F or

thi s r e a so n, e mpl oy

inga c omp e tit ive sa le s p ri c e wi ll a lso decr ease the cha

nces tha t the utilit y

will overre cover

stranded c osts through the true-up pr ocess. Th e a c tua l ma

rk e t va lue us e d b y the Com mis sio n w a s lo we r t ha n th e pr ic e of

fe re d. F or

thi s rea son, the ap p ar ent purpose of the statute would see m to have bee n satisfied despite the la ck of evidenc e showingsufficie nt competitive circ umstances. 37 to sales occurring befor e the true-up r econc iliation. Se e id

. Although the offe r was made befor e the Commi ssion issued its final orde r, t he sale was not finalized until after the true-up pr ocee ding, a nd th e r e f o r e , th e Co mm is s io nc o n c lu d e d th a t a n y a tt e mp t t o u s e th e s u

b s e qu e n t s a le o f

G e n c o a s the sole basis for de termining marke t value would be imprope r and w ould be contrary to the provisions of the utilities code. Th e Com mis sio n’ s c on str uc tio n o f t

he sa le -o f- a sse ts p ro vis ion is r e a so na

ble 19 and consistent with the re lev an t s t atutory lang uag e, and w e ar e per suaded the interpre tation

acc urate ly

ref lects the intention of the leg islature. Acc ording ly , it would be improper for this Court to take judicial notice of

a sale occur

ring afte r the a dminist rative r ecor d has closed. 20 For all the re asons pre viously g iven, we c onclude that the Com m i ssion did not err when it fa iled to use one of the other va luation methods list ed in the utilities code.I n support of its assertion, the Customers point to lang uag e found i n t he Commissi on’s 21 order that stated that it pe rfor med a marke t valuation that was “ outside of the methods spec ified in” the utiliti es code

. 38

The Utility

Counsel and the Customers also ar g ue that by employing a

valuation method not specifica lly

authorized by

statute, the Commissi on ex ce ed ed i t s authority

. See id. § 39

. 2 6 2 ; 1 6 T ex. Admin. C ode § 25.263; see also Tex. Util . Code Ann. § 12.001 (West 2007) (explaining that Commission “ex erc ises the jurisdiction and power s confe rre d by this ti tle”); Tex. Gov’t Code Ann. § 2001.174(2) ( West 2000) (requ i ri n g co u rt to reve rse c ase if a g ency conclusions are “in excess of t he age ncy ’s statutory authority ”). I n support of their ar g uments, the

21 Customers invoke the doctrine of expre ssio unius es t ex cl u s i o alterius

. Se e Mi d- Ce ntu ry In s. Co. v . Kidd , 997 S.W .2d 265, 273 (Tex. 1999) (ex plaining that doctrine stands for pr oposition t hat expression of one thing means exclusion of all others). They argue that the leg islature specifie d five methods for de termining marke t value and, the ref ore, ne cessa

rily exclude d al l other methods of perf orming that task.

We do not believe that the doctrine of expre ssio unius est exclusio alterius pr oh ibi ts the Commiss ion from eng ag ing in the c omplained-of a ction.

First, we note t hat the doctr ine is only an aid f or dete rmining le g islative intent and should not be employ ed in a wa y that leads to an unr easona ble re sult. Id. at 274. Second, the Utility

Counsel and the Customers’ int erpr etation fails to acc ount for the fac t that fulfilling the va

rious require ments for a valuation method ca n take a g reat deal of time but that the der egulation proce ss has relatively quick dea dlines. See, e .g. , Tex. U t i l

. C o d e Ann. § 39.262(h)( 2), (3) (both requir ing that stock be trade d on exchang e for more than one y ear befor e valuation method may

be employ ed). Under the Utility Counsel and the Customers’ interpr etation,I t is worth noting that sever al of the Customers sug g ested that in lig ht of the fa ct that the 22 partial stock va luation could n o t b e em ploy ed, the Commission shoul d employ other methods for deter mining mar

ket value. 39 if a uti lity is u lti mate ly

un a ble to f ulf ill the re qu ir e me nts of a va luatio n metho d an d the re is no t ime to fulfill the require ments of another method, the ut ility would not be entitl ed to rec over for strande d costs. Given the tre mendous leg islative emphasis place d on the nee d for stranded- cost rec overy , we conclude that this int erpr etation is inconsistent with that mandate.

We a lso do not be lieve that the Commi ssion e x cee ded its authority when it deve loped an alter native valuation method. As discusse d previously , the J oint Applica nts did not select a

nother marke t-valuation method, and the Commi ssion pr operly conclude d that none of the ot h er l isted methods could have been e mploy ed bec ause the ir requir ements we re not satisfied. As a re sult, the Commi ssion face d the problem of reconciling an overwhelming statutory mandate that utili ties be allowed to re cover

their st rande d costs with the fac t that the specific methods listed for deter mining stranded c osts could not be employ ed. 22

To resolve this conflict, t h e Commissi on chose to utiliz e the de finition of “marke t value” found in the utiliti es code as a ba sis for deve loping a s u b s t i t ute valuation method. See id. § 39.251(4) ( defining“mar ket value” as “the value the a ssets would have if bought an d sold in a bo na fi de tr ans a c tio n o n th e op e n ma rk e t” ). As dis c us se d mo re tho ro ug hly in t he nex t sec tio n, in de te rm ini ng the a sse ts’ mark e t val ue , the Com mis sio n re lie d exte ns ive ly on inf or matio n alr e a dy

in the re cord: namely

the control-pr emium panel’s r eport and the offe r to buy Genc o. Both piec es of information wer e indicia of the marke t value of G enco’ s assets. Moreove r, althoug h specifie d for another use, the pa

nel’s re port was a

leg islatively

authorized tool to be used duringtrue-up proce eding s. Id. § 39.262(h)( 3).40 I n light of the Commi ssion’s predica ment, its im portant role in de regulation, and the information chose n to estimate m arke t value, we cannot conclude that the C ommissi on acte d in an arbitra ry manner or ex cee ded its authority by using a n alternative valuation method in order to ensure that a cr itical leg islative mandate w as met.

The Customers also asse rt that by developing a n ew va luation method, the Commi ssion has improperly cre ated a new powe r for administrative expedience and that the ne w power contra dicts the provisions of the utilit ies code. I n support of their arguments, the Customers

re fe r t o s ub secti on 39 .2 52(d ), wh ic h im po se s a du ty on uti lit ie s to e ng a g e in c omm e rc ia lly

rea sonable a ctivities to reduce their strande d costs. Id. § 39.252(d). I t also auth o ri z es the Commi ssion to “consider” the utiliti es’ c onduct when de termining the amount of stranded costs but also ca utions that “nothing in t his section authoriz es t he [ C] ommissi on to substit ute its judgment for

a mar ket valuation of g ener ation assets determined under” the sec tions li sting the f ive methods for deter mining mar

ket value. Id. The Utility Counsel and the Customers ar g ue that by developingan

a lt e r native method for

valuation, the Commissi on has substituted its j udg ment for a marke t valuation and, ther efor e, violated the statute.

We d o n ot b e lie ve that th e Com mis sio n im pe rm iss ibl y

c re a te d a new po we r i n contravention of the utilities code. Contrar y to the asser

tions of the Ut i l i t y C o u n s el and the Customers, the Commi ssion’s actions did not violate subsection 3 9 .252(d). That provision states that the Commiss ion may not “substitute its judgme nt for a ma rket va luation .

. . deter

mined under Sections 39.262(h) a

nd (i).” Id. As previously discussed, the methods for deter m i n i n g marke t valuation under

subsections (h) a

nd (i) could not have been e mploy ed t o as ce rt ain m arke t value. There fore , the Com m i ssion was not substit uting its opinion for a ma rket va luation calculated by using one of those methods.41 Second, the c ases that the Customers re l y o n in support of their ar g ument that by using a n alternative valuation method, the Commissi on has impermissibly cre ated a new powe r ar e distinguishable. See Public Util. Co mm ’n v. GTE-Southw est, Inc. , 901 S.W .2d 401 (Tex. 1995); Denton County Elec. Co-op v. Public Util. Comm’n , 818 S.W .2d 490 (Tex. App.—Texarkana 1991,

wr it d e n i e d )

. I nb o t h c a s e s , t h e u t i l i t i e s c o d e s p e c i f i e d t h a tt h e C o m m i s s i o nh a d t h e a u t h o r i t y to eng ag e in an a ction only

when c erta in conditions were me t. G TE

- S o u thwest, Inc. , 901 S.W .2d at 40 7; Denton , 8 18 S.W. 2d a t 49 2. Ho we ve r, the pa rt ie s argue d a

bo ut whe the r t

he Com mis sio n a lso po sse sse d th e imp lie d p ow e r to e ng a g e in the same a c tiv ity wh e n the c on dit ion s we re no t pr e se nt. GTE-Southwest, Inc. , 9 01 S.W. 2d a t 40 4; Denton , 818 S.W .2d at 492. I n th is c a se , th e Com mis sio n is no t a sk ingthi s Co ur t to c on clu de that, d e sp ite statutory lang uag e author izi ng the Commiss io n t o act only under c erta in circumstanc es, it has an implied authority

to act whe n the circ umstances a re not prese nt. On t he contr ary , the Commiss ion is asking this C ourt to conclude that it has the authority to act to fulfill a leg islative mandate w hen the e nume rate d metho ds fo r c omp lia nc e are no t a

pp lic a ble to t he pr e se nt c ir c ums tanc e s. Specifica lly , the Commi ssion a sks this Court to conclude that whe n all the per missibl e methods of calc ulating ma

rket va lue ar e unava ilable bec ause the ir conditions are not met, the Commi ssion has the imp lie d a

uth or ity to d e vis e an alt e rn a tiv e me tho d f or c a lc ulatin g mark e t va lue in o rd e r t o c omp ly with the leg islative directive that utili ties rec over f or strande d costs that they have inc urre d. Given t h e s t ro n g leg islative mandate, w e must conclude that the Commiss ion’s authority to use an alternative valuation method is “re asonably nece ssary to fulfill a function or per form a duty that the L eg islature has e x pressly place d in the” Commissi on’s purview

. See G T E -Southwest, Inc. , 90 1 S. W.2 d at 40 7; see also State v. Public Util. Comm’n , 883 S.W .2d 190, 194-97, 204 (Te x . 1994)I t is worth noting that sever al par ties prese nted alter

native valuations calculate d by using 23 methods not considere d by the valuation pane l. These e stimates provided a r ang e of values that were above a nd below the a

mount ulti mately

chosen by

the Commiss ion. I n s up po rt

of thi s a sse rt ion , th e Cus tom e rs po int to a dmi ssi on s b y

the pa ne l th a t it s 24 valuation was not indepe ndently verifie d and that the actua l ma rket value may be “more or less” tha n the amount ca lculated. 42 (conc luding that Commi ssion had im plied authority to alleviate impac t of regulatory lag by defe rring

acc ounting, de spite fac t that this power was not expli citly listed in utilit ies code) . Acc ording ly , we must also conclude that the Commission’s actions did not amount to an impermissible crea tion of

a new power . The Method Chosen by

the Commission was Proper As part of

its valuatio n, the Commiss ion considere d the control-pr emium panel’s repor t. I n i t s re p o rt , the pane l list ed a r ang e of possible va lues estimating the actua l value of the Genc o’s stock. The va lue ultimately chosen by

the Commiss ion was th e m i d -v al ue of the proposed r ang e. 23

Throug h sever al ar g uments, the Utility Counsel and t he C ustomers asser t that even if the Commissi on was a llowed to use an a lternative va luation method, the Commi ssion’s utili zation of the re port as a me thod for asse t valuation was proc edura lly improper. First, they

contend t h at i t was er

ror to re ly

on the pane l’s repor

t beca use it was prepa red so l el y fo r t he purpose of dete rmining w hether a contr ol premium exi sted and not for deter mining the statutorily

require d estimate of Ge nco’s mar ket value. Fur

ther, they argue that by 24 using the panel’ s repor

t as a basis of estimating ma rket va lue, the Commissi on impermissibly made the pane l the final fa ct-finde r for marke t v aluation. Alt houg h they acknow ledg e that, under the43

utilit ies code , the Commiss ion is required to a dopt the panel’ s determin at i o n re g ardingwhether a control pre mium ex ists, see Te x. Ut il. Cod e Ann. § 39 .2 62 (h )( 3) (r e qu ir ing Com mis sio n to “ a do pt” control-pr emium amount determined by panel) , they

argue that ther e is no statutory authority for allowing the pane l to serve a s a final f act- finder f

or the mar

ket valuation of g ener ation assets. Second, they

argue that the Commi ssion’s utilization of the panel’ s repor t violated their due pr ocess ri gh t s beca use they wer e not g iven prior notice and an oppor tunity to be hea

rd reg ardingthe use of the control pane l’s repor t as a tool for mar

ket valuation. See Tex. Gov’t Code Ann. § 200 1. 05 1 ( e xpla ini ngtha t pa rt y is e nti tle d to no tic e pr ior to h e ari ngand

op po rt un ity to prese nt and re spond to evidence ); Ma dd e n v . Te x as Bd . o f Ch iro prac tic Ex am ’r

s , 663 S.W .2d 622, 6 2 6 -2 7 (T ex . Ap p . —

Au s t i n1 9 8 3 , wr i tre f’ d

n . r. e. ) ( “ T o b e m ea n i n gfu l , ‘n o t i ce ’ a n d ‘h ea ri n g’ require previous notice a

nd a h ea ring relative to the issues of fa ct and law which will control the result to be rea ched” ). F urther, the y argue that they

wer e unable to bring forth evide nce r efutingthe pa ne l’ s f ind ing s r e late d to the mark e t va lue of Ge nc o’ s st oc k. Mo re ov e r, the y c on te nd that be c a us e the pane l’s repor

t was used f

or asc erta ining the ma

rket va lue of Ge nco’s g ener ati o n assets, t hey should have be en allowe d to cross-e x amine the pa nel member s. See Smith v. Houston Chem. Serv s., Inc. , 8 72 S.W. 2d

25 2, 27 8 (T e x. Ap p. —Aus tin 19 94 , wr it de nie d) (e xpla ini ngthat pr oc e dura l r ig hts “e n co mp as s edb y

d u e p ro ce s s o f l aw ar e gen er al l y re co gn i z edt o b e a s fo l l o ws : n o t i ce o f h ea ri n g; the oppor t u n i t y t o prese nt argument and evide nce a nd to rebut and te st opposing evide nce a nd argument by cross-e x amination or ot her appropriate m eans; appear ance with counsel; and a dec ision by a neutr al dec ision maker base d on evidenc e introduce d into the rec ord of the he aring ”).

Finally , they

alleg e that the Commission’s uti liz ati o n o f the pa nel’s re port was pr ob le matic be c a

use th e pane lis ts w e re no t r e qu ir e d to c omp ly wi th c on te ste d- c a se re qu ir e me nts
.44

See, e .g., Tex. Gov’t C ode Ann. §§ 2001.051-.178 (West 2000) (rules g overningcontested c ases)

. I n p art ic ula

r, the y a sse rt that th e pa

ne lis ts we re a llo we d to com mun ic a te pr ivate ly wi th thi rd pa rt ie s,

wer e allowe d to obtain information from external source s when conducting their ana ly sis, and wer e allowed to conduc t their own re sear ch.

These challeng es to the panel’ s final re port wer e likely waived when the r eport wa s admitted into the rec ord with no objection fr o m t h e C ustomers or the Utility Counsel. Howeve r,

even a ssuming that th e C u s t o m ers and the Utility Counsel’s complaints were prese rved f or consideration on appea l, we conclude that the Commiss ion’s consideration of the pane l’s repor t was not proce durally

improper. The Commission’s re liance on the control-pr emium report a s an aid for deter mining

mark e t va lue did

no t im pe rm issib ly

e le vate the status of

the pa ne l to fi na l f

a c t- fi nd e r f

or mark e tva lue de te rm inatio ns . A lth ou g h th e pa ne l’ s d e c isi on

a bo ut t he e xis t e nc e of

a c on tr ol p re mium w ou ld have be en binding upon the Commiss ion had the par tial-stock-va luation method been use d, see Tex. Util . Code Ann. § 39.262(h) (3), the Commission was not bound by the panel’s conclusions when de termining marke t value. The Commi ssion merely used the panel’ s estimate when making its own marke t -v al u e deter mination. See Ce ntral Power & Light Co. v. Public Util. Comm’n , 36 S.W. 3d

54 7, 56 1 (T e x. Ap p. —Aus tin 20 01 , pe t. de nie d) (s tatin g that a s so le jud g e of we ig ht t o g ive te st im on y and e vid e nc e , Co mmi ssi on may c on sid e r r ang e of

va lue s p re se nte d in

makin g its final dete rmination).

Moreove r, althoug h the Customers corr ectly point o u t t h at the control pa nel was

c on ve ne d s ole ly

fo r t he purp os e of de te rm ini ngwh e the r a c on tr ol p re mium e xiste d, inh e re nt w ith inFur thermore , the t erms of the contrac t betwee n the Commiss ion and the pane l members 25 specifie d that they

wer e to “r eac h a conc lusion reg ardingthe ra ng e of fair values of Texas Genc o.” 45 that deter mination was an estimation of the true marke t value of G enco’ s stock. See Tex. Util . Code Ann. § 39.262(h)( 3) (e x plaining that control panel is composed of three financ ial experts “fr om the top 10 nationally

rec og nized investment banks wit h demonstrated experience in the United States

e le c tr ic ind

us tr y ” and is a sse mbl e d to de te rm ine wh e the r va lue of pu bli c ly tr a ded st ock is “fa ir ly repr esentative of the total common stock equity or whe ther a

control pre mium ex ists for the re tained interest”)

. I n fac t, in testimony g iven bef ore the Commi ssion, the panel’s pur pose wa s descr ibed 25 as dete rmining a

“fa ir marke t value for

[Genco] in roughly

t h e same time period as the va luation time period in this case.”

F ur the rm or e , a lth ou g h th e pa

ne l’ s r e po r

t w a s n o t u s e d i n t h e p r e c i s e m a

nn e r o ri g ina lly anticipated, the Customers and the Utility Counsel w ere on notice that the pane l’s repor t would be used for the purpose of determining the true value of Ge nco’s stock. See id. Moreove r, the pa nel pr ov ide d a ll the re le va

nt pa rt ie s wi th no tic e of its a c tio ns and wi th t he op po rt un ity to b e he ard . F ir st, the par ties were g iven not ice that the panel had been convened and that it would be eva luating the value of Genc o’s s tock. Second, the parties were informed that the panel would have severa l open hear ings a

nd wer e allowed to c omment at the hea ring s reg ardingthe pane l’s proposed methods for making its determinations. Finally , the par ties were allowed to file a ny conce rns and information that th e y ha d th a t w e re re le va

nt t o th e pa

ne l’ s p ro po se d a

nal y si s, in cludin g inf

or matio n r e late d to marke t value, and the panel pledg ed to consider the filing s when makingits decision. Be cause the parties were awa re that the panel’ s repor

t would provide an e stimate of Ge nc o’ s st oc k a

nd that the e va luatio n wou ld ne c e ssa ri ly a ff e c t th e Joint

Ap pli c ants ’ s tr and e d- c os tI n support of their ar g ument that they wer e denie d due proc ess, the Customers re ly on 26 Ma dd e n v . Te x as Bo ar d o f Ch ir op ra c tic Ex am ine rs , 663 S.W .2d 622 (Tex. App.—Austin 1983, writ ref ’d n.r.e.)

. That case is disti ng uishable. In Madden , the Board created a new definition for the term “ bona fide chiropra ctic school” but did not make that information known until it detailed the de fi nit ion

in an or de r de nying Ma dd e n the op po rt un ity to take the c hir op ra c tic lic e ns inge xam. Id. at 626. As a re s u l t , M ad den wa s denied due proce ss beca use he w as unaw are of the ne w re qu ir e me nts of

the de fi nit ion

duri nghis c on te ste d c a se be fo re the B oa rd and wa s, the re fo re , una

ble to prese nt any evidenc e reg arding those new e lements. Id. a t 62 7. I n thi s c a se , the Com mis sio n d id not alter or a dd additional elements to any d ef i n i t i o n rele vant to the true- up proce eding and, there fore , did not deprive a ny party of th e opportunity

to present e vidence reg ardingthe new elements. F urther, the Customers knew that a pa nel had be en conve ned and that its repor t would be an estimation of Ge nco’s mar ket value. 46 rec overy , they

had eve ry incentive to par

ticipate in the pane l’s deter mination and to provide evide nce

su pporti ngthe ir

po sit ion s. Moreove r, the Customers and U tilit y Counsel argued that the 26 require ments of the partial-stock valuation method might not have been satisfied and we re a llowed to present e vidence reg ardingother mar ket valuations that mig ht be employ ed. I n a dd iti on , in

makin g a

du e -p ro c e ss cla im , a part y mus t sh owtha

t a du e -p ro c e ss violation occurred an d t h at h e or she was ha rmed by that violation. Se e Ha mm ac k v . P ub lic Ut il. Comm’n , 13 1 S.W. 3d 71 3, 73 0 ( Te x. Ap p. —Aus tin 20 04 , p e t. d e nie d) ; se e als o Tex. Gov’t Code Ann. § 2001.174 (prohibiting court fr om reve rsing ag ency decision unless “the substantial r ights of the appellant have been prejudice d”). I n making their due-pr ocess claims, the Custome rs an d the Utility Counsel fail to specify

what additional evide nce the y would have introduc ed had they been informed that the Commission would be utili zing t he panel’s report when a scer taining the value of Genc o’s stock. See Cit

y o f C o r p u s Christ i v. Public Util. Comm’n of Tex. , 51 S.W .3d 231, 263 (Tex. 2001). Although the Customers and the Utility Counsel complain that they wer e not allowed to c ro ss- e xami ne the pa

ne l me mbe rs , the y c ite to no a uth or ity fo r the pr op os ition th at c ross e xami nin g the pa

ne l me mbe rs wa s app ro pr iate and pr e se nt no ev ide nc e that the y fi le d a re qu e st t o47

cross- ex amine the pa

nel. Fur thermore , the Customers and the Utility Counsel were g iven the op po rt un ity to e lic it te sti mony fr om and c ro ss- e xami ne wi tne sse s that ha d in fo rm a tio n r e le va nt t o the pa ne l’ s d e te rm inatio n, and

the Com mis si on qu esti on e d th e pa ne l me mbe rs re g ard ingthe ir valuation methods.

Additionally , g iven the pane l’s unique role in the true -up proc eeding , it is not clear that the re q u i re ments of a c ontested ca se have any applicability

to the panel’ s determination. Es se nti a lly , th e pa

ne l’ s f un c tio n is to d e te rm ine wh e the r a c on tr ol pr e mium e xists and the n to su pp ly the Commiss ion with that information; its role is not to make decisions reg arding the outcome of the true-up pr ocee ding. See Te x. Ut il. Cod e Ann. § 3 9. 26 2( h) (3 ); see also Tex

. Go v ’t C ode Ann. § 2001.060 (West 2000) (e x plaining that rec ord consists of “data submitted to or considere d by he ari ngof

fi c e r o r m e mbe rs of

a g e nc y ” ). F ur

the rm or e , ev e n if the c on te ste d- c a se re str ic tio ns sh ou ld apply to the panel’ s determinat i o n , the prohibition ag ainst ex parte communications in contested

c a se s a llo ws fo r e x part e c omm un ic a tio ns wh e n, a s h e re , e a c h p art y is g ive n n oti c e and

a llo we d to pa rt ic ipate . T e x. Go v’ t Co de Ann. § 2 00 1. 06 1( a ) ( Wes t 20 00 ). Re g ardless , th e Com mis sio n d id instit ute modified contested-ca se requirements to help ensure the pane l’s independe nce: the pa nel (1) ha d to present a ll of the source s of i nformation it relied on in making its dete rmination, (2) ha d to ke ep a log of all its meetings a nd communications, and (3) was prohibited f rom communicating

e x part e “ wi th t

he Com mis sio ne rs , th e Pol ic y De ve lop me nt D ivi sio n s ta ff a ssi sti ngwi th t

he c a se . . . , [and] any

of the pa rties.” I n light of the prec eding , we must conc lude that the Commissi on’s use of the panel’ s repor t was not proce durally

improper. The Commi ssion was fac ed with the dil emma of determining48

the marke t value of G enco’ s stock when none of the methods listed in the utilit ies co d e co uld be employ ed. In resolving this dil emma, the Commission l og ically used a statutorily

authorized repor

t estimating the actua l value of G enco’ s stock. I t was not er ror f or the Commission t o do so. See Tex as Utils. Elec. Co. v. Public Util. Comm’n , 881 S.W .2d 387, 404 (Tex. App.—Austin 1994),

r ev ’d in part on other grounds , 935 S.W .2d 109 (Tex. 1997) (conc luding that, in rate-making context, if uti lity

fails to pe rsuade Commi ssion that cer tain expenditures wer e prude nt, Comm ission may consider othe r evide nce in r ecor d to make disallowanc e dete rmination).

I n addition to contending that it was improper f or the Commission t o co n s i d er the repor t, the Customers and the Utility Counsel a lso attack the validity of the re port and the me thods employ ed by

the pane l for estimating the value of Ge nco’s stock. In particula r, they argue that the panel’ s repor

t was flaw ed bec ause it wa s based on theor ies rathe r than mar ket transa ctions. We d isa g re e wi th the Cus tom e rs ’ c ri tiq ue of the fa c tua l va lid ity

of the pa ne l’ s r e po rt
. I n the pre vious section, we c oncluded that the Commission did not exceed its authority by deciding to u s e an a lt e r

n a ti v e v a lu a ti o n me th o d f o r d e te r mi n in g ma

r k e t v a lu e . N o w , in lig ht of the Customers’ asser

tions, we revie w the Commissi on’s valuation to deter mine if it wa s supported by substantial evidence

.

The Commission’s market valuation depe nded hea vily on the control-pr emi um panel’ s repor

t. I n deter mining the actua l va lue of Genc o, the panel perf ormed a nd considere d sever al “fina ncial and c omparative analy ses.”

First, it perf

ormed a discounted-c ash-f

low analy sis. This analy sis relied on financ ial projec tions, hist orica l trends, and e lectric ity and natur al g as price s. Ba sed on these f actor s, the pane l

e sti mate d th e dis c ounte d p re se nt- da y va lue of Ge nc o’ s c a shfl owfr om 2 00 4 to 20 08 . S e c on d, it49

pe rf or me d a pr e c e de nt- a sse t- transac tio n a na ly sis . T his ana ly sis re lie d o n p ub lic ly a va ila ble information re g ardingprior tra nsactions involving g ener ation assets. The pa nel used the sa le price of these pr evious transa ctions to e stimate the value of Genc o’s g ener ation assets. Third, it perfor med a public-ma

rket-c ompara

bles ana ly sis. Essentially , the pane l compare d stock-mar k e t d ata f or Ge nco to other “publicly -trade d companies in the non- regulated powe r g ener ation industry .” Finally , the panel c onsidered the offe r to purcha se Ge nco announc ed in J uly 2004. None of the valuation methods utiliz ed by the panel wer e depende nt on the s al e of Genc o stocks in a stock exchang e. For that rea son, the pane l’s evaluation was not aff ecte d by the fac t that less than 19% of Ge nco’s stocks a ctually trade d on a stock e x chang e. I n light of the substanti a l f a c tu a l u n d e r p in n in g of the pa

nel’s re port, we must conc lude that a re asonable basis exis ts for the Commi ssion’s valuation and, accor dingly , that its valuation was supported by

substantial evidence

. The Allegedly U

nreasonable Business Practice s were Irrele vant under the Primary Holding The Customers and the Utility Counsel argue that, in i ts primary holding, the Commi ssion should have made a n additional reduc tion to the Joint Applicants’ rec overy to acc ount for c onduct that was alleg edly commerc ially unrea sonable. The Commi ssion made this reduction to t he Joint Ap pli c ants ’ r e c ov e ry

un de r i ts a lte rn a tiv e ho ldi ngbu t c on c lud e d th a t th e re du c tio n w ou ld have be en i nappropr iate under the primary

holding. In its alternative holding , the Commiss ion

e sti mate d ma

rk e t va lue by

us ingthe pa

rt ia l- sto c k- va lua

t i on me tho d e ve n th ou g h a ll the re qu ir e me nts had not bee n met.

The Commission’s red

u c ti on was ba sed on an option that CenterPoint gave to Reliant Resource s, I nc. (“ Resource s”) to purc hase the share s of Genc o stock that CenterPoint owned. The50

Commi ssion determined that the option wa s not commercia lly rea sonable be cause it impos ed signific ant re strictions on how Ge n co could operate but did not require Resour ces to pa y for the op tio n. F or

thi s re a so n, the Com mis sio n c on c lud e d that by g ivi ngthe op tio n, Ce nte rP oin t f a ile d to f u ll y mi ti g a te it s s tr an d e d c o s ts a s r e qu ir e d by statute. See Tex. Util . Code Ann. § 39.252(d) (r e qu ir ingCom mis sion to con sid e r util ity ’s e ff or ts t o p ur su e c omm e rc ia lly re a so na ble me ans to reduc e its stranded c osts when deter mining amount of r ecove ry ); 16 Tex. Admin. C ode § 25.263(e) (4) ( specify

ing that if Commi ssion de termines that utilit y failed to mitig ate, it may reduc e net book value of

g ener ation assets). The Commission determined that the commer cial v al ue of the option was $3 30 ,3 14 ,0 00 . In o the r w or ds , th e $3 30 ,3 14 ,0 00 re pr e se nts the a mou nt of mon e y

that G e nc o s ho uld have re c e ive d a s c omp e ns atio n fo r the sig nif ic ant re str ic tio ns that it wa s e nc umb e re d wi th a s a re su lt of th e o p ti o n , o r a lt e r

n a ti v e ly , it r e p r e s e n ts th e r e d u c ti o n to th e o v e r a ll v a lu e o f G e n c o due to the

re str ic tio ns . Af

te r makin g thi s d e te rm inatio n, the Com mis sio n r e du c e d th e a mou nt o f s tr and e d c os ts that the J oint Applicants were entitled to rec over by that amount and by

an additional $177,874,089 to acc ount for the tax es t hat would have been paid had the option been pur chase d. The total amount of the re duction was a

pproxi mately

$508 milli on. The district cour t affir med t he Commissi on’s d et erm i n at i o nt o l i m i tt h e ap p l i ca t i o no f t h e r edu ct i o nt o t h e a l t ern at i v e h o l d i n g.

The Customers and the Utility Counsel ag ree that the re duction was a ppropriate but

argue that th e re du c tio n s ho uld have a pp lie d to the Com mis sio n’s pri mary ho ldi nga s w e ll. Essentially , they

argue that re g ardle ss of what val uation method was e mploy ed, the option was

commerc ially

unrea sonable a

nd that the J oint Applicants’ re cover y s hould, theref

ore, be reduc ed irrespe ctive of the valuation method chose n. They further contend that the Commiss ion’s decision51

to limi t the reduc tion to the alternative holdingis arbitrar y and ca pricious, unre as o n ab le, and

c on tr ary to t he dir e c tiv e in s ub se c tio n 3 9. 25 2( d) that th e Com mis sio n c on sid e r a uti lity ’s e ff

or ts t o reduc e its stranded c osts when deter mining the amount of money that the utilit y is e ntitled to recove r. See Te x. Go v’ t Co de Ann. § 2 00 1. 17 4 ( lis tin g g ro un ds fo r re ve rs ing a g e nc y ’s de c isi on ); Te x. Ut il. Code Ann. § 39.252(d)

.

We disag ree . Subsection 39.252(d) is not a tool t h at i s u s ed to punish utili ties for

c o mm e r c ia ll y u n r e a s o n a

b le c o n d u c t. E v e n if th e p r o v is io n a ll o w s th e Co mm is s io nto alter the

a m o u n tt h a ta

u t i l i t y i s e n t i t l e d

t o r e c o v e r

i f t h e u t i l i t y f

a i l s t o “ p u r s u e c o m m e r c i a l l y r e a s o n a b l e w ays to reduc e its potential stranded costs,” Tex. Util. Code Ann. § 39.252(d), there is no indica tion from the w o r d s u s e d i n t h a t s e c t i o n o r i n an y p r o v i s i o n o f t h e u t i l i t i e s c o d e t h a t t h i s p o w e r is punitive in nature.

On the contra

ry , g iven the leg islative direc tive compelling an acc urate assessment of stranded c osts, it s eems log ical to assume that a ny power that the Commiss ion may have to alter the amount of re cover

y is lim ited to ensuring th at t h e amount of stranded c osts that a utilit y rec overs

corr esponds to the ac tual costs that the utility incurre d as a r esult of der egu l at ion and was not int e nd e d to be us e d f

or punis hin g uti lit ie s for c omm e rc ia lly unre a so na ble be havio r. I n othe r w or ds , if the commer cially

unrea sonable be havior benefits the ut ility financ ially and lessens the impact of the strande d costs, then t h e amount that the utility is entitled to recove r should be modified. Howeve r, if the c ommercia lly unreas o n ab l e behavior has no f inancial impac t or if the fina ncial impact is either irr eleva

nt to or accounted for

in the valuation method chose n, then adjusting the amount of re cover

y would be contr ary

to the leg islative directive. I n its primary

holding, the Commission considered se vera l f actor s when de termining52

the marke t va lue of Genc o’s stock. First, althoug h the Commiss ion corre ctly conclude d the sale- ofassets m ethod could not be used to estimate Ge nco’s mar ket value, the Commi ssion did consider the

a mou nt o ff e re d to purc ha se Ge nc o w he n att e mpt ing to as c e rt a in the mark e t val ue of Ge nc o’ s a sse ts. The off er c ame se vera l months after the option expired and after the restric tions place d upon Genc o by the option had ende d. As a re sult, any det ri m ental ef

fec t on Genco’ s value re sulting fr om the option should have dissipated. Ther efor e, the offe r’s usefulness as an estimate of Genc o’s marke t value wa s arguably

unaff ecte d by the option. Ho we ve r, e ve n if

the po te nti a lly

ne g a tiv e e ff

e c ts o f t he op ti on ha d n ot f

ull y dissipated, the Commiss ion did not rely solely on the proposed sale price when deter mining Ge nco’s marke t value. Whil e performing its estimate, t he C ommissi on also considere d the valuation re port prepa red by t h e control-pr emium panel. To e stablish Genco’ s true value , the pane l perfor med

se ve ra l ana ly se s uti lizin g the fo llo wi ng fa c tor s: the mark e t va lue of oth e r pu bli c ly tr a de d c omp anie s, the price of ele ctricity , historical trends, f orec asted mar

ket conditions, and the amount obtained by the prior sa le of g ener ation assets. None of these a naly ses wer e af

fec ted by the option. Furthe r, the actua l va lue ultimately chosen by the Commi ssion wa s the midpoint of the values c alculate d by the

va luatio n p ane l.

After concluding that the various marke t va luations that it relied o n i n i t s primary holding we re una ffe cted by the option, the Commi ssion de termined that it “did not need to examine the [J oint Applicants’] busin es s prac tices” r eg ardingthe option and that no adjustment for

commerc ially

unrea sonably

behavior

n ee d ed to be made. I n light of the prec eding , the Commi ssion’s decision to limi t the adjustment to its alternative holding was re asonable and did not violate subsection 39.252(d)

.53 F or a ll the re a so ns pre vio us ly g ive n, we c on c lud e that th e dis tr ic t c ourt pr op e rl y aff irmed the Commission’s use of an alter native valuation method and its decision to limit the d edu ct i o nfo r t h e o p t i o nt o i t s al t ern at i v e h o l d i n g.

Al te r nat e Hol ding

Havingconclude d

th a t t h e Co mm is s io n

p ossessed the a

uthority to perfor m the marke t valuation it made under its primary holding, we need not addre ss the par ties’ ar g uments reg arding the pr op ri e ty

of the Com mis sio n’ s a lte rn a tiv e ho ldi ng , the pr op ri e ty of the re du c tio n to str and e d- c os t

rec overy due to t he opti on g iven t o Resource s, or whether the reduc tion should have bee n “g rossedup ” to a c c ount f

or fe de ra l taxes. Excess Mitigat ion Credits

Th e Cus tom e rs and the Ut ili ty Couns e l a lso c ha lle ng e the Com mis sio n’ s de c isi on to allow the Joi nt Applicants to rec over, a s stranded c osts, $470 milli on for cre dits that CenterPoint had been or dere d to give to Reliant and other reta il elec tric providers. This decision wa s aff irmed by the dis tr ic t c ourt . In a

se pa rate iss ue, the Com mis sio n d isa g re e s w iththe dis tr ic t c ourt ’s de c isi on to allow the Joi nt Applicants to rec over $180 million for i ntere st on the cr edits that CenterPoint ga ve to R e lia nt. B e fo re a dd

re ssi ngthe me ri ts of

the se c la ims , w e wi ll r e vie w h owthe se c re dit s c a me to be aw arde d. Al tho ug h th e pr ov isi on s o f t he uti lit ie s cod e g ov e rn ing the re c ov e ry of str and e d c os ts took effe ct in 1999, competition did not a ctually beg in until 2002. Tex. Util. Code Ann. § 39.102. During t he interim per iod, the Commi ssion took st eps to prepa re f or the star

t of competition, including f

ree zing re tail rates. See, e .g. , id. § 39.052 (fr eezing reta il rates).54 I n addition, to help smooth the t ransition to a competitive marke t, the Commiss ion prepa red a repor t—the 1998 ECOM Report—estimating the potential stranded co s t s t h at nine utilit ies would have a

t the start of re tail competition in 2002. Citi es o f Co rp us Chr ist i , 188 S.W .3d at 686. I f the 1998 ECOM Report projec ted that a utilit y would have stra nded costs, the utility

was require d to eng ag e in steps to mitigate its pre dicted strande d costs. Tex. Util

. Code Ann. § 39.254; CenterPoint Energy, I

nc. , 143 S.W .3d at 88. To fac ilitate mitig ation, the utilit ies code pr ovided “a number of tools to an e lectric utilit y to miti g ate stra

nded costs.” T ex. U t i l

. C ode Ann. § 39.254. These tools allowed a utilit y “to reduce .

. . its stranded costs eac h y ear ” by reduc ing the net book value of g ener ation assets. Id. Duringthe i n t erim per iod, utili ties were require d to file annua l reports with the Commi ssion detailing a

ny ear nings the y

had th at wer e in excess of their c osts. See id. § 39.257 (re quiring utilit y

to file repor

t identify ing “ any

positive differ ence betwee n annual revenue s . . . and

a nn ua l c o s t s ” )

. T h e s e r e p o rt s w e r e u s e d t o d e t e r m i n e w h e t h e r t h e u t i l i t i e s w e r e o b t a i n i n g e xce ss

ea rn i n gs as a re s ult of the frozen utility rate s. CenterPoint Energy, I nc. , 143 S.W .3d at 88. I f a utilit y ’s annua l report indicated t hat t he uti lity had posi tive ear nings for t he y ear , then the utility was compelled to ap p l y t h e amount of the excess ear nings to re duce “ the net book value ” of the potentially

stranded a ssets. Tex. Util . Code Ann. § 39.254. After competition beg an, the Commi ssion wa s require d to perfor m another ECOM analy sis for the utilities sometime befor e the true- up proce eding s in 2004. See id. § 3 9. 20 1( h) . T his analy sis used updated c ompany -spec ific information to es t i mate ea ch utility ’s pre dicted strande d costs. Id. I f, afte r perf

orming the calc ulation, the Commi ssion predicted that a utility would have str and e d c os ts, the n th e Com mis sio n w a s a uth or ize d to fa c ili tate re c ov e ry fo r t he st rand e d c os ts. Citi es o f Co rp us Chr ist i , 1 88 S.W. 3d a t 68 6- 87 ; see Tex. Util . Code Ann. § 39.201(b) (3).The diff ere nce be tween the 1998 estima t e an d the 2001 estimate wa s the result of a n 27 unfore seen inc rea se in the price of natura l ga s. Citi es o f Co rp us Chr ist i , 188 S.W .3d at 688 n.5. I n Citi es o

f Cor pu s Ch ris ti , this Court concluded that the Commission di d not have the 28 au t h o ri t y t o o rd er

a r ef u n d f o r o v er -m i t i gat i o nb ef

o re t h e 2 0 0 4 t ru e- u

p p ro ce ed i n g. 188 S.W .3d at 693. Stated differ ently , this Court conclude d that the C ommissi on could not order utilit ies to awa

rd excess mitigation credits. Howe ver, the holding in that ca s e does not aff ect the outcome of this appe al bec ause the J oint Applicants were not parties to that ca se and because the issues raised in this appea l do not address the pr opriety of the Commiss ion’s order requiringutilit ies to g ive the c re dit s. I n th is c a se , w e mus t si mpl y de te rm ine wh e the r t

he Joint Ap pli c ants shou ld rec over f or the c redits g iven. 55 When the Commi ssion perfor med the sec ond ECOM analy sis, it predicted that the J oint Applicants would not have a ny stranded c osts. Essentially , the ca lculation predic ted t hat the expected mar

ket value of t he gene ration assets would exceed the net book value of the assets. As

a re su lt, the Com mis sio n c on c lud e d th at mit ig a tio n e ff or ts e ng a g e d in

by Ce nte rP oin t—n a me ly

a pp lyinge xce ss e arn ing s to re du c e the ne t bo ok va lue of the a sse ts—were ex cessive and wo uld ult imate ly

re su lt i n a

n o ve rr e c ov e ry

of str and e d c os ts. Co n s e qu e n tl y , th e Co mm is s ion ordere d 27 CenterPoint to refund the e x cess e arning s. Se e Citi es of Corpu s Chris ti , 188 S.W .3d at 688. The ref und was a war ded as c redits, ca lled excess mitigation cr edits, see id. at 689, that wer e to be g iven 28 out over a seven- y ear

period. Rather than allowing the cre dits to be g iven to end-use customers, the Commi ssion concluded t

h a t C e nterPoint should give the c redits to reta il electric providers, inc luding CenterPoint’s co-a

pplicant Reliant, to reduc e the c ost of purcha sing tra nsmissi on service s. I n a dd ition , th e Com mis sio n o rd e re d Ce nte rP oin t to c re dit to t he re ta il e le c tr ic providers 7.5% in interest for the a mount of excess ear

nings r etained by

CenterPoint that had not y et be e n tr ans fe rr e d a s c re dit s. As a re su lt, the or de re d c re dit s we re ba sic a lly c omp os e d of tw o p art s: (1) a n amortized portion of t h e ex cess e arning s retaine d by CenterPoint, and (2) inter est on the balanc e of the excess ear

nings that had not y et bee n ref unded.56 Fur thermore , the Commiss ion concluded that the reta il electric providers c ould not p as s t h ro ug h the value of the cr edits to their price -to-beat customers bec ause pa ssing throug h the be nefit of the c re dit s w ou ld v iol a te the pr ov isi on of the uti lit ie s c od e pr oh ibi tin g re ta il e le c tr ic providers f

rom cha rg ing r ates that we re diff

ere nt than the price to beat. See Tex. Util. Code Ann. § 39.202(e) (providing that reta il electric providers c an not cha rg e diffe rent rate s until one or more events oc cur)

. Duringthe 2 0 0 4 t rue-up proce eding , it was discover ed that the se cond ECOM

e sti ma te was i naccu rat e andth at t he J oi nt App li cant s h ad actual ly in curr ed s igni fi cant st rand ed co sts
. As a re sult, the Commission orde red the utilit ies to c ease cre diting to the re tail electr ic provider s the value of the ex cess mit igation and the c orre sponding inter est on the re tained ea rning s. Be cause the C o m m i s s i o nd i s co n t i nu edt h e c re d i t s p ri o r t o t h e s ev en -y ea r d ea d l i n e, n o t al l o f t h e e x ce s s ea rn i n gs had bee n cre dited to retail ele ctric pr oviders.

I n its order, the Commi ssion c oncluded that the amount of excess ear nings that had not been c redited to re tail e lectric providers should be use d to miti g ate the Joint Appli cants’ stra nded

c os ts. As fo r the c re dit s a lr e a dy g ive n, the Com mis sio n c on c lud e d that the Joint Ap pli c ants c ou ld

rec over the value of

the principa l amount of the cr edits g iven to reta il e lectric providers, inc luding the co- appli cant Reliant, re g ardle ss of whethe r the va lue of the c redit had ultimately been pa ssed thr ou g h to Re lia

nt’ s c us tom e rs . I n othe r w or ds , e ve n th ou g h th e Com mis sio n h a d p re vio us ly prohibited Reliant from passingthe bene fit of the c re d i t s o n t o its price-to-be at customers, the Commi ssion determined that the J oint Applicants should rec over the value of the cr edits that were not passed throug h to pr ice- to-beat c ustomers as we ll as the value pa ssed throug h to non-price -tobeat c ustomers.

Although the Commi ssion allowed the Joi nt Applicants to re cover the principa l57

amount of the c redits, it de nied re cover y for the inter est portion of the c redits that the Commissi on had orde red Cente rPoint to awa rd in order

to acc ount for the va lue of the e x cess e arning s that had not y et bee n cre dited to r etail elec tric providers. Howeve r, the Commi ssion did authorize a diff ere nt kin d o f i nte re st r e c ov e ry . T he Com mis sio n a llo we d th e Joint Ap pli c ants to r e c ov e r 1 1. 07 5% in int e re st o n th e pr inc ipa l c omp on e nt o f t he e xce ss m iti g a tio n c re dit s a c tua lly cred it ed to th e re ta il elec tric providers. The rec overy was retroa ctive, meaning that the J oint Applica nts w er e a l l o wed to rec over inter est fro m t h e t i m e that ea ch cr edit issued. Stated another way , the Commiss ion allowed the J oint Applica nts to rec over interest on the principal component of the cre dits that had actua lly been g iven to re t ai l elec tric provider s from the time that the c redits wer e g iven but d i s all owed r ecove ry

for the por

tions of the mitigation cr edits previously g iven that re prese nted int e re st o n th e a mou

nt o f t he e xce ss e arn ing s r e ta ine d b y Ce nte rP oin t. Th e dis tr ic t c ourt

up he ld t he Com mis sio n’ s det e rm inatio n that th e Joint Ap pli c ants sh ou ld r e c ov e r t

he pr incipa l c omp on e nt o f t he e xce ss m iti g a tio n c re dit s g ive n a nd 11 .0 75 % i n interest on the principal component of the cre dits a ctually g iven from the time t h ey we re gi ven. Ho we ve r, the dis tr ic t c ourt re ve rs e d the Com mis sio n’ s de c isi on that pr oh ibi te d th e Joint Ap pli c ants fr o m re co v er i n g t h e c o mp o n e n to f t h e c re d i t s gi v en re p re s en t i n g i n t er es to nt h e e x ce s s ea rn i n gs not refunde d.

Ex c ess M iti ga tio n Cr e dit

s fo r P ric e -to-Be at C

us tom e rs On a pp e a l, t he re a pp e ars to b e no dis pu te that the Joint Ap pli c ants we re e nti tle d to

re c ov e r a s st

ra nd e d c os ts the c re dit s g ive n to re ta il e le c tr ic pr ov ide rs other th an Re lian t. Wh a t is dis pu te d is wh e the r t

he Joint Ap pli c ants sh ou ld b e a llo we d to re c ov e r f or c re dit s g ive n to Re lia

nt.58

More spe cifica lly , the dispute on appe al concerns whether the J oint Applicants should be allowed to rec over f

or the portion of the cre dits g iven t o Reliant that the C ommissi on prohibited Reliant from passing throug h to its price-to-be at customers.

Th e Com mis sio n a

nd the Joint Ap pli c ants argue that th e Com mis sio n’ s d e c isi on to allow the Joi nt Applicants to rec over f or the e x cess mit iga

tion cre dits given to Reliant wa s proper . F ir st, the y

a sse rt that th e iss ua

nc e of the c re dit s led to a n in c re a se in s tr and e d c os ts

and that de nyingre c ov e ry

fo r t he se c os ts w ou ld r e su lt i n a n un der- rec ov e ry

of str and e d c os ts i n violation of the utilit ies code

. See Tex. Util

. Code Ann. § 39.252(a) (spec ifying that utilit y is entitled to rec over “ all of its ne t, ve rifiable, nonmitigable stranded costs”). As support for this a ssertion, they note t hat due to the i nacc urate ECOM calc ulation, the C ommissi on order ed C enterPoint t o cre dit the

v al u e o f th e ex ce s s ea rn i n gs t o R el i an t ra t h er t h an al l o wi n g C en t er P o i n tt o u s e t h e e x ce s s ea rn i n gs to reduc e the ne t book value of g ener ation assets

. Be cause of this, the J oint Applicants and the Com mis sio n a

rgue that th e a mou

nt o f str and e d c os ts i nc re a se d a nd that th e Joint

Ap pli c ants sh ou ld be able to rec over f

or those costs. Second, they

contend that r ecove ry

should not be denied even thoug h Reliant was Ce nte rP oin t’ s c o- a

pp lic ant f or str and e d- c os t r e c ov e ry . E sse nti a lly , th ey argue that any be ne fi t bestowed upon Reliant should not preve nt CenterP o i n t fr o m rec overingbeca use CenterPoint and Re lia nt a re dis tin c t c or

po rate e nti tie s. I n ot her words , th e be ne fi t g ive n to Re lia nt d id n ot b e ne fi t CenterPoint; to the contrary , the J oint Applicants and the Commi ssion a ssert that the be nefit g iven to Reliant was to the detriment of Ce nterPoint.

Third, the Joi nt Applicants and the Commi ssion contend that re cover y should not beT h e Jo in t A p p li c an ts a ls o a s s e rt t

h a t r e c o v e r

y s h o u ld n o t b e d e n ie d

o nth e g r o u n d s that 29 Reliant retaine d the benef it of the cre dits without passing the benef it on to pr ice- to-beat customers beca use, startingin 2002, the customers we re f ree to switch to a reta il provi d er n o t bound by the price -t o -b ea t re strictions and there by obtain the bene fit of the cr edits. Howeve r, eve n if the c us tom e rs mig ht h a ve be e n a ble to o bta in t

he be ne fi t of

a pa rt ia l r e fu nd by sw itc hin g pr ov ide rs , th is does not neg ate the f

act that Reliant re tained the va lue of the por tion of the cr edits attributable to the the n- e xistin g pr ic e -t o- be a t c us tom e rs . Al tho ug h ac kn ow le dg ing that Reli ant wa s pro hib ite d fr om pa ssi ng the va lue of the c re dit s 30 on to price- to-beat customers, t he J oint Applicants assert that there is some evidence that the price

to-beat customers ac tually benef itted from the excess mi tigation cre dits. Specifica lly , they contend that th e e xiste nc e of the c re dit s re du c e d the pr ic e to be a t that the c us tom e rs we re c ha rg e d. Th e on ly evidenc e off

ere d to support this contention is the testimony of a vic e pre sident for Reliant stating that part of the rea son that Reliant did not appeal the Commission’s determination of the p ri ce to be at wa s b e c a us e Re lia nt k ne w that it

wo uld be re c e ivi ngthe e xce ss m iti g a tio n c re dit s. B e c a us e of thi s, the J oint Applicants assert that pr ice- to-beat customers indirec tly rec eived th e b en ef

i t of a lowe r price to beat. Ot h er t h an these blanket asse rtions, the J oint Applicants point to no evidence suppor ting these c laims or demonstrating that the customers a ctually rec eived a

benef it due to the cre dits or that Reliant’s decision not to appea l the price -to-beat de termination was in f act based on the exist ence of the c re dit s. I n lig ht of the Com mis sio n’ s dir e c tiv e that Re lia nt n ot p a ss t

he va lue of

the c re dit s on to price- to-beat customers, such g ener al asser tions, without more, are insufficient to support the proposition that the price- to-beat customers bene fitted from the c redits or just ify the conc lusion that the Joint Ap pli c ants be a llo we d to re c ov e r f or the va lue of

the c re dit s g ive n a

nd re ta ine d b y

Re lia nt. Se e Pa rk Ha v e n v . Te

x as De p' t of Hu ma n S

e rv s. , 80 S.W .3d 211, 215 (Tex. App.—Austin 2002, no pet.) (notingthat g ener al desc ription of usual proce ss doe s not c onstitut e substantial e vidence of what occ urre d in particular case ). F urther, it is worth noting that betwee n 2002 and 2003, the J oint A p p l i c an t s p e t i t i o n e d t h e C o m m i s s i o n t o i n c r e a s e t h e p r i c e t o b e a t t h a t t h e y w e r e a u t ho ri zed to char g e four

times and that the Commissi on ag ree d to eac h incre ase. 59 de nie d e ve n th ou g h Re lia nt did no t pa ss t

he be ne fi t of

the c re dit on to i ts p ri c e -t o- be a t c us tom e rs . 29 I n essenc e, they

argue that by

reta ining the va lue of the c redits, Reliant was only doing what it was order ed to do by

the Commiss ion and that the Joi nt Applicants should not be punished for c omply ing wi th t he Com mis sio n’ s o rd e rs . 30 Alternatively , the J oint Applicants insist that if CenterPoint is unable to rec over the value of the cr edits it gave to Reliant during the t rue- up rec onciliation, it will be unable to rec over60

for this imposed cost in any other manne r. I n es s en ce, the J oint Applicants argue that ther e is no statutory provision that a llows a

utilit y to transfe r the va lue of c redits that it was aw arde d to one of its affiliates under the circ umstances prese nt in this c ase a nd there fore insist t hat there is no way for CenterPoint to recla im the value of the cre dits from Reliant. I n support of t his argument, they argue that the only

provision of the utiliti es code authorizing the tra nsfer of cred i t s b et ween aff

iliated utilit ies is ina

pplicable to this circ umstance. See id. § 39.262(e) (re quiring reta il electric provider to cre dit its aff

iliated transmission-and-distribution utilit y “any positive differe nce” betwee n price to beat and a ctual mar

ket price ). More over, the J oint Applicants insist t h at Reliant has alr eady

cre dited the maxim u m am o u n t possible under this provision and, there fore , satisfied its statutory obligation. See id.

We d isa g re e wi th t he ass ert ion s o f t he Com mis sio n a

nd the Joint

Ap pli c ants
. Assuming without dec iding that Reliant a nd CenterPoi nt a

r e c o mp le te ly

s e p a rate entities, the utilit ies

c od e tr e a ts f

or me rl y bund le d u til iti e s a s r e late d e nti tie s f or the purpo se of

str and e d- c os t

rec onciliation. For e x ample, the util ities code re quires for merly bundled utiliti es to apply toge ther for the rec overy of strande d costs. See id. § 3 9. 26 2( c ). Th is j oin t tr e a tme nt i s mo st p ro no un c e d in

su bs e c tio n 3 9. 26 2( a ), wh ic h p ro vid e s, in r e le va nt p art , a s f

oll ow s:
An elec tric utility , together with its af

filiated reta il e lectric provider and its affiliated transmission and distribution ut ility , may not be per

mitted to overrec over stra nded costs . . . .

Id. § 39.262(a) (empha sis added).

The plain languag e of this sec tion demonstrates t h at all three aff iliated utilit ies are to b e c on sid e re d a s a

sin g le un it f

or the purp os e of

de te rm ini ngstr and e d- c os t r e c overy . Th is conclusion is even mor e appa rent whe n the statute is rea d in light of the utilities code’ s o t h erTh e l e n g t h y u nb u n d l i n g p r o c e s s i s e v i d e n c e d b y t h e f a c tt h a tR e l i an th a d

n o tfu lly 31 separ ated f

rom its parent, unbundled c ompany until 2002. This conce rn wa s expressed in a dissenting opinion to the Com m ission’s order. The 32 dis se nt p ro vid e d, in r e le va nt p art , a s f

oll ow s: To bo th pe rm it Rel iant to re ta in t he se [exc e ss m iti g a tio n c re dit s] and Ce nte rP oin t to rec over the same amount in st rande d costs is clear ly a duplicative r ecove ry

. . . .

. . . [T] he Commissi on is requiringthe elec tric customers in the C enterPoint area to pa y tw ic e fo r t

hat po rt ion

of Ce nte rP oin t’ s st

ra nd e d c os ts. I f t

he re c ov e ry

of tho se c os ts is c o n ti nu e d , Ce n te r Po in t, in e f f e c t, c o ll e c ts mo n e y f

r o m it s c u s to me r s , g ives that mon e y to R e lia nt, and the n c oll e c ts o nc e a g a in f ro m it s c us tom e rs . 61 pro v isions emphasiz ing the need f or ca lculating acc urate marke t valuations, miti g ating stranded

co s t s , and pre venting overr ecove ry . The re ason for the joint treatment is likely the re sult of the le g isl a tur e ’s re c og nit ion

that tr ue un bund lin g int o sep arate , d ist inc t e nti tie s w ou ld t a ke so me tim e

and that th e re wo uld

un do ub te dly

be re so ur c e re a llo c a tio n a mon g the thr e e uti lit ie s f or so me tim e af t er t h e i n i t i al u nb u n d l i n g. Th e le g isl a tur e no do ub t e nv isi on e d th e po ssi bil ity that on e uti lity 31 might see k to rec over a s a cost a be nefit g iven to its affiliate.

I n deter mining whe ther the Joint Appli cants should re cover for the cre dits, we ne ed

no t a dd re ss t he pr op ri e ty

of the Com missi on ’s ord e rs : w e ne e d o nly take no tic e of

the ir e ff e c t. CenterPoint obtained excess ea rning s from its customers, but t he Commissi on order ed CenterPoint to transfe r that monetar

y benef it to R eliant, its co-appl icant, and c ompelled Reliant to retain that benef it. Bec ause Reliant r etained the benef it and beca

use joint true-up a

pplicants are prohibited from over rec overingas a sing le unit, it would be improper to a llow Ce nterPoint to recove r fr om enduse customer s the amount g iven to and re tained by Reliant. A contrary conclusion would amount to the ty pe of ove rre cover

y soug ht to be preve nted by the ut iliti es code’s t reatment of t he af filiated

u t i l i t i e s a s o n e u n i tf

o r s t r an d e d

- c o s tr e c o v e r

y. 3262 F or a ll the re a so ns pr e vio us ly g ive n, we c on c lud e that the Com mis sio n’ s dec isi on to

a llo w the Joint Ap pli c ants to re c ov e r as str and e d c os ts the a mou nt o f t he e xce ss m iti g a tio n c re dit s g iven to Reliant and not passed on to pric e-to-be at customers violate d subsection 39.262(a) of the utilit ies code . Acc ording ly , we r ever se the portion of the judgme nt of the district court a ffirmingthat portion of the Commi ssion’s or der and rema nd for further

proce eding s consistent with this opi nion.

In te re st On appe al, t he C ommissi on argues t hat t he dis trict court erre d when it held that the J oint Applicants were entitled to rec over the 7.5% intere st on the ex cess e arning s that was cr edited to the reta il elec tric providers. Duringthe time that the cr edits were order ed to be made , CenterPoint

cre dited approximately

$650 milli on to various re tail providers. Of the $650 mill i o n , about $470 milli on was for

excess mitigation, whil e the rema ining $180 milli on cre dited was for interest on the

excess ear

nings that CenterPoint had not y et re funded throug h the cr edits. Essentially , the Commiss ion contends that the Joint Applicants should not rec over for the inter est portions of t h e cr edits beca use the intere st portions were not stra nded costs as that term i s defined. See Tex. Util. Code Ann. § 39.251(7) (def inition of stranded costs). It argues that the intere st credits did not reduc e the ne t book va lue of any g ener ation assets or c onstitut e a r eturn of excess ea

rning s. On the contra

ry , it insists that the 7.5% interest rate was imposed to e nsure that

c u s t o m e r s r e c e i v e d

t h e t i m e v a l u e o f

t h e e x c e s s e ar

n i n g s r e t a i n e d

b y C e n t e r P o i n t
. S t a t e d

d i f f e r e n t l y, the Commiss ion asserts that the inter est was imposed to prevent CenterPoint from re ceivingthe benef it of retainingthe value of the excess ea

rning s that it was not otherwise a uthorized to keep. We disag ree . The Commission’s assertions ignor e the fac t that, althoug h predic ted otherwise, the J oint Applicants did have sig nificant stra nded costs and, a ccor dingly , would not haveThe Commission arg ues that the c ases holding that a par ty must return money

it collected 33 under an order that was later reverse d are inapplicable to the c ircumstance s of this case due to the 63 o v e r r e c o v e r e d h a d t h e e x c e s s e ar

n i n g s b e e n u s e d t o r e d

u c e t h e v a l u e o f

t h e i r g e n e r a t i o na s s e t s . If the ECOM model had a ccur ately predic ted that the Joi nt Applicants wer e g oing to have unr ecove red str and e d c os ts b y

the tim e of

the tr ue -u p p ro c e e din g , Center Poi nt w ou ld h a ve us e d th e e xce ss

ear nings to re duce the net book value of g ener at i o n as s et s to miti g ate its strande d costs. See Tex. Util . Code Ann. § 39.254. B eca use the Joint Applicants did in fa ct h av e s t randed costs and sh ou ld have be e n a llo we d to us e the e xce ss e arn ing s to mit ig a te the ir str and e d c os ts, th e utility customers we re not e ntitled to the tim e value of the e x cess e arning s.

Due to the Commission’s order, the Joint Appli cants we re not a l l o we d to use the

e xce ss e arn ing s to mit ig a te the ir a c tua l st ra nd e d c os ts unti l a ft e r t

he tr ue -u p p ro c e e din g . B e c a

us e this mi tigation was delay ed, the Joint Applicants we re de nied the ac tual mitigation potential of the

ex ce s s ea rn i n gs . I n o t h er

wo rd s , t h e J o i n tAp p l i ca n t s we re p ro h i b i t edfr o m u s i n g t h e e x ce s s ea rn i n gs to reduc e the ne t book value and w ere , acc ording ly , denied the time va lue of an e arlier mitigation. See id. To have the same e ff e c t a s a pr ior mit ig a tio n, the Joint

Ap pli c ants must be a llo we d to

rec over f or the intere st credited on the reta ined ea rning s. Al low ingre c ov e ry

fo r t he int e re st c re dit e d w ill pla c e the Joint Ap pli c ants in the same po sit ion that th e y wo uld oth e rw ise have be e n in

had th e ECO M p re dic tio n n ot b e e n in c or re c t. Cf. Drake v. T

rinity Universal Ins. Co. , 600 S.W .2d 768, 771 (Tex. 1980) (holding that when or der

re qu ir ingpa

y me nt w a s r e ve rs e d, e state wa s e nti tle d to re c ov e r m on e y pa id) ; Currie v. Drake , 550 S.W .2d 736, 739 (Tex. Civ. App.—Dallas 1977, writ ref ’d n.r.e .) (holding that party obtaining benef it through judg ment that is later re verse d must return bene fit to other par ty). To ho ld 33fac t that the Commi ssion’s order r equiring CenterPoint to make ex cess mit iga tion credits was ne ver re v e r s e d

. H o w e v e r , w h il e th e a c tu a l o r d e r w a s n o t r e v e r s e d b y a c o u rt, th e Co mm is sion ordere d CenterPoint t o d i scontinue makingthe cr edits. Whi le not a tec hnical re versa l, the eff ect of the Commi ssion ’s s u b s eq uent orde r is sufficie ntly simil ar e noug h to a re versa l by a cour t to make ref ere nce to the c ases a

ppropriate

. 64 oth e rw ise wo uld un re a so na bly de ny the Joint Ap pli c ants the fu ll r e c ov e ry fo r c re dit s th a t th e y

sh ou ld not have had t o g ive. Cf. CenterPoint Energy, Inc

. , 143 S.W .3d at 92-93 (stating that r ecove ry for actua l costs cannot be de nied due to inac curate ECOM predic tion).

For all the re asons pre viously g iven, we co n cl u d e that the J oint Applicants were entitled to rec over a s stranded costs the amount cre dited to r etail elec tric providers as interest on the

excess ear

nings r etained by

CenterPoint, except that, for the r easons g iven in the pre vious section, the J oint Applicants are not entitled to recove r for the intere st c redited to Reliant that wa s not passed

on to its price -to-beat customers. There fore , we affirm the portion of t he dis trict court’ s judgme nt to t he e xten t th a t it

a llo we d th e Joint

Ap pli c ants to r e c ov e r t

he a mou nt t hat th e y c re dited to re ta il

e le c tr ic pr ov ide rs oth e r t

ha n Re lia nt a s int e re st on the va lue of the e xce ss e arn ing s n ot ye t g ive n to the re tail electr ic providers but r ever se that portion of the judgme nt to the extent that it allowed the J oint Applicants to rec over the interest credited to Reliant. Acc ording ly , we remand this issue for proce eding s consistent with this opi nion.

Investm ent Tax Cre dits and Excess Ac cum ulated Deferre d In com e Tax

During the true- up proce eding, t h e C o m m i s s i o nd edu ct edapproximately $146 milli on from the Joint Applicants’ stra nded-c ost rec o v er y t o ref lect the pr esent-da

y value of various tax b en ef i t s gi v en to t he Joi nt Applicants. The district cour t affir med this deduction. The Joint Applicants conte nd that the ded u ct i on was e rrone ous for two re asons. Fir st, they asser t that theMuch o f t h e d escription of these two ty pes of be nefits comes f

rom undisputed expert 34 testimony prese nted to the Commiss ion. 65 Com mis sio n a

bu se d it s disc re tio n by makin g the de du c tio ns be c a us e the de du c tio ns vio late d c e rt a in require ments of the Interna l Revenue Ser vice. Sec ond, they argue that even if the re ductions were proper , this Court shoul d still find that the Commiss ion abused its discretion by failing to provide

a re medy for the Joint Applicants i n the eve nt that the I nterna l Revenue Ser vice late r conc ludes that there was a

tax vi olation. For rea sons unrelate d to dere g ulation, Congre ss had pre viously g iven var ious companies, inc luding the Joint Appli cants, two ty pes of tax benef

its: t ax credits and de fe rred taxation. T h e r e le v an t tax c r e d it s ar e c a ll e d inv e s tm e n t tax c r e d it s . S ee g en eral ly 68 Fe d. 34 Reg . 10190 (Mar ch 4, 2003) ( descr ibing e ffe cts of der egulation on i nvestment tax credits). Fr om 1962 to 1986, Congre ss ga ve these cre dits to various util ities to encoura g e them to invest in new equipment, i n cluding g ener ation assets. Unlike a deduction that off

sets taxable income, the inv e s t m e n t t a x c r e d i t o f f s e t s a u t i l i t y ’ s t a x l i a

b i l i t y . U n d e r r e g u l a t i o n , a l t h o u g h t h e uti lit y experience d the bene fit of the cr edits ear ly on, it was requir ed to pass the be nefit on to its customers over the book life of the a sset—a proc ess re fer red to a s normalization. Th e de fe rr e d taxes r e le va nt i n th is i ssu e are cal le d e xce ss d e fe rr e d in c ome ta xes. Def err ed taxation resulted from Cong ress’s decision to allow ut iliti es t o acc eler ate the depre ciation of var ious assets and, as a result, pay signific antly reduc ed income ta x es. See Public Util. Comm’n v. GTE-Southwest, Inc

. , 833 S.W .2d 153, 166 (Tex. App.—Austin 1992), rev’d on other grounds , 901 S.W .2d 401 (Tex. 1995).

Although the taxable value of the assets wa s quickly d e prec iated, the r egulatory value66

of the assets depre ciated usinga straig ht-line method. Id. Ex plained anothe r wa y , for r ate- making purposes, the value of

the assets wa s reduc ed by the same a

mount each year . The amount of tax es

c ha rg e d to the c us tom e rs wa s ba se d on the re g ulator y va lue . A s a

re su lt, the a mou

nt o f t a xes p a id by the customers dur ing the first portion of an a sset’s expected life was more than the amount of income taxes actua lly

paid by the utility

. C i t

y o f S o me r vi lle v. Public Util. Comm’n , 865 S.W .2d 5 5 7, 564 (Tex. App.—Austin 1993), overruled by P u b l i c U t i l

. C o m m ’ n v . G T

E

- S ou thw e st , 901 S.W .2d 401 (Tex. 1995). The r esulting diff ere n ce betwee n the tax assessed and the a mount collecte d from customer s for taxes was de posited into an acc ount. GTE-Southwest, Inc. , 833 S.W .2d at 166. Duringthe later

parts of an asset’s expected life, the amount of taxes pa id by the utility was more than the amount collecte d from the c ustomers. City of S om e rv ill e , 865 S.W .2d at 564. During this period, the balanc e of the taxes owe d that wer e in e x cess of those collecte d from customer s were paid out of the a ccount pr eviously mentioned. The e x cess de fer

red inc ome taxes at issue in this case r esulted fr om the reduc tion of the corporate income-tax rate
. See ge nerally 68 Fe d. Reg . 10190 (desc ribing eff ects of de regulation

on de fe rr e d in c ome ta xes) . B e fo re the re du c tio n, the uti lit ie s w e re c oll e c tin g deferred ta xes at a highe r tax rate. Howe ver, be cause the tax rate wa s lowere d, the utilit y would never have to pa y the full amount of the def

err ed taxes collecte d. The ba lance of the de fer red ta x es ac crue d at the hig her rate over the amount acc rued at the lower r ate c onstitut ed the e x cess de fer red inc ome taxes. Utili ties passed throug h the bene fits of the excess def err ed taxes by

utiliz ing a

normalization method.

TheDe du c tio ns

On appeal, t he J oint Applicants di spute the propriety of t he Commissi on’s dec ision to reduc e the amount of st rande d costs by the pre sent-day

values of the investment tax cre dits given67

to them and the excess ac cumulated de fer red inc ome taxes that they acc um ulated. The J oint Ap pli c ants do no t di sp ute that r e ta ini ng the c re dit s and de fe rr e d taxes b e ne fi tte d th e m or that th e ir

cu s to me r s w e r e e n ti tl e d

to r e c e iv e th e s e b e n e f

it s . H o w e v e r , th e y

d o in s is t t

h a t uti li ti e s w e re prohibited from pa ssing the benef its on to c ustomers ear lier than allowed by the Interna l Revenue Service . I n other words, the J oint Applica nts c ontend that utilit ies wer e re quired to pass throug h the benef its to t heir c ustomers over the full depre ciation schedule of their a ssets and we re not a llowed t o re tu rn t h e v al u e o f t h e b en ef i t s at an ea rl i er

t i m e. Fu rt h erm o re , t h ey ar gu e t h at p as s i n g t h ro u gh the be ne fi ts e arl ie r tha

n a llo we d— an a lle g e d no rm a lizatio n vio latio n— wo uld have e xpos e d a

uti lity to pote ntially

signific ant pena lties. See Tax Reform Act of 1986, Pub. L . No. 99-514, 100 Stat. 2146 (stating that normalization method is not satisfied if excess tax re serve is reduce d more quickly than

a llo we d) ; see also 26 C.F.R. 1.167( l )-1 ( sta t i n g t h at assets m ay be depr eciated by

straig ht-line de pr e c ia tio n o r b y

no rm a lizatio n me tho d) . Sp e c if ic a lly , th e y

a sse rt that a uti lity that c omm its a normalization viol ation could be r equire d to pay back the rema ining ba lance of the c redits an d be denied the be nefit of c laiming a cce lerated depr eciation of their assets.

B a se d o n th e pr e c e din g , t

h e Jo i nt A p p l i c a nts a rgue that by

of fs e tti ngthe str and e d- c os t

re c ov e ry fo r t he c re dit s and

de fe rr e d taxes, the Com mis sio n ha s impe rm iss ibl y re qu ir e d the m to pa ss throug h these be nefits to their customer s ear lier than is allowed and, acc ording ly , forc ed the Joint Applicants to commit a normalization violation.

As support for the se asse rtions, the J oint Applicants p o int to several pr ivate letter

ru lin g s is su e d b y

the I nte rn a l Re venue Se rv ic e . T he se le tte rs we re iss ue d to va ri ou s u til iti e s in

re s p o n s e t o qu es t i o n s ab o u tth e e ff ec tt h at d er egu l at i o nh ado na u t i l i t y ’s o b l i gat i o nt o p as s t h ro u gh the bene fits of excess defe rre d income taxes a nd investment tax cre dits and about whethe r passing68

thr ou g h th e be ne fi ts a ft e r d e re g ulatio n w ou ld c on sti tut e a no rm a lizatio n v iol a tio n. Th e le tte rs state that pa ssi ngthe be ne fi ts o n to c us tome rs a ft e r d e re g ulatio n is imp ro pe r a nd wo uld vio late normalization requireme nts. Essentially , the letters state that benef it flow-throug h is only

allowed

ov e r the tr a dit ion a l re g ulator y lif e of an a sse t and

that if the re g ulator

y lif e of an a sse t is pr e matur e ly te rm inate d thro ug h d e re g ulatio n, the ta x be ne fi ts m ay no t be pa sse d thro ug h to a uti lity ’s c us tom e rs . I n light of the se ruling s, the J oint Applicants insist that the Commiss ion’s decision to deduct the pr esent-da

y value of the investment tax credit s an d d ef er red inc ome taxes from the J oint Applicants’ strande d-cost re cover y was a n abuse of

discretion and unr easona ble. We disag ree . First, the Commi ssion’s decision t o reduc e strande d-cost re cover y by the amount of the cre dits and tax es retained seems rea sonable in light of the s tatutory mandate that

u ti li ti e s n o t b e a ll o w e d to o v e r r e c o v e r d u r in g th e tr

u e - u p p r o c e ss. S

ee Tex. Util . Code Ann. § 39.262(a) . Utiliti es we re g iven the bene fit of tax credits and the be nefit of quickly d epre ciating the va lue of the ir a sse ts wh ile c oll e c tin g fr om cu sto me rs the fu ll r e g ulator y tim e -v a lue of

the a sse ts. Ha d th e ind

us tr y c on tin ue d to be re g ulate d, the Joint Ap pli c ants wo uld have be e n r e qu ir e d to pa ss thr ou g h th e be ne fi ts o n to their end -use c us tom e rs . A llo wi ngthe Joint Ap pli c ants to r e ta in t

he se benef its without reduc ing the ir strande d-cost re cover y by the amount re tained would see m to run afoul of the prohibition ag ainst overr ecove ry .

Se c on d, the le tte rs re lie d u po n b y the Joint Ap pli c ants are pr ivate le tte r r uli ng s, which, by

statute, may

not be “use d or cited a s prec edent.” See 2 6 U.S.C.A. § 6110(k)(3) (W es t2 0 0 2 ). I n fa ct , t h e le t t er s re l i ed o nb y t h e J o i n tAp p l i ca n t s s p ec i fi ca l l y s t at e t h at t h e r

u l i n gs

are specific ally

limit ed to the taxpay ers r equestingthe ruling s.I n support of their assertions, the J oint Applicants also point to another rule propose d by 35 the Interna l Revenue Ser vice a fter the Commi ssion issued its order and to a r ece nt private letter ru ling g iven to the J oint Applicants. See A p p l i c a t i o n o f N o r m a l i z a t i o n A c c o u n t i ng Rul e s to Ba lance s of Ex cess Defe rre d I ncome Tax es and A ccumulate d Def err ed Investment Tax Credits of Public Utili ties Whose Assets Cease To B e Public Utility Property , 70 Fe d. Reg . 75762 (propose d Dec . 21, 2005) (to be co d i fi ed at 2 6 C.F.R. pt. 1). The ne w proposed r ule states that for

utilit ies de re g ulate d a ft e r D e c e mbe r 2 00 5, pa ssi ngthr ou g h th e be ne fi ts of de fe rr e d ta xes and c re dit s w ou ld not violate t h e n o rm ali zation requirements. How ever , the proposed r ule furthe r states that the I nte rn a l Rev e nu e Se rv ic e wi ll fo llo w the te rm s spe c if ie d in its pri or pr ivate le tte r ru lin g s for the pa ssthroug h of bene fits by

utilit ies that wer e deregulated bef ore D ece mber 2005. In a letter filed af ter oral a rg ument, th e J o i n t Ap p l icants filed a copy of a pr ivate letter

ruling rec ently

issued by

the I nterna l Revenue Ser

vice a ddresse d to the J oint Applicants. The letter states that the Commi ssion’s re du c tio ns c on sti tut e no rm a lizatio n v iol a tio ns . Although this s u b s eq u ent proposal a nd private le tter ruling lend some support to the Joi nt Ap pli c ants ’ a

rgume nts , in

de te rm ini ngwh e the r t

he Com mis sio n a

bu se d it s d isc re tio n, we mus t li mit ourselves to re viewing the Commiss ion’s decision in light of t h e i n formation ava ilable to the Commi ssion at the time that its decision was made. F or this rea son, the new pr oposal an d letter ruling have no bear ing on the reasonablene ss of t he Commissi on’s ac tion. Moreover , althoug h the ne w r ule state s th a t th e I nte rn a l Re ve nu e Se rv ic e wo uld a pp ly the te rm s of its pr ior le tte r ru lin g s to utilit ies previously

dere g ulated, the pr oposed rule a lso states that utili ties dere g ul ated be fore De c e mbe r 2 00 5 c ou ld p a ss t hr ou g h th e ta x b e n e f

i t s w i t h o ut vi olatin g the no rm a lizatio n r e qu ir e me nts 69 Third, the Comm i s s i o n based its dec ision in l arg e par t on a rule by

the Interna l Revenue Service that was proposed afte r the issuance of the last letter ruling relied on by the J oint Ap pli c ants . T he pr op os e d r ule wo uld have a llo we d a

de re g ulate d u til ity

to pa ss t hr ou g h th e be ne fi ts of the defe rre d taxes a

nd cre dits without violating nor malization requirements. See Application of Normalization Accounting Rules to Ba lance s of Excess Def err ed Income Tax es and A ccumulate d De fe rr e d Inv e stm e nt T a x Cre dit s of P ub li c Ut ili tie s Who se Ge ne ra tio n A sse ts C e a se to b e Pub lic Ut ili ty Pr op e rt y , 6 8 F e d. Re g . 101 90 , *10 19 0 ( pr op os e d M arc h 4 , 2 00 3) (t o b e c od if ie d at 26 C.F .R. pt. 1) . In p art ic ula

r, the pr e a mbl e to the ru le state d that the be ne fi ts s ho uld be “ fl ow e d thro ug h to rate pay ers.” Id. at 10191. After considering the proposed rule, the Commi ssion, in its order, stated that the proposed r

ule wa s more instructive tha n the letter r

ulings be cause the proposal wa s more

re c e nt a nd be c a us e the ru le , if

a do pte d, wo uld

a pp ly to a ll util iti e s, un lik e the le tte r r uli ng s. 35a s lo nga s th e y c omp lie d w it h the te rm s o f t he 20 03 pr op os e d r

ule , w hic h a llo ws a

uti lity to p a ss throug h the bene fits after dere g ulation w ithout violating normalization requireme nts. See 70 Fe d. Reg . at 75764-65. 70

I n li g h t o f

th e p r o h ib it io na g a in s t o v e r r e c o v e r y an d th e p r o p o s e d

r u le , w e c an n ot conclude that the Commiss ion abused its dis cr etion or ac ted unre asonably when it deduc ted the prese nt-day

value of the def

err ed taxes and cr edits from the Joint Applicants’ r ecove ry for stra nded cost s. This conclusion is further suppor ted by the fa ct that other state s’ utility commissions have conclude d that passing throug h the value of cre dits and defe rre d taxes after de regu l at i o n does not constitute a normalization violation and the fact that the J oint Applicants’ ex pert testified that he wa s

unawa re of any rec ent instance in which the I nterna l Re venue Service conclude d that a utility had committed a normalization violation. See, e .g. , DPUC Rev iew of t he United I lluminating Co.’s Divestiture Plan Phase I I , Docke t No. 98-10-07, 1999 Conn. PUC L EXI S 313, *28-29 (Jun e 9 , 1 9 9 9 ) ( c o n c lu d in g th a t r a te p ay e r s w e r e e n ti tl e d to b e n e f it o f tax c r e d it s an d

d e f e r r ed ta xati on ); Application of Penn. Power Co. f o r A p p r o val of

its Restructuring Plan Under Section 2806 of the Pub. Util. Code , Docke t No. R-00974149, 1998 Pa. PUC L EXI S 182, *65-66 (Jul y 22, 1998) (using prese nt-day value of tax credits as offse t to util ity ’s re cover y ). F o r th e s e r e a s o n s , w e mu s t c o n c lu d e th a t th e d is tr ic t c o u rt p r o p e r ly aff irmed the portion of the C ommissi on’s order reducing the J oint Applicants’ re cover y by the cur rent va lue of the tax benefits.

Reme dy I n addition to contesting the deduction for cre dits and defe rre d taxes, the J oi nt Ap pli c ants a lso c on te nd

tha t th e Com mis sio n a

bu se d its dis c re tio n b y

fa ili ngto i nc lud e a

re me dy in its order to ac count for the possibili ty that the Interna l Revenue Ser vice mig ht later de cide that the71

de du c tio n v iol a te d n or

ma lizatio n r e qu ir e me nts . A s su pp or t f or the ide a that th e Com mis sio n s ho uld have f ashioned a

reme dy , the J oint Applicants p oint to the various private le tter ruling s discussed previously . They

also point to a rec ent private letter ruling issued by the Interna l Revenue Ser vice afte r ora l argument. The letter states that if the Joint Applican ts pass throug h the value of the tax benef its to t heir c ustomers as par t of the der egulatio n p ro ce s s , the J oint Applicants will have committed a normalization violation.

Af te r r e c e ivi nga

c op y of the pr iva te le tte r ru lin g , th e Com mis sio n f ile d a le tte r w ith this Court st ating that “the a pplicable f

eder al-income -tax law is in flux.” Fur ther, the le tter provides that it remains unclea

r whe ther the Commission’s reductions will constitute normaliz a ti o n v io la ti ons beca use the propose d I nterna l Revenue Ser vice r ule addr essing the proprie ty of passing throug h the tax benefits as part of

dere g ulation has not been finalized. Howeve r, t he letter also states t hat “the new pr ivate letter

ruling incre ases the c umulative we i g ht on the side of the [J oint Applicants’] argument that the Commiss ion’s treatment of the two [tax benef its] might ca

use a normalization viol ation.”

I n light of the I n t ernal Revenue Ser vice’ s rec ent letter r

uling, the c ontinuing

uncer tainty on the issue, “the pote ntial tax impact on the [J oint Applicants],” an d the potential impact on rates, the Commissi on now asks this Court to remand the r em ed y i s s u e back “ to the Commi ssion to be r e-c onsidered in lig ht of new developments.” Although the Customers support the Commiss ion’s decision to discount the J oint Applica nts’ stranded c osts, the Custom ers state on appea l that they

do n o t oppose providing the J oint Applicants a re medy in the event the I

nterna l Revenue Service deter

mines that a violation occur red. We, therefor e, reverse the judg ment of the district cou rt to the extent that it aff irmed the Commission’s decision to not provide the J oint72

Ap p l i ca n t s wi t h a r em ed y , an d we re m an d t h i s p ro ce ed i n g b ac k t o t h e d i s t ri ct co u rt fo r p ro ce ed i n gs consistent with this opi nion.

P lan ts He ld forF ut ur e Us e and C ons tr uc ti on W or k in P r og r e ss

Under regulation, utili ties were allowed to c harg e their c ustomers for the ir operating expenses. See Cit ies for Fair Util. Rates v. Public U til. Comm’n , 924 S.W .2d 933, 935 (Tex. 1996). Oper ating expense s we re g ener ally limit ed to the expenses re sulting fr om running a func tioning power plant. As a re sult, uti lities were g ener ally prohibited from re cover ing f rom curr ent customers the cost of c onstructing new powe r plants and c ould only rec over the costs afte r a new plant had bee n completed. See id. There was o n e ex ce ption to the prohibiti on ag ainst ear ly rec overy for “construc tion work in prog ress” : A uti l i t y wa s allowed to re cover its construction costs befor e construction was complete if it de monstrated that ear ly rec overy was “nec essar y to t h e uti lity ’s financ ial integ rity ” and that the construction wa s not “ineff iciently or i m p ru d entl y

manag ed or planned.” Tex. Util . Code Ann. § 36.054.

I n addition to the c onstruction costs, utilit ies often ha d to pay other e x penses r elating to assets that might not be produc tive for y ear s to come. Citi es for Fair Util. Rates , 924 S.W .2d at 937. For examp l e, t o p re v ent t he possibility of havingto pay

an exorbitant land-purc hase pr ice imm ediately

befor e construc tion beg an, utilities often purcha sed or r ented land y ear s befor e construction wa s scheduled to be g in. Id. This ty pe of p ro active pla

nning w as enc ourag ed by allowing utilit ies to rec over the acquisition costs even if actua l c onstruction did not beg in until y ear s afte r the utilities obtained ri gh ts to the land. See id. Th e se c os ts w e re of te n r e fe rr e d to a s c os ts related to “plants held for future use .”73 I n its order, the Commission allowed the J oint Appl i cants to re cover the costs for plants h e ld

f o r f u tu r e u s e an d

f o r c o n s tr u c ti o nw o r

k in p r o g r e s s . T h e d is tr ic t c o u rt a f f ir me d tha t decision. On a

ppeal, the Customers c ontest this decision. The Cus tomers arg ue that the pur pose of stranded- cost rec overy is to allow ut iliti es t o rec over f or costs that would have been r ecove red ha d

re g ulatio n c on tin

ue d. B a se d on thi s pr op os iti on , the Cus tom e rs ins ist that the Joint Appl ic ants should not have bee n allowed to re cover the construc tion and future- use costs because they did not satisfy the re quirements of the statutes g overningear ly rec overy for these t y

p es o f costs under regulation. I n other wor ds, the Customers contend that th e J o i n t Applicants should not recove r b e c a u s e t h e y p r e s e nt e d n o e v i d e n c e s h o w i n g t h a tr e c o v e r y w a s n e c e s s ar

y t o t h e i r “ f i n an c i a l i n t e g r i t y” and that construct i o n wa s n o t “ineff iciently or imprudently

planned or

manag ed.” See Te x. Ut il. Code Ann. § 36.054.

When making this asse rt io n , th e Cu s to me r s a c k n o w le d g e th a

t t h e a d ministrative- code provision gove rning true-up pr ocee dings spe cifies that the ne t book value of a utilit y ’s g ener ation assets includes the c osts releva nt to this issue. See 16 Tex. Admin. C ode § 25.263(g )(2) (spec ifying what is included in net book value)

. They further acknow ledg e that section 36.054 is f ound in the rate -makingportion of the utilities c o d e, not the stranded- cost-re cover y portion. Howeve r, they ins ist that th e re qu ir e me nts of

se c tio n 3 6. 05 4 w e re inc or po ra te d in to t he str and e d- c os t pr ov isi on s v ia

se c tio n 3 9. 26 0, wh ic h p ro vid e s, in r e le va nt p art , a s f

oll ow s:
The de finition and identification of invested capital . . . that af fec t the net book value of g e ne ratio n a sse ts duri ng the fr e e ze pe ri od sh a ll be tr e a te d in a c c or dance wi th generally ac cepte d accounting principle s a s m o d if ied by re gulatory accounting rules generally applicable to utili ties

.As a pre liminary matter, we note th at t h e C u s t omers ar e not contesting whether the 36 calc ulated value s for c onstruction work in prog ress and plants held for f uture use a

re suppor ted by substantial evidence ; rather , they contend that the values should not have bee n included in the Joi nt Applicants’ net book value be cause various statutory require ments were not met. I n light of this, we need not a ddress whe th er t h e calculated value s are supported by the evidenc e pre sented to the Commi ssion. W e also note that section 36.054 i s entitled “Construction Work in Progre ss” and ma k e s n o me n ti o n o f p la

n ts h e ld f o r future use

. See Tex. Util . Code Ann. § 36.054 (West 2007). As a re sult, the Customers’ arguments conce rning the nee d for c omply ing w ith section 36.054 seem to ha ve no applicability to the inclusion of future- use costs in the J oint Applicants’ net book value

. 74 Tex. Util . Code Ann. § 39.260(a) (empha sis added). Esse ntially , the Customers contend that the requirem en ts list ed in sec tion 36.054 constitut e “g ener ally acc epted a ccountingprinciples as modified by

regulatory

acc ounting rules g ener ally applicable to utilit ies” a nd, there fore , must have been c omplied with to properly allow re cover

y . Be cause the J oint Applicants prese nted no evidenc e

re g ard ingthe e le me nts lis te d in se c tio n 3 6. 05 4, the Cus tom e rs a sse rt that the Joint Ap pli c ants sh ou ld not have be en allowe d to rec over the value of these c onstruction costs. We believe that the C ommissi on’s deter mination that the utili ties code a llows for the

rec overy of the disputed cost s is corre ct and c onsistent with the releva nt statutory

provisions for

se ve ra l r e a so ns . 36

First, t h e C ustomers’ construc tion of section 36.054 ig nores the unique role that section had in rate-setting . As discussed pre viously , utilit ies wer e g ener ally not allowed to collec t for c onstruction costs of developing new gene ration assets until afte r t he construc tion was complete. See Cities for Fair Util. Rates , 9 2 4 S

. W

. 2 d at 9 3 5

. S ec t i o n3 6

. 0 5 4 p ro v i d eda m ec h an i s m t h ro u gh which a utility

could re cover construction costs ear ly but, due to the pot ential unfa irness of c harg ing

curr ent customers f

or a benef it that they may never rec eive, limit ed the circ umstances unde r which this ty pe of r ecove ry

was available. See id. a t 93 6; see also Tex. Util. Code Ann. § 36.054 (limiti ng75

circ u m s t an ces f

or ea rly rec overy beca use “inc lusion of construction work in prog ress is an exceptional form of r ate r elief” ). I f the utility was una ble to prove that the strict require ments of section 36.054 had be en complied with, it was prohibited f rom rec overingat that time, but it wa s not pr oh ibi te d f

ro m se e kin g e arl y

re c ov e ry of the se c os ts at ano the r r a te -s e tti ng hearin g or ult imate ly seekingrec overy

afte r construc tion had completed. I n light of the fact that utilit ies could eventually rec over for t hese costs even if they failed to qualify for early rec overy , denying rec overy for these costs would constitute a denia l of a cost incurr ed by

the J oint Applicants that they would have been al l o wed to recove r for under regulation: a re sult that the Cust omers admit, on appe al, is inappropriate. Fur thermore , g iven that the true-up proce eding was desig ned to be a one-time e vent in which utilities are a llowed to rec over their strande d costs, construing the relevant provisi ons in the manner sug g ested would for ever

deny the utiliti es the rig ht to recove r these othe rwise r ecove rable expenses and would g ive sec tion 36.054 a punitive ef

fec t not contemplated by

the l eg islature when it enac ted the statute duringregulation. Suc h a c on str uc tio n w ou ld a lso vio late the uti lit ies co de ’s mand a te that ut ili tie s are a llo we d to

rec over “ all” of the ir strande d costs. See Tex. Util . Code Ann. § 39.252.

Second, we see no r eason to c onclude that section 39.260 somehow incorpor ates the direc tives from sec ti o n

3 6

. 0 5 4 in to s tr a n d e d-cost re cover

y . The re quirements listed in section 36.054 do not seem to relate to an y t y p e o f acc ounting pr inciples or rule s. Rather, the r equire ments are g e are d s ole ly

tow ard a de te rm inatio n o f whe the r a c os t may be inc lud e d in a utili ty ’s rate , n ot w ith de fi nin g or de sc ri bin g any pa rt ic ula r a c c ounti ng me tho do log y . A dd iti on a lly , s e c tio n 3 6. 05 4, by its terms, applies to a “ utilit y ’s rate base .” Id. § 36.054. To conc lude that sec tion 36.054 applies to trueup proce eding s, we would essentially have to treat a uti lity ’s rate base as sy nony mous with it s net76

book value—the rele vant fac tor considere d in tr ue-up proce eding s. Howeve r, these c oncepts a re not equivalent, see id. § 31.002 (def inition of rate ), and w e must presume that the leg islature included both terms in the u t i l i ties code f or a r eason, see H

elena Chem . Co. v. W

ilkins , 47 S.W .3d 486, 496 (Tex. 2001).

Fur ther, the provision of the administrative code detailing the requir em en t s for stranded- cost rec overy

includes the va lue of c onstruction work in pr og ress and plants held for f uture

us e in t h e n e t b o o k v a l u e o f a u t i l i t y ’ s g e n e r a t i o n a s s e t s b u t m a k e s n o m e n t i o n t h a t a u til ity mus t pro v e th a t r e c o v e r

y is n e c e s s ar

y f o r th e “ u ti li ty ’ s f

in an c ia l in te g r it

y ” o r th a t th e u ti li ty d id

not “inef ficiently or imprudently ” plan the construction of the assets. 16 Tex. A d m i n . C o de § 25.263(g )(2) (providing that ne t b o o k value c onsists of “g ener ation-re lated ele ctric pla nt in service, less acc umulated depr eciation . . . plus gene ration-r elated construction work in prog ress [and] plant held for f

u tu r e u s e ” )

. T h a t r

u le w a s a d o p te d in 2 0 0 1 , an d n o o n e c o n te s te d th e p r o p riety of subsection (g )’s inclusion of the disputed costs. See Tex. Util . Code Ann. § 39.001(f ) (West 2007) (re quiring party

challeng ing va lidity

of compe tition rule to file notice of a ppeal within 15 day s after

ru le is a do pte d a

nd pu bli sh e d) ; Ci ty o

f A lv in v . P u b li c Util. Comm’n , 143 S.W .3d 872, 879-80 (T e x. Ap p. —Aus tin

20 04 , n o p e t.) (s tatin g that va lid ity c ha lle ng e s mus t be fi le d w ith in 1 5 d ay s) ; see also Tex. Gov’t Code Ann. § 311.023 (spec ifying that when attempting to asce rtain statute’s meaning , courts may

consider a g ency ’s interpre tation of statute). F or a ll the re a so ns pr e vio us ly g ive n, we c on c lud e that th e Com mis sio n’ s d e c isi on to allow the Joi nt Applicants to rec over a s stranded c osts ex penditures made f o r co n s t ruction works in prog ress a

nd plants held for f

uture use w as re asonable , did not violate any provision of the utiliti es

c o d e , a n d c o m p l i e d w i t h t h e r e qu i r e m e n t s o f

s e c t i o n2 5

. 2 6 3 o f

t h e a dm i n i s t r a t i v e c o d e . A c c o r d i n g l y,We note as a pr eliminary matter that the leg islature was signific antly less specific when 37 definingand desc ribin g t he ca pacity auctions and c apac ity -auc tion awar ds than it was when descr ibing the va

rious methods for deter

mining the marke t va lue of a utilit y ’s g ener ation assets and has there by , arguably , aff

orded the Commi ssion more discretion when attempting to ac complish the leg islative directives listed in the statute. See, e .g. , Tex. Util . Code Ann. § 39.153(f) (West 2007) (g iving Commission power to adopt rules pr escr ibing c apac ity -auc tion procedur es). 77 we mus t c on c lud e that th e dis tr ic t c ourt pr op e rl y a ff ir me d th e Com mis sio n’ s d e c isi on to allow re cover

y for these costs. Capacity Auction and the Capacity-Auction True-Up

I n a dd iti on

to t he str and e d- c os t tr

ue -u p, the tr ans iti on

to a co mpe tit ive mark e t a lso involved true-ups for other costs, including a

deter mination of a “c apac ity -auc tion awar d.” As part 37

o f t h e t r an s i t i o n , e a c h u t i l i t y w a s r e qu i r e d t o a u c t i o no f f e n t i t l e m e n t s t o i t s g e n e r a t i o nc a p a c i t y. Tex. Util . Code Ann. § 39.153(a ). These auctions we re de signe d t o re d u ce t h e former ly bundled utilit y ’s marke t share a

nd to encour ag e compe tition. Se e Re lia nt I , 101 S.W .3d at 137. The va rious require ments relating to the capa city auctions ar e found in the utilities code a nd in the administrative code

. See Tex. Util . Code Ann. § 39.153; 16 Tex. Admin. C ode § 2 5. 38 1 ( 20 07 ). Un de r bot h the statut e and the ru le , f or me rl y re g ulate d u til iti e s w e re re qu ir e d to

a uc tio n o ff e nti tle me nts to “ a t le a st 1 5 p e rc e nt o f” the ir g e ne ra tio n c a pa c ity be fo re and

a ft e r t he date on which customer

choice wa s s et to beg in. Tex. Uti l. Code Ann. § 39.153(a) (re quiring sale of entitlements befor e choi ce b ega n), (b) (re quiring auctions to be c onducted until 60 months after choice beg ins or ear li er d at e if c erta in market c onditions were satisfied); 16 Tex. Admin. C ode § 2 5. 38 1( d) (s ame a s su

bs e c tio n 3 9. 15 3( a )) , ( h) (i ii) (s a me a s su bs e c tio n 3 9. 15 3( b) ); CenterPoint Energy, I nc. , 143 S.W .3d at 96. Auctions we re to be held four times a y ear . 16 Tex. Admin. C odeTh e fo llo wi ngis a n e xamp le of wh e n thi s pr ov isi on wo uld be a pp lic a ble : if a uti lity se lls 38 all the re qu i re d enti tlements to three of its products but fails to sell all of the entitlements to the re ma ini ngpr od

uc t, t he uti lity may sti ll be de e me d to have c omp lie d w iththe 15 % r e qu ir e me nt i f i t is able to se ll a ll of the entitlements to the non-complying product that are offe red in one month out of the a uction y ear . 78 § 25.381(h)( 1)(A) (i). Dur ing th e au ct i ons, the utilit ies wer e oblig ated to sell entitlements to four ty pes of c apac ity

products: base load, g as-inter mediate, g as cyclic, and g as-pe aking products. Id. § 25. 38 1( c )( 5) , ( f

) , ( g )

. T h e a m o u n to f

e a c h t y p e o f e n t i t l e m e n tt h a ta

u t i l i t y w a s r e qu i r e d

t o s e ll

va ri e d d e pe nd ingon

the c omp any ’s g e ne ra

tio n a sse ts, bu t the tot a l amo un t of the e nti tle me nts so ld had to amount to at least 15% of the utility ’s total g ener ation capa city

. Id. § 25.381(e) (1). I f a utility

di d not sell all 15% of its capa city products, it might still be viewed a s having complied with this requireme nt so long a s cer tain other conditions were satisfied. U nder the administrative code , to be deemed compliant, a utility had to “of

fer [] products in a pr oduct categ ory (for example, g as-inter

mediate) and succe ssfully [sell] , at least, a ll of the entitlements offe red in one particula r month, in that categ ory .” Id. § 25.381(h)( 1)(B )(iv). I n other wor ds, reg ardle ss of the 38 uti lity ’s su c c e ss i n s e lli nga pa rt ic ula r t y pe of pr od uc t in a uc tio ns thr ou g ho ut t

he y e ar, the uti lity

wi ll be dee med to be in compliance for that product for the entire y ear if during one month of the y ear , the utility is able to sell all of the e ntitlements to t he produc t that it offe red for sale. T his deemedcompliance provision may be applied to a utilit y ’s fa ilure to sell the entitlements to one or more of its products and, see mingly , even in circumstance s in which a utilit y has failed to sell the nece ssary entitlements for a ll of its capac ity produ cts. Stated diffe rently , provided that the utility meets the deeme d-complianc e re quirements outlined above for e ach of its products, th e uti li ty

c o u ld be dee med

c omp lia nt wi th the 15 % re qu ir e me nt e ve n if it wa s un a ble to se ll the re qu ir e d numb e r o f e nti tle me nts fo r a ny of its c a pa c ity pr od

uc ts. As a re su lt, the pr ov isi on a llo ws fo r de e me d c omp lia nc e in c e rt a in79

situations when signific antly less than 15% of the e ntitlements to t he utility ’s ca pacity products have sold. The par

ties ref er to this portion of the administrative c ode as the “saf e-ha rbor pr ovision.” I f t he uti lity fa ils to m e e t th e sa fe -h arb or re qu ir e me nts —in

oth e r w or ds , it fa ils to s e ll

a ll the e nti tle ment s to on e or mor e pr od

uc ts o ff e re d in on e mon th—

the uti lity

may pr op os e mod if ic a tio ns to t

he a uc tio n te rm s in a

n atte mpt to i nc re a se the lik e lih oo d th a t th e e nti tle me nts wi ll sell. Id. § 2 5. 38 1( h) (7 )( C) . T he pr op os a ls a re to b e ma de in n oti c e s th a t th e uti lit ie s are re qu ir e d to file with the Commi ssion pr ior to capa city auctions. See id. ; see also id. § 25.381(h)( 2)(B ) (r equiring utilit y to file notice of pending auction). I n g ener al, these notice s specify the auc tion terms for the various produc ts. Id. § 25.381(h)( 2)(ii). The se re visions mi g ht i n cl ude cha ng es to the price of a product or the ty

pe of pr oduct auc tioned. Id. This provision is called the “ alternative safe -har bor provision” by

some of the pa

rties. Be cause the utiliti es code mandates that the ut iliti es auction off a sig nificant portion of the ir c a pa c ity a sse ts, it a lso pr ov ide s the uti lit ie s w itha me tho d f or re c ov e ri ngpo te nti a l lo sse s in the eve nt that the sale pric e at the a uction is less than ot herw ise would have been obta ined had the transition to a non-re g ulated envir onment not occur red: t h e c a p a c it y - a u c tion true -up. B y

authorizing the true-up, the leg islature expressed its conce rn that a stable marke t would not ex ist unti l severa l y ear s after

dere g ulation bega n an d “t h at di stortions and fluctuations in the marke t price of power during the first two y ear s of der egulation could harm c onsumers and g ener ation companies a like.” CenterPoint Energy, I

nc. , 143 S.W .3d at 96. Essentially , a true -up is conducte d to determine a u t i lity ’s ca pacity -auc tion awar d, which constitutes the diffe renc e betwe en the pr ice that the utility was pre dicted to obtai n by theAlthough not de terminative of this issue on appe al, we note that there is disagr eeme nt 39 about whethe r the J oint Applica nts c omplied w ith the safe -har bor rule for 2002. The Customers and the C ommissi on asser

t that it was im possible for the J oint Applicants t o comply with the safe -har bor provision for the first half of 2002 beca use the provision wa s not enac ted until the summer of 2002. Fur ther, the Customers a

rg ue that the J oint Applica nts f ailed to c omply with the s af e- h arb or pr ov isi on s f

or the remain der of

20 02 . E sse nti a lly , th e Cus tom e rs argue that th e Joint Ap pli c ants c ou ld o nly

be de e me d to have satis fi e d the r equ ir e me nt t hat th e y se ll a ll o f t

he ir pr od uc ts’ entitlements that were offe red in a one-month per iod if the time period under consi deration was extended to include all of 2002 ra ther than the time that the provision was in effec t. The Customers asser t that this t y

pe of retroa ctive compliance is ina ppropriate under the circ umstances of this case. Th e Joint Ap pli c ants , o n the o th er hand , c on te nd that th e re wa s a

sa fe -h arb or

pr ov isi on

in eff ect fo r al l of 2002. Essentially , they argue that the Commission promulgated a much shorter version of se ction 25.381 in 2000 that specific ally allowed f or modification by

future or ders a

nd that two subsequent order s added a safe -har bor provision. Tex. Pub. Ut i l

. C omm’n, Order Adopting 80 ECOM model for sellin g i ts power on the wholesale ma rket a nd the pre dicted fue l costs offset by the differ ence betwee n the price that utilit y actua lly obtains in the capa city

auctions and the utilit y ’s actua l fuel costs. See 16 Tex. Admi n. Code § 25.263(i), ( l ). I f the diff ere nce be tween the actua l price obtained and the actua l fuel costs is less than the diffe renc e betwe en the pr edicted pr ice a nd predic ted fue l costs, the utilit y is allowed to rec over the diffe re n ce. Tex. Uti l. Code Ann. § 39.262(d)( 2). T h e ca pacity -auc tion true-up is desig ned to “guara ntee c onsumers and pow er companies that the power company will rece ive no more a

nd no less than a mar g in prede termined by the Commiss ion in 2001 when the ECOM model wa s run.” CenterP o i n t E n er gy, Inc

. , 143 S.W .3d at 96.

We now turn to the results of the capa city auctions relevant to this case . I n 2002, the J oint Applicants offe red e ntitlements in all four product cate g ories and oste nsibly complied with the

s a f e - h a r b o r r e q u ir e me nts , me a

n in g tha t during the re levant auc tion periods, the J oint Applicants were

a b l e t o s e l l a l l t h e e n t i t l e m e n t s o f f e r e d f o r o n e m o n t h f

o r e a c h p r o d

u c tc a t e g o r

y. 39New § 25.381, R elating to Capacity Auctions , Pr oje c t N o. 21 40 5, a t 64 -6 5 ( De c e mbe r 1 4, 20 00 ); see

Tex. P ub. Util. Com m’n, Procee ding to Address March 2002 and July 2002 Cap a ci t y A uctions , Project No. 24888, at 12 para . 2 (F eb. 7, 2002) ( final orde r adoptingcapa city -auc tion-mecha nics document conta ining safe- harbor provision); Tex. P ub. Util. Com m’n, Procee ding to Impleme nt the Cap ac ity Au c tio n R ule , Project No. 23774, at 23 para . 2 (Sept. 6 , 2 0 0 1) (f inal order adopting me c ha nic s d oc ume nt) ; see also Tex. Pub. Util. C omm’n , Application of

AEP Tex. Cent. Co. &CPL Retail Energy, LP to Determ ine T rue-Up Balances Pursuant to PURA § 39.262 Rates , Docke t No. 31056, at 102 (F eb. 16, 2006) (final order specify ing contents of safe -har

bor rule found in mec hanics document). We need not dete rmine whe ther the safe -har bor provision w as in e ffe ct for a ll of 2002. To fully comply with the provision, a utility must satisfy the provision’s require ments for a ll the y ear s l ea d i n g u p t o the true- up proce eding . Stated differ ently , if a utility fails to comply

with the require ments in one y ear , the utilit y may not e mploy the safe -har bor rule. We ultimately

conclude that th e Joint

Ap pli c ants fa ile d to c omp ly wi th t he pr ov isi on

in 2 00 3 an d, the re fo re , n e e d n ot a dd re ss whether they complied in 2002. Although we will a ssume for the sake of argument that the re levant re qu i re m en t s we re s at i s fi edi n2 0 0 2 , we d o n o t e t h at t h e C o m m i s s i o n , i na s u b s eq u en tp ro ce ed i n g, has dete rmined that its previous orde rs did not establish the safe -har bor provision c urre ntly

found in the capa city -auc tion rule. Se e ge ne ra lly Tex. Pub. Util. Com m’n, Ap pli c ati on of A EP

Te x . Ce nt. Co. & CPL Retail Energy, LP to Determ ine True-Up Balanc es Pursuant to PURA § 39.262 Rates , Docke t No. 31056, at 102 (F eb. 16, 2006) ( final orde r). 81 Howeve r, in 2003 the J oint Applica nts w ere unable to satisfy the re quirements of the

sa fe -h arb or

pr ov isi on

fo r t he ir g a s- int e rm e diate pr od

uc t. A ft e r f

a ili ngto s e ll e nti tle me nts to t he ir g a s- int e rm e diate pr od

uc t at a uc tio n, the Joint Ap pli c ants inf or me d the Com mis sio n o f t

he ir ina bil ity to meet the saf

e-ha rbor r equire ments. Tex

. P u b

. Ut il. Com m’n, Te x as Ge nc o, L.P . R e qu est for Ruling that the Company has Me t its Obli gation Under PURA § 39.153( a) , Docke t No. 27744, (M ay 5, 20 03 ). I n the ir no tic e and oth e r d oc ume nts fi le d late r, the Joint Ap pli c ants ma de pr op os a ls to fac ilitate the sale of the ir entitlements.

I n th e ir fi rs t pr op os a l, t

he Joint Ap pli c ants su g g e s t e d

t h a t t h e 1 5 % r e q

u i r e me nt s ho uld be dee med satisfied as a result of other auctions conduc ted by

the J oint Applicants. Id. I n addition to the c apa c i t y

a u c t i o n s a ti s s u e i nt h i s a

p p e a l , u t i l i t i e s w e r e a

u t h o r i z e d t o a u c t i o ne n t i t l e m e n t s toThe Joint Applicants subseque ntly withdrew this sug g estion. 40

82 their ca pacity products in auc tions that did not have to c o m p l y with the strict require ments of the capa city auctions. See Tex. Util. Code Ann. § 39.153(d). Rely ing on this authorization, the J oint Applicants sold entitlements to their products in private auctions for price s that wer e hig her tha n the sale pric e in the ca

pacity auctions. I n light of the se additional auc tions, the J oint Applicants asked the Commiss ion to consider the number of entitlements sold in both ty pes of au cti ons when de te rm ini ngwh e the r t

he 15 % r e qu ir e me nt h a d b e e n me t. 40 I n th e ir se c on d prop os al, t

he Joint Ap pli c ants su g g e ste d th a t a dd iti on a l pu bli c

au ct i o n s be conduc ted with modified product spe cifications. See Tex. P ub. Util. Com m’n, Texas Genc o, L.P. Request

for Ruling that the Company has Met its Obligation Under PUR A § 39.153(

a) , Do c k e t N o . 2 7 7 4 4 , a t 1

- 3 ( Ju n e 2 0 , 2 0 0 3 ) ( T e xa s G e n c o , L

. P. ’ s Re s p o n s e to o r d e r N o . 2 )

. A fter

rec eiving this proposa l, the Commi ssion a uthorized the J oint Applicants to conduct two additional auctions. No a dditional entitlements were sold in the fir st sup p l em en t al au ction. I n the sec ond auction, t h e J oint Applicants were able to sell entitlements to seven of the twenty -eig ht offer ed products, whic h d i d n o t satisfy the re quirements of the safe -har bor provision. I n this auction, the

rese rve pr ice wa s set at the low pric e of one penny per kilowatt month. Be cause the J oint Applicants were unable to c omply with the 15% require ment or the safe -har bor provision, the Commissi on conclude d that the ca pacity -auc tion-true-up f

ormula found i n t h e administrative code could not proper ly be employ ed without modification. See 16 Tex. Admin. C ode § 25.263(i)( 1). The tr ue-up f ormula spec ifies that the ca pacity -auc tion awar d wi ll b e c a lc ulate d b y

us ing the fo llo wi ngfo rm

ula :83

(ECOM marke t reve nues - ECOM fuel costs) - ( (ca pacity auction pric e x tot al 2002 and 2003 busbar

sales) - actua l 2002 and 2003 fue l costs).

Id. T o a c c o u n t f

o r th e Jo int A p p li c an ts ’ f a il u r e to c o mp ly , th e Co mm is s io n a v e r a g e d th e p r ic e of

a ll c a pa c ity pr oduct s so ld i n s tatut or y and pr ivate a uc tio ns and

us e d th is n

umb e r a s th e “ c a

pa c ity auction pric e” f

ound in the formula. Be cause the price obtained in the private auc tions was highe r than t he price used in the s tatutory auctions, t he avera g ed “capa city auction price” w as g reater than the price calc ulated by the J oint Applica nts using only the capa city -auc tion va lues. Due to the nature of the for mula, this increase led to a $440 milli on reduc tion to the capa city -auc tion awar d reque sted by the J oint Applicant s . T h e J oint Applicants appea led this determination, and the district c ourt

reve rsed the Commi ssion’s de termination and, acc ording ly , allowed the J oint Applicants to recove r the full amount they

orig inally

calc ulated. Ona p p e a l, th e Cu s to me r s an d th e U ti li ty

Co mm is s io nc o n te s t t

h e p r o p r ie ty

o f the district court’s rever sal. I n response , the J oint Applicants set forth several arg uments as support for their asse rtion that the district court’s r ever sal of the Com mission’s decision wa s proper and that the Commi ssion’s orig inal reduc tion was an a buse of its discre tion. I n t heir fir st set of arguments, the J oint Applicants assert that c ompliance with the 15% rule or

the safe -har

bor rule is irr eleva

nt to the capa city -auc tion true-up for mula. As support for this assertion, they

note that the provisions of the utilities co d e an d t he administrative c ode perta ining to the true -up proc eedings do not condition the use of the ca pacity -auc tion calculation upon the sale of

a ce rtain number of

entitlements. See Tex. Util

. C o d e Ann. § 39.262(d)( 2); 16 Tex. Admin. C ode § 25.263(i). T hey also argue that the capa city auction’s 15% require ment and84

the ca pacity -auc tion true-up ser ve dif fe re nt purposes and should, ac cording ly , be viewe d ind e pe nd e ntl y . T he y

c on te nd tha t th e tr ue -u p w a s d e sig ne d to g ive uti lit ie s a pr e dic ta ble marg in from the sales of power in 2002 and 2003. See Ce nterPoint Energy, I nc. , 143 S.W .3d at 96 (stating that tr ue -u p e sse nti a lly

g ua ra nte e s c on sume rs and

po we r c ompani e s th a t po we r c omp anie s w ill

rec eive no more and no less than mar g in prede termined by ECOM model in 2001). R ega rd ing the capa city

auction’s 15% require ment, the J oint Applicants insist that it w a s p ri mar il y des ign e d to su pp ly re ta il e le c tr ic pr ov ide rs tr yingto c omp e te in t

he ne wl y dere g ulated mar

ket with acc ess to much-ne eded c apac ity products. See 16 Tex. Admin. C ode § 25.381(b) ( stating that purpose of capa city -auc tion pr ovision is to pr omote competition in market thr ou g h in c re a se d a c c e ss t o g e ne ratio n) . In li g ht o f t he se dif fe re nt p ur po se s, the Joint

Ap pli c ants urg e that it was inappr o p ri at e for the Commiss ion to conclude that the f ailure to c omply

with the 15% re quirement for

bade the use of the una ltered true -up for mula. Howeve r, for

the re asons that follow, we believe that the Commi ssion’s construction of the rele vant portions of the utilit y code as requiring that the 15% re quirement or the safe -har bor provision be complied with in order to proper ly apply

the true- up equation is corr ect a nd consistent with the rele vant statutory lang uag e. The J oint Applicants’ c onstruction of the true -up provisions in the utilit ies code and the a dminist rative c ode is too narr ow and r uns contrary t o t h e ca n o n of statutory construction re quiring courts to construe a provision in light of the entire g overningact a nd not to rea d the provision in isolation. See J ones , 969 S.W .2d at 432. Whil e it is true that the true-up provisions in the util ities code a nd in the administrative code do not s p ec i fi cally forbid the use of the c a pa c ity -a uc tio n- tr ue -u p f or mul a du e to a uti lity ’s fa ilure to su c c e ssf ull y a uc tio n o ff 15 % o f i ts capa city products, both provisions do expli citly ref er to the pr ovisions requiring utilit ies to auction85

off at least that amount. The true -up provision of the utilities code spec ifies that a utility is entitled to the differ ence betwee n the price of powe r obtained throug h “the c apac ity auctions under

Sections 39.153 and 39.156” a

nd the ECOM-powe r-c ost pr ojections. Tex. Util . Code Ann. § 39.262(d) (2). Section 39.153 require s that a utility auction off

“at lea st 15 perce nt” of its capa city products. Id. § 39.153(a)

. Simi larly , the capa city -auc tion-true-up provision of the administrative code states that

a uti li ty is e nti tle d to the “ dif fe re nc e be tw e e n th e pr ic e of po we r o bta ine d thro ug h th e c a pa c ity auctions” and the ECOM-pow er- cost projec tions and specific ally ref ers to subsec tion 25.381(h)(1), which re quires that 15% of capa city products be sold or that the safe -har bor provision be c omplied with. 16 Tex. Admi n. Code §§ 25.263(i)(1) , .381(h)( 1).

Given the e x plicit refe renc e to the 15% r equire ment found in both the administrative

c o d e an d t h e u t i l i t i e s c o d e , w e ar e p e r s u a d e d t h att h e C o m m i s s i o n ’ s c o n s t r u c t i o no f t h e c a p a c i t yauction-true -up provisi ons as requiring compliance with the 15% re quirement for proper utiliz ation of the true -up for

mula acc urate ly

ref lects the leg islature’s intent. Fur thermore , the fa ct that one of the purposes of

the 15% requireme nt is to ensure that competitor s h a v e a c c e s s to v ar io u s c a p a c it y p r o d u c ts d o e s n o t p r e c lu d e th e p o s s ib il it y th a t t he le g isl a tur e a lso be lie ve d th a t satis fy ingthe 15 % re qu ir e me nt fo r tr ue -u p purp os e s wa s a lso c ru c ia l. As p art o f th e tr an s it io n to c o mp e ti ti o n , th e le g is latu r e h a d to d e te r

mi n e th e p r o p e r a mo u nt of entitlements to be auc tioned off that would e nsure that a sufficie nt number of entitlements would be available to competitors without flooding the m arke t with excess entitlements. As with the partial stock-valuation method discussed previou s l y , t h e leg islature no doubt chose 15% as the r equire d amount to be sold as an attempt to ensure that enoug h en t i t l em ents wer e ava ilable to potential competitors and that e noug h wer e sold to provide a r eleva nt approxim ation of the true marke t value86

of the e ntitlements. I n addition, g iven the fac t that utilities are authorized to r ecove r any differ ence be tw e e n th e pr e dic te d v a lue of the sa le of

po we r a nd that ob ta ine d in the c a

pa c ity a uc tio ns , it se e ms logic al to conclude that the leg islature conte mplated that customers, a s t he ultimate payors of a defic it, would best be serve d by ensuring that the ca pacity -auc tion value re flec t, as nea rly as possible, the true va lue of the capa city products in orde r to preve nt the utilit ies from be ing ove rcompe nsated and the c ustomers overc harg ed.

For all these re asons, we c onclude that the f ailu re to comply

with the 15% require ment or the saf

e-ha rbor pr ovisions is rele vant t o the t rue- up calc ulation as well as the need to foster c ompetition.

I n their sec ond set of arg uments, the J oint Applicants contend that e ven if c ompliance with the 15% re quirement or the safe -har bor rule is re quired for

a prope r true- up ca l cu l at ion, the Co mm is s io n e r

r e d b y c o n c lu d in g th a t th e y d id n o t c o mp ly w it h th e s a f e - h ar b o r p r o v is ion. See 16 Tex. Admin. Code § 25.381(h)( 7)(C). Essentially , they contend that they complied with the safe

harbor provision beca

use they satisfied the re quirements of the alternative safe -har bor provision,

w h i c h t h e y

i n s i s to n l y

r e qu i r e s t h a ta

u t i l i t y p r o p o s e a

u c t i o nm o d i f

i c a t i o n s t o t h e C o m m i s s i o n . In oth e r w o r d s , t h e y c o n t e n d t h a t o n c e t h e y p r o p o s e d m o d i f i c a t i o n s f o r t h e a u c t i o n i n g o f t h e ir

g a sintermediate product, the alternative safe -har bor require ments wer e met, and they should have be en deeme d compliant with the 15% re quirement.

Howeve r, for

the re asons t h at fo l l o w, we b el i ev e t h at t h e C o m m i s s i o n ’s i n t er p re t at ion of the saf e-ha rbor a nd alternative-saf

e-ha rbor pr ovisions is corr ect. The safe -har bor provision specific ally

states that the utility “shall be deeme d to ha ve met the 15% require ment” if it satisfies the re quirements listed. Id. The alternative safe -har bor provision is found i n t h e s en t ence87

imm e diate ly

fo llo wi ng th e saf

e-h arb or pr ov isi on . A lth ou g h it a llo ws uti lit ie s to pr op os e mod if ic a tio ns to the ty

pe or pr ic e of

c a pa c ity pr od uc ts a uc tio ne d, no wh e re in t

he pr ov isi on

do e s it state that mere ly proposing modifications will constitut e complianc e with the saf e-ha rbor pr ovision or the 15% r equire ment. Id. Af te r e mpl oying the tr a dit ion a l ru le s o f c on str uc tio n, we mus t pr e sume that this omi s s ion from the alter native provision was pur poseful. Se e US

A W as te Se rv s. , 150 S.W .3d at 494.

I n a dd iti on , th e Joint

Ap pli c ants ’ c on str

uc tio n o f t

he sa fe -h arb or

pr ov isi on

wo uld essentially

nullify the 15% re quirement. Unde r their inte rp re t ation, a utility would be dee med

c omp lia nt b y the me re a c t of

fi lin g a pr op os e d mo dif

ic a tio n r e g ard le ss o f whe the r t he pr op os a l is

re a so na ble un de r t

he c ir c ums tanc e s o r m a de in g oo d f a ith . E ve n if

a ut il it y fai led to se ll a

sin g le entit l em en t , it could stil l be dee med to have c omplied with the 15% requir ement under the J oint Applicants’ c onstruction so long a s it files any proposal to modify

the terms of the auction. Rather than e x cusing noncompliance with the safe -har bor provision, the alter

native safe -h arbor provision seems to allow a utility to apply for a nother opportunity

to comply

with the

re qu ir e me nts of

the 15 % r ule or the sa fe -h arb or pr ov isi on by g a ini ngpe rm iss ion

to m od if y the te rm s of an a uction in order to incr ease the likelihood of selling the entitlements and a ctually meeting the modified requir ements. The Joint Appli cants a sked for and we re g iven other opportunities to satis fy the re le va nt r e qu ir e me nts bu t f

a ile d to me e t th e m. I n light of the prec eding , we c onclude that the Commission’s construction of the sa feharbor provisions is consistent with the rele vant statutes and r egulations and ac curately ref lects the intent of the leg islature. See Fleming Foods of Tex. , 6 S.W. 3d a t 28 4; Southwestern Bell Tel. Co. , 92 S.W .3d at 441-42.88 I n their third set of a

rg uments, the J oint Applicant s ar gu e that the reduction wa s improper be cause they

substantially

complied with the safe -har bor provision. S u b s tantial compliance has bee n define d as complianc e with t h e “e s s en t ial require ments of a statute.” Stratton v . A us tin In de

p. Sc h. Di

st. , 8 S.W .3d 26, 30 (Tex. App.— Au s t i n 1 9 9 9 , no pet.); W e ntw or th v . M

e de lli n , 529 S.W .2d 125, 128 (Tex. C i v . Ap p . — S an Antonio 1975, no writ). “A deviation from the r equire ments o f t h e st atute which doe s not seriously hinder the le g islature’s purpose in imposing the require ment is substantial compliance.” Stratton , 5 2 9 S

. W

. 2 d a t3 1

. In lig ht o f t he pr e c e din g a

uth or ity , th e Joint

Ap pli c ants ins ist

that e ve n if

the y did no t f ull y c omp ly wi th the rele vant require ments, their actions wer e enoug h to c onstitut e substantial compliance with the

re le va nt s ta tut e s and

ru le s. We d o n ot a g re e wi th t

he a sse rt ion

that se lli nga ll o f t

he e nti tle me nts to th e g a sintermediate product for

one month was not an e ssential require ment for satisfy ing the safe -har bor provision, nor do we be lieve that deeming utilit ies compliant with the 15% rule when they have not met the signific antly reduc ed require ments of the safe -har bor provision would not seriously hinder the purp os e of

the statut e and the ru le

. Th e le g isl a tiv e g oa l in e na c tin g the re le va nt s tatut e s w a s to have the utilit ies comply

fully with t h e 1 5 % requirement, not a saf e-ha rbor r ule fa shioned by

the Commi ssion. More over, the use of the phra se “at least” in the utilities code is some indication that the le g isl a tur e tho ug ht o f 1 5% a s th e a bs olute min imum th a t ne e de d to be so ld i n o rd e r to p ro pe rl y estimate the va lue of the entitlements and that it actua lly pref err ed that a la

rg er a mount be sold. See Tex. Util . Code Ann. §§ 39.153(a ), .262(d) . I t i s aga i nst this ul timate leg islative g oal, not the satisfac tion of the safe -har bor rule, that substantial compliance must be mea sured. During theThe Joint Ap p l i ca nts also refe r to a fe dera l case as support for their asse rtion that they 41 substantially complied wit h the re levant statutes and r ules. See Estate of McAlpine v . Commissioner , 89 auctions in 2002 and 2003, the J oint Applicants only auctioned of

f 10% of Genc o’s ca

pacity , much less than the 15% r equire d by statute. Furthe r , th e Jo in t A p p li c an ts ’ ar g u me n t ig n o r e s th e r e lati o n s h ip b e tw e e n th e 15% require ment and the safe -har bor provisi on. I n interpre ting a nd enfor cing the re levant utilities code provision and in rec og nition of the possibili ty that full compliance may not alway s be possible, the Com mis sio n p ro mul g a te d th e sa fe -h arb or pr ov isi on , all ow ing a uti lity to b e de e me d c omp lia nt w ith the c a pa c ity -a uc tio n r e qu ir e me nts e ve n th ou g h the uti lity so ld le ss tha n 15 % of its c a

pa c ity pr od uc ts. See 16 Tex. Admin. C ode § 25.381(h) (7)( C). Essentially , the C o m m i s s i on made a deter mination of wh a t wi ll c on sti tut e su

bs tanti a l c omp lia

nc e wi th the le g isl a tiv e g oa l. Gi ve n th a t th is s ub sta nti a lcompliance provision allows utili ties to be dee med compli ant even though their actions fall far short of the leg islative g oal, i t is logic al t o require that compliance with the safe -har bor provision be ne ar absolute in order

to achieve , as much a s possible, the desired le g islative mandate. F urther, g iven the Commi ssion’s expertise in the dere g ulation proce ss, we see no rea son to overr ide i ts determination of what constitutes substantial compliance by creating our own interpr etation of whe n the 15% require ment will be deeme d to have be en substantially complied with. De sp ite ob ta ini ng

pe rm iss ion

to h old tw o ad dit ion a l a uc tio ns fo r t

he ir g a sintermediate product, the J oint Applica nts w ere still able to se ll only seven of t h e t we nty -eig ht entitlements that they

wer e re quired to sell to be dee med compliant under the safe -har bor provision. I n li g ht o f t

he pr e c e din g , w e c ann ot c on c lud e that the Joint Ap pli c ants su bs tanti a lly

c omp lie d w ith the re le va nt r e qu ir e me nts
. There fore , we conclude that the Commi ssion c orre ctly deter mined that 41968 F.2d 459 ( 5th Cir. 1992). I n particula r, they highligh t t h at t h e cour

t in McAlpine stated that “substantial compliance is achieve d wher e the r egulatory req u i re ment at issue is unclea r and a rea sonable taxpay er a cting in good f aith and exerc ising due diligenc e never theless fails to meet it.” Id. at 462. Withou td ec i d i n g wh et h er t h at i s t h e p ro p er

s t an d ar d fo r d et erm i n i n g s u

b s t an t i al co mp l i an ce, we note that prior to making the cited state ment, the cour t in McAlpine expressly stated that it was not “ attempting to a

nnounce a rule applicable in all case s.” Id. Moreove r, in that ca se the re levant require ments were unclea r. Ther e is no indication in the rec ord that t h e J o i n t Applicants we re unclea r about how to satisfy

either the 15% rule or t he saf e-ha rbor pr ovision. On the contrar y , g iven the ir ba c k- and -f

or th e xch ang e s w iththe Com mis sio n r e g ard ingthe sa le of c a pa c ity prod

uc ts, it i s clea r t h at the J oint Applicants were awa re that they

had not satisfied e ither set of r equire ments.
90 the J oint Applicants did not comply with e ither the 15% re quirement or the safe -har bor provision. I n thei r f ourt h s e t of argume nts , th e Joint

Ap pli c ants argue that it

wa s im pr op e r t o de ny the m th e fu ll amo un t of the c a pa c ity -a uc tio n aw ard that the y re qu e ste d b e c a us e the fa ilure to sell entitlements was larg ely due to two fa ctors outs i d e o f their control: (1) actions take n by the Commi ssion, and (2) the la ck of a viable mar

ket for g as-inter

mediate products. Specifica lly , they note that it was the Commission t hat spec ified the c apac ity products to be sol d at auc tion and the minimum auction pric e. Se e ge ne ra lly 16 Tex. Admin. Code § 25.381. F urther, the y argue that the la c k o f a via ble mark e t was dem on st rate d b y the fa c ts t

hat th e y we re un a ble to s e ll the c a

pa c ity products eve n at price s that were s i gnificantly lower tha

n first authorized by

the Commiss ion and that ot he r util iti e s w e re a lso un abl e to sell the ir g a s- int e rm e diate pr od

uc t du ri ngthe re le va

nt t ime period. The y

also contend that their ability to sell the entitlements in a public auction wa s signific antly

hamper ed by

the fa ct that Reliant, Cen t er P o int’s larg est potential purcha ser, wa s

s t a tu t o r i l y p r o h i b i t e d

f r o m p art i c i p a t i n g i nt h e p u b l i c a u c t i o n s b e c a

u s e i t w a s an a f

f i l i a t e d c o mp an y. See Tex

. Ut il. Cod e Ann. § 3 9. 15 3( c ) ( pr oh ibi tin g a ff ili a te s f ro m pu rc ha sin g e nti tle me nts in public auctions).The Joint Applicants also insist that by specify ing a ny minimum price rathe r than a llowing 42 completely

open bidding , the Commiss ion may have disc ourag ed sale s duri n g m o nths with low demand a nd may have disc ourag ed buy ers f rom bidding. H oweve r, other tha n ref err ing to articles stating that reser

ve or minimum prices re duce the probabil ity of a sa le at an a

uction, the J oint Ap pli c ants re fe r t o n o e vid e nc e that th e sim ple a c t of se tti nga min imum pr ic e of

any kin d w ou ld nece ssarily

and detr imentally impact the auction of capa city products, nor do they explain why

that ne g a tiv e e ff

e c t w ou ld o nly

have be e n pre se nt in the sa le of g a s- int e rm e diate e nti tle me nts and no t in the s ale of the ot her entitlements. I n addition, their arg ument ag ain i g nores the f act that it was the leg islature, not the C ommissi on, that deter mined that setting mini mum auction prices was ne cessa ry and bene ficial to the c apac ity auction. See Tex. Util . Code Ann. § 39.153(f ) (West 2007). 91 We disag ree with this l ine of re asoning . We cannot take u m b ra ge with the Commi ssion’s actions bec ause by specify ing what products would be sold and for what minimum amount, the Commiss ion was doing ex actly what the leg islature ins tructed it to do. The utilities code require d the Commiss ion to develop rules “that define the scope of the c apac ity entitlements to be auctioned” and that “sta t e t h e minimum amount of capa city that can be sold at auction as a n entitlement.” Id. § 39.153(e) . Fur ther, the utili t i es co d e re quired the Commission to adopt rules “that pre scribe the proce dure f or the a uction,” including desig nating “which gener ation units or comb i n ation of units are offe red f or auc tion” and esta

blishing “a

n opening bid price.” Id. § 3 9

. 1 5 3 (f). Moreove r, althoug h they express dissatisfaction with the Commis sion’s actions on 42 appea l, the J oint Applica

nts ha ve failed to de monstrate that they objected to the pr oducts or the pr ice specifie d in the Commi ssion’s r ule within the time period authorized by statute. See id. § 39.001(f) (spec ifying time that pa

rty has to cha lleng e validity

of rule)

. Fur thermore , the fa ct that Reliant was prohibited from purcha sing the products at the auction ca

nnot excuse noncompliance with t h e requirements of the utilities code or the administrative code. The provisions re lating to the c apac ity auctions, like with strande d costs, occur in the context of deregulation, unde r which a f ormer monopoly

was re quired to sepa

rate into dist inct companies w ith the ultim ate g oal of de veloping a compe titive retail marke t. Id. §§ 39.001, .051(b).92

Given the c ommon origin of a ffiliated c ompanies, the leg islature n o d o u b t conclude d that the

e xclu sio n o f a ff

ili a te d c omp anie s w a s n e c e ssa ry to e ns ur e that no n- a ff

ili a te d c omp anie s tr

y ingto

e n t e r t h e m ar k e tw e r e a

b l e t o p u r c h a s e t h e c a

p a c i t y p r o d u c t s n e c e s s ar

y t o c o mp e t e an d

t h a tt he ir entra nce into the mar

ket was not hampere d by the possibilit y

of improper

dealing s betwee n aff iliated companies.

I n addition, we must presume that when the le g is la tu r e e n a c te d the statutory

provision excluding af

filiated compa

nies from public a

uctions, it was awa

re of and fu l l y

considere d the possibili ty that its c hoice might hamper the ability of utilit ies to se ll their entitlements. I t is not t he pla c e of thi s Court to re -w e ig h the fa c tor s re le va nt in thi s ty

pe of pu bli c -p oli c y

de c isi on , a

nd we wi ll not t hwar t the will of the leg islature by allowing the exclusion of affiliated c ompanies to justify noncompliance with the 15% re quirement or the safe -har bor rule. F ina lly , th e fa c t th a t t here app are ntl y wa s li ttl e mark e t f

or the g a s- int e rm e diate product a ctually

supports the Commis sion’s decisions rathe r than unde rmines them as alleg ed by the Joint Ap pli c ant s. I t is a

pp are nt f ro m th e fa c t th a t th e Joint Ap pli c ants we re a

ble to s e ll the g a sintermediate product in private auctions that the mar ket value of

this product was not zero. Howeve r, for

whateve r re ason, the publi c au ct i o n s failed to ade quately ref lect an a ccur ate mar

ket

v a l u e f o r t h e p r o d u c t s . In l i g h to f

t h e p r e c e d i n g an d

t h e f a c tt h a to n e o f

t h e p u r p o s e s o f t h e c a p a c i t yau ct i o n t ru e- u

p i s t o en s ure t h at u t i l i t i es re ce i v e no m o re t h an t h ey we re p re d i ct edt o o b t ai nt h ro u gh the sale of

power , CenterPoint Energy, I nc. , 1 43 S.W .3 d at 96 , th e Com mis sio n’ s d e c isi on to deter mine a more acc urate marke t value wa s rea sonable.

I n their final se t of arguments, t h e J oint Applicants contend that the a ctual method used by t h e Commi ssion to determine the c apac ity -auc tion awar d was improper . I n essenc e, theyT h is f igu r e is b a s e d o n th e mi n im u m a u c ti o n p r ic e ( $ 0

. 0 1 p e r k il o w a tt mo n th ) , the si ze 43 of the e ntitlements (25000 kilowatt months per e ntitlement), and the 21 a dditional entitlements that would have be en sold. Otherw ise, the Commissi on would have be en for ced to c hoose between ignoring the issue 44 of the J oint Applica

nts’ noncompliance with the statute completely or strictly enfor cing the statutory requ i re m en t s , t h u s d ep ri v i n g t h e J o i n tAp p l i ca n t s o f t h e $ 1

. 0 5 9 b i l l i o ncap ac i t y -a uction rec overy that the Commiss ion allowed under its alternative c alculation.

93 argue that the method employ ed by the Commiss ion reduc ed their r ecove ry by too gr eat a

n amount when compar ed to the relatively small a mount by which they failed to c omply with the safe -har

bor provision. They

argue that if they had sold all the entitlements offe red in the f inal auction, the additional rec overy

would have a

mounted to only

$5,250. 43 Although the J oint Ap p licants’ fr aming of their a rg ument initially

appea rs compelling , we c annot ag ree with their cha rac terization of the re duction. Th e s i tuation presente d in t his iss ue is s imi lar t o th e on e pr e sente d in the mark e t va luatio n o f t he Joint Ap pli c ants ’ g e ne ratio n a sse ts. Th e re le va nt ru le and

statut or y pr ov isi on a ssume that th e uti lity

wi ll c omp ly

wi th the 15% re quirement or w ith the safe -h ar b o r p ro vision, and neither one addre sses the situation of noncompliance . As a re sult, the Comm ission was caug ht betwee n a statutory mandate r equiringthat utilit ies rec over for t heir capac ity -auc tion costs and the J oint Applicants’ noncompliance with the require men t s nece ssary

for de termining an ac curate awa rd. F or all the re asons that we c oncluded that the Commiss ion had the implied authority to develop an a lternative ma rket-va luation method, we must also conc lude that the Commissi on has the implied power to develop an a lternative me ans for e stimating the “c apac ity -auc tion price” to be used in the true -up ca lculation when the r eleva nt statutory and rule require ments have not be en satisfied. 44Although the J oint Applicants do not spe cifica lly contest the Customers’ cha rac terization 45 of the formula and its functioning whe n less than 15% of a utilit y ’s entitlements have sold, the J oint 94 M o r e o v e r , w h e n d e t e r m i n i n g t h e m e t h o d f o r c a l c u l a t i n g t h e v a l u e o f

t h e c a p a c i t yauction price , the Commi ssion log ically looked to the private auctions to help estimate the va lue of the entitlements in a public auction. This decision seems pa rticularly appropr iate g iven the re lative

su c c e ss t hat th e Joint

Ap pli c ants ha d in

a uc tio nin g of

f t he e nti tl eme nts in t

he pr ivate a

uc tio ns . F ur the rm or e , th e me tho d c ho se n b y the Co mm is si on wa s b a se d o n th e te sti mony of a wi tne ss testifying be fore the Commiss ion and was suppor ted by substantial evidence

. Ad dit ion a lly , th e Joint

Ap pli c ants ’ c ha

ra c te ri zat ion

of t he disp ari ty

be tw e e n th e ir reque sted awa

rd and the awa

rd dete rmined by the C ommissi on fails to addre ss significa nt, releva nt fac tors that led to the larg e disparity

. The J oint Applica nts were instructed to sell a c erta in amount of e nti tle me n t s t o e a c h o f i t s f o u r p r o d u c t s . T h e t o t a l nu mb e r

o f e n t i t l e m e n t s w a s s u

p p o s e d to constitute at least 15% of the J oint Applicants’ total number of c apac ity products. Howe ver, in 2002

and 20 03 , th e Joint

Ap pli c ants fa ile d to se ll the re qu ir e d amou nt o f ent it leme nts fo r a

ny of the ir products, mea

ning that less than the statutorily require d 15% wa s sold. Although they may have me t the low e r sa le re qu ir e me nts of the sa fe -h arb or pr ov isi on of the a dmi nis tr a tiv e c od e fo r s ome of the ir products, the J oint Applicants st ill sold signific antly few er entitlements than was r equire d under the utilit ies code . As a result, the ca pacity -auc tion awar d calc ulated by the J oint Applicants was base d on the sale of

a number of entitlements dee med insufficie nt by the leg islature for

that purpose. F ur the r, the Cus tom e rs pr ov ide an un c on tr a dic te d e xplanatio n fo r ho w the fa ilure to

se ll the re qu ir e d amou

nt o f a ny of th e capac ity

pr od uc ts a nd ho w the sa le of

so fe w o f t

he g a sintermediate products in particula r l ed to an overestimate of the capacity -auc tion costs by the J oint Ap pli c ants
. The Customers asse rt that the true- up formula r equire s the s al e o f the full 15% of

45Ap pli c ants do ins ist that the Cus tom e rs may no t r a ise thi s a

rgume nt o n a

pp e a l be c a

us e it amou

nts to an unauthorized cha lleng e to the true -up rule. We disag ree with the J oint Applicants’ asser tion. The Customers ar e not contesting the proprie ty of the rule when a ll the nece ssary require ments have been me t—an asser

tion that they

arguably would have be en unable to bring in this appea l. Rather, the y c on te st the Joint

Ap pli c ants ’ unm od if

ie d use of the fo rm

ula wh e n the ne c e ssa

ry re qu ir e me nts have no t be e n me t. 95 entitlements or, alternatively , the s ale of enoug h entitlements to satisfy the safe -har

bor rule in or der to obtain a valid re sult. Essentially , the C ustomers argue that when enoug h of the e ntitlements have be e n s old , th e fo rm

ula is abl e to pr op e rl y

c omp are the re ve nu e fr om t he sa le of c a pa c ity pr od uc ts with the fuel e x penses a ssociated with those products. Howeve r, they aver that when a

n insufficient amount of entitlements is sold, t he nec essar y compar ison of reve nue to fue l expense is no longer possible beca

use the incur

red f uel expense will have no c ounterpa rt for c omparison. I n th is c a se , th e Cus tom e rs ins ist that the ins uf fi c ie nt s a le of

e nti tle me nts to t

he g a sinterme d ia

te p r o d u c t m e a nt t h a t t he re venue c omponent of the c apac ity -auc tion price wa s determined pr ima ri ly by the pr ic e s f

or ba se loa d p ro du c ts, wh ic h a re re lativ e ly ine xpe ns ive wh e n c omp are d to the other c apac ity products, while the expense ca lculation was he avily weig hted by

the hig her f

uel expenses associate d with the other non-ba seload produc ts. As a re sult, the Cust omers insist that the capa city -auc tion price wa s artificia lly lowere d by t h e inclusion of sig nificant e x penses without

acc ompanying r evenue . The Joint Applicants actua lly aler ted the Commissi on to the possibili ty that the c a pa c ity -a uc tio n p ri c e mig ht b e low e re d in thi s ma nn e r whe n th e y

a sk e d th e Com mis sio n to consider the number of sa les in the private a nd public auctions in its determination of whe ther the 15% requirement had been met. Tex. P ub. Util. Com m’n, Reque st for Ruling that Texas GE NCO, LP has Met Its Obligation Under PURA § 39.153( a) , D oc ke t N o. 27 74 4 at 6 (M ay 5, 20 03 ). I n th e ir fi l i n g, t h e J o i n tAp p l i ca n t s wa rn edt h e C o m m i s s i o no f t h e p o t en t i al n e gat i v e e ff ec t s o f s el l i n g aI n its final order, the Commi ssion chara cter ized this eff ect a s “an una cce ptable downwa rd 46 b i a s i nt h e c a

p a c i t y a u c t i o np r i c e , ” w h i c h i t c o n c l u d e d c a u s e d “ ano v e r s t a t e m e n to f

t h e c a p a c i t yauction true -up amount.”

I t i s w o rt h n o t i n g t h a t u n l i k e i n t h e s t r an d e d

- c o s t i s s u e , t h e C u s t o m e r s an d the Ut ili ty 47 C o u n s e l d o n o tar g u e o na p p e a l t h a t t h e J o i n t A p p l i c an t s w e r e n o te n t i t l e d t o r e c o v e r

y f o r c a p a c i t yauction costs despite the ir failur e to satisfy the fiftee n-per cent r equire ment or the saf e-ha rbor require ments. 96 dis pr op or tio nate sh are of

ba se loa d p ro du c ts a

nd state d th a t th e sa le of

mor e ba se loa d p ro du c ts w ou ld “lower the ‘c apac ity

auction pric e.’” 46 I n light of the prec eding , we must conc lud e that the method employ ed by the Commss ion for ca lculating the ca pacity -auc tion awar d was re as o n able a nd consistent with the rele vant statutory

provisions. Further , for a ll the rea sons give n in this section, we conc lude that the C o m m i s s i o nd i d

n o ta b u s e i t s d i s c r e t i o no r

a c tar b i t r ar i l y w h e ni tp e r f

o r m e d t h e m o d i f

i e d c a p a c i t yauction ca lculation. Acc ording ly , we c onclude that the district c ourt improperly reve rsed the 47 p o rt i o no f t h e C o m m i s s i o n ’ s o r d e r

r e d u c i n g t h e J o i n tA p p l i c an t s ’ c a p a c i t y- a u c t i o nr e c o v e r

y.

Carr ying Costs

Duri ng the tr

ue -u p pr oc e e din g , the Com mis sio n de te rm ine d that the Joint Ap pli c ants

wer e entitled to re cover

$168 milli on as interest or “ca rry ing c osts” on the ca

pacity -auc tion awar d,

and the dis tr ic t c ou

rt a ff ir me d thi s de c isi on . I n thr e e se ts of argume nts , th e Cus tom e rs c on te st this decision and argue that the Commiss ion exceeded its authority by allowing this ty

pe of r ecove ry . First, they argue that no provision of the utilit ies code a uth or ize s th e Com mis sio n to

awa rd ca rry ing c osts on a capa city -auc tion awar d. I n a similar asser tion, the Customers a

rg ue that there is no authority

for the pr oposition that a utilit y has any rig ht to a capa city -auc tion awar d befor e97

the a mou nt o f t he awa rd is d e te rm ine d in

a tr ue -u p p roce edin g , ma

kin g the c arr

ying -c os t

awa rd improper

.

W e d i s a g r e e w i t h t h e C u s t o m e r s ’ a s s e rt i o n s . T h e r e l e v a n t p r o v i s i o nf o r c a p a c i t yauction re cover

y is found in subsection 39.262(d), whic h authorizes a utilit y to r ecove r “the net sum of . . . any differ ence betwee n the price of power obtained throug h the capa city auctions . . . and the power cost projec tions that were e mploy ed for t h e s am e t ime period in the ECOM model.” Te x. Ut il. Cod e Ann. § 3 9. 26 2( d) . In o the r w or ds , th e pr ov isi on sp e c if ie s that a utili ty is e nti tle d to

rec over the differ ence betwee n the pre dicted pric e of power and the a ctual amount obtained in the capa city auctions occ urring in the y ear s prior to the true-up. Whil e it is true that this provision does not contain the phra se “c arr y ing c o s t s , ” t h e Commi ssion neverthe less conclude d that the J oint Ap pli c ants wo uld

no t f ull y re c ov e r unl e ss the y we re a llo we d to r e c ov e r t he tim e va lue (c arr

yingc os t) associate d with the delay

betwee n when the c ost was i ncurr ed and when it was fina lly calc ulated. For the re asons that follow, we believe that the C ommissi on’s i nterpre tation of the

u t i l i t i es code is corre ct. Fir st, the Commi ssion’s construction is supported by prior pre cede nt

conce rning the re cover

y of ca rry ing c osts. Assertions that are simil ar to those made by the Customers were prese nted to the sup re m e co urt in a rule c halleng e to a pr evious version of subsection 25.263( l ) of title 16 of the administrative code

. See generally CenterPoint Energy, Inc

. , 143 S.W .3d 81. I n CenterPoint Energy, I nc. , the supreme court had to de termine the validity of a

ru le pr omu lg a te d b y

the Com mis sio n that allo we d util iti e s to r e c ov e r i nte re st o n th e ir str and e d c os ts but limi ted the intere st recove ry to the time afte r a f

inal true-up or der w as issued. Id. a t 83 . D e sp ite the fa c t th a t th e re le va

nt tr ue -u p pr ov isi on ma de no me nti on of int e re st o r c arr

yingc os ts, the su

pr e meI n 2006, the Commi ssion pr omulgated the curr ent version of the rule, which require s that 48 stranded c osts be deter

mined as of the f

irst d ay o f competit ion. 16 Tex. Admi n. Code § 25.263( l )( 3) (2 00 7) ; see 31 Tex. Reg. 5603 ( 2006). 98 court c oncluded that the r

ule was inconsistent w ith the g overning statutory scheme beca

use it did not allow for the rec overy

of more c arr

y ing c osts. Id. a t 84 ; see also id. a t 89 (s tatin g that “ [t]he on ly expli cit ref

ere nce t o ca rry ing c osts on stranded costs appe ars in a se ction of the Ac t reg arding

se c ur iti zat ion ,” no t tr

ue -u p r e c ov e ry

). Es se nti a lly , the su

pr e me c ourt

c on c lud e d th a t to c omp ly wi th the mandate t h at a u t ility fully rec over, stra

nded costs ar e to be de termined fr om the date that competition first beg an. See id. at 87. Stated differ ently , the supreme court conclude d that utilit ies

are entitled to rec over the value of these c osts from the time that they are incurre d, not just from the time that they

are calc ulated. B eca

use the rule did not allow the utilit ies to rec over interest from the first day of compe tition, t he supre me cour t concluded that the rele vant portion of the r ule was in v al id. Id. at 84. This same rationale applies with equa l force to the situation presented 48 in t his a pp e a l. Second, bec ause t h e capac ity -auc tion awar d was not ca lculated until the true- up proce eding , the J oint Ap p l icants’ e nd-use c ustomers wer e g iven the bene fit of the time value of reta ining the c apac ity -auc tion awar d until the true-up: a be nefit for which they

should be requir ed to c ompensate the J oint Applicants. Cf. Phillips Petroleum Co. v. Stahl Petroleum Co. , 569 S.W .2d 480, 485 (Tex. 1978) (holding that, under equitable principles, party may rec over inter est on money that rig htfully

belong ed to that par

ty but was used by

another ). Finally , the over all leg islative mandate that utili ties rec over the expenses that they inc ur a s a re su lt o f t he tr ans iti on

to a c omp e tit ive mark e t wo uld se e m to re qu ir e the Com mis sio n toTh e Cus tom e rs c on te nd that, a s u til iti e s, the Joint Ap pli c ants bo re the ri sk of delay in 49 rec overingtheir m o n ey u n d er regulation. Re lia nt I , 101 S.W .3d at 147 (stating that “[n] ormal ‘re g ulatory

lag ’ is considere d to be an element of risk borne by a uti lity ”). Howeve r, in light of the fac t that the t rue- up proce eding was de signe d to smooth t he tra nsition from regulation to competition and in light of

the strong leg islative dictates mandating that util ities be made f ully whole bythe trueup proce dures, we must conclude that it is inappropriate i n this case to assig n that risk to the J oint Ap pli c ants
. 99 awa rd utiliti es the time va lue associate d with the delay in rec overingthe ca

pacity -auc tion awar d. 49 I n light of the prec eding , we must conc lude that the Commissi on’s interpre tation of the ca pacity -auc tion provisions of the utili ties code is consistent with the re levant statutory provisions and ac curately ref lects the intent of the le g islature. We see n o discerna ble diffe renc e betwee n rec overy

for c apaci t y -a u ct i o nco s t s an d s t ra n d ed -c o s tre co v ery

t h at wo u l d

wa rr an t a dec ision completely at odds with pr ior prec edent, nor do we see any leg itimate r eason for limiting the Joint Applicants’ c apac ity -auc tion interest rec overy by using the date that the ca pacity -auc tion awar d was calc ulated rather than the date that the de ficit from the c apac ity auctions wa s actua lly

incurre d. I n their sec ond set of ar g uments, the Customers conten d t h at rec overy for c arr y ing costs was inappr opriate be cause the Commi ssion’s true-up ru le do e s n ot s pe c if ic a lly a uth or ize thi s ty pe of r ecove ry

for c apac ity -auc tion awar ds. See 16 Te x. Ad min . Co de § 2 5. 26 3( i) . In li g ht o f t his , they further asser t that the J oint Applicants have w aived any rig ht to seek this re cover y beca use they did not c ontest this omi ssion from the rule in the time a llowed by statute. See Tex. Util . Code Ann. § 39.001(f) (spec ifying pe riod of time in which par ty may contest rule a dopted by

Commi ssion). We disag ree for two reasons. Althoug h subsection (i), whic h is entitled “True -up of

c a pa c ity a uc tio n pr oc e e ds ,” do e s n ot s pe c if ic a lly a dd re ss c arr yingc os ts o n c a

pa c ity -a uc tio n a wa rd s,

a later subse ction seems to allow this ty pe of r ecove ry . See 16 Tex. Admin. C ode § 25.263(i), ( l ).100

Subsection ( l ) s pe c if

ie s tha t a utili ty “ sh a ll be a llo we d to re c ov e r, or sh a ll be lia ble fo r, c arr

yingc os ts on the true- up balanc e.” Id. § 25.263( l ). When de fining what constitutes the “true -up bala nce,” the code includes the “[ c]apac ity auction true-up calculated under subsec tion (i).” Id. As a re sult, by its terms, section 25.263 require s the rec overy of ca rry ing c osts on a capa city -auc tion awar d. Even a ssumi n g t h at s ubsection ( l ) does not apply , we would still conclude that the

rec overy of ca rry ing c osts was appropr iate. Althoug h the s ubsection relied on by the C ustomers does

no t sp e c if ic a lly a llo w f or the re c ov e ry of c arr

ying c os ts, the su

bs e c tio n do e s no t e xpre ssl y pr oh ibi t their re co v er y ei t her. See id. § 2 5. 26 3( i) . In li g ht o f t he a bs e nc e of an e xplic it p ro hib iti on

and in lig ht o f t he fa c t th a t th e re c ov ery

is c on sis te nt w iththe re le va nt s tatut e s, we wo uld

a pp ro pr iate ly defe r to the Commissi on’s interpre tation. See A cke rso n v. C l a r en d on Nat’l Ins. Co. , 168 S.W .3d 273, 275 (Tex. App.—Austin 2005, pet. denied) ( stating that “[a]n a d m i n i s t ra tive ag ency ’s interpre tation of its own rules is entitled to gr eat we ight a nd defe renc e”)

. I n light of the fac t that car rying- cost rec overy

is consistent with the util ities code a nd the administrative code, we cannot conclude that the Commiss ion exceeded its authority by allowing the J oint Applicants to recove r ca rry ing c osts on their capa city -auc tion awar d. Finally , the C ustomers asser t that by g iving the Joint Appli cants c arr ying c osts, the Com mis sio n im

pe rm iss ibl y

a llo we d th e Joint

Ap pli c ants to obt a in a dou ble re c ov e ry . I n ma

kin g thi s

argument, the Cus tom e rs no te that th e Com mis sio n b a se d it s d e c isi on to a llo w f

or c arr ying -c os t

r e c o v e r y l ar g e l y o nt h e t e s t i m o n y an d r e c o m m e n d a t i o no f

a C o m m i s s i o ns t a f

f w i t n e s s , D ar

r yl Tietjen. In his testimony , Tietjen re commended allowing the J oint Applica nts to rec over interest on the capacity -auc tion awa

rd i n order

to make them whole. I

n addition, Tietjen also testified that theI n a sing le sentenc e, the Customers asse rt that there “is no statutory basis for a ssuring [t he 50 J oint Applicants] a g uara

nteed return dur ing 2002 a nd 2003, afte r re g ulation had ende d.” Howe ver, the whole thrust of the ir argu m en t i s t h at the ca rry ing c ost awar d, not the return, w as improper

. Moreove r, althoug h the utiliti es code does not specif y that a u tilit y

is entitled to thi s g uara

nteed return dur ing the transition period, many of the re asons that led us t o conclude that an aw ard of car rying c osts was proper

would also seem to have equal a pplicability

here

. 101 J oint Applicants should r ecove r a “re turn” on the J oint Applica nts’ capital expenditures for 2002 a nd 2003. The Customers conte nd that the “r etur n ” i s simply interest and that it was theref ore

unnece ssary

and improper

for the Commission to allow the J oint Applic an t s t o re cover two interest aw ards.

We disa g ree . Although both a war ds are essentially

interest aw ards, they

serve very differ ent purposes. U n der r egulation, when esta blishing a utility ’s rate, the Commissi on was

re qu ir e d to se t a

rat e th at would a llo w “ the uti lity a re a so na ble op po rt

un ity to e arn a re a so na ble

re tur n o n th e uti lity ’s inv e ste d c a pit a l us e d. ” Te x. Ut il

. Co de Ann

. § 3 6. 05 1 ( Wes t 20 07 ); see Central Power & Light Co. , 36 S.W .3d at 552-53. In light of this “guara nteed r eturn” provision, the C o m m i s s i o n awa

rded the J oint Applicants a re turn on their ca pital expenditures made befor e the true -up. 50

T h e c ar r y i n g - c o s t aw ar d , o n t h e o t h e r h an d , s e r v e s an e n t i r e l y d i f

f e r e n tp u r p o s e . It

w a s i s s u e d t o a c c o u n tf

o r t h e d e l ay b e t w e e nt h e t i m e t h a tt h e J o i n tA p p l i c an t s i n c u r r e d c a p a c i t ya u c t i o nc o s t s an d

t h e t i m e t h a tt h e c o s t s w e r e f u l l y c a l c u l a t e d

an d r e c o v e r y c o u l d b e g i n . It

re a ssi g ne d th e tim e va lue of the awa rd to t he Joint Ap pli c ants rathe r t ha n th e ir e nd -u se c us tom e rs : a bene fit we pre viously

conclude d that the J oint Applicants were entitled to rec over. The fac t that these two re cover ies are distinct is also hi g hlighted by the fa ct that the Joint Ap pli c ants wo uld

have be e n e nti tle d to the re tur n e ve n if the y we re no t e nti tle d to the int e re st102

awa rd. Stated anothe r wa

y , if the capa city -auc tion a war d had been g iven to the J oint Applicants at the time that the cost wa s incurr ed, ther e would be no ne ed to awa rd ca rry ing c osts because there would have be en no dela

y , but the J oint Applicants woul d s t i l l h ave a rig ht to recove r a r eturn on their investments.

I n li g ht o f t

he indepen den t nat

ur e and dis tin c t pu

rp os e s o f t

he awa rd s, we mus t

c on c lud e tha

t th e Commi ss io n did no t e xce e d it s a uth or ity by a llo wi ngthe Joint

Ap pli c ants to

rec over both a

war ds. There fore , we conclude that the district c ourt proper ly aff irmed that portion of the Commission’s order. Depre ciation Expens es

I n their final issue on appea l, the J oint Applica nts c omplain a

bout a reduc tion that the Commi ssion made to their stranded- cost rec overy . I n its orde r, the Commi ssion reduce d the J oint Applicants’ a

war d by $378 milli on. This deduction was based on the Commiss ion’s deter mination that the J oint Applicants rec overe d a po rt i o n o f t h eir stra nded costs throug h the auc tioning off of entitlements to their g ene ra t i o n assets in the ca pacity auctions and throug h the cor responding

c a p a c i t y- a u c t i o nt r u e - u p aw ar d

. S p e c i f

i c a l l y, th e C o m m i s s i o n c o n c l u d e d t h a tt h r o u g h t h e c a

p a c i t ya uc tio n p ro c e ss a

nd tr ue -u p, the Joint

Ap pli c ants we re a

ble to r e c ov e r f

or the de pr e c iatio n to the ir g e ne ratio n a sse ts i n 2 00 2 a nd 20 03

. B e c a

us e a uti lity ’s str and e d- c os t re c ov e ry e ns ur e s tha t a uti lity wi ll be awa

rd e d, a mon g oth e r thi ng s, the va lue of the de pr e c iatio n to its a sse ts t hat w ou ld o rd ina

ri ly have be en re cove re d o ver the life of the a ssets under tra ditional reg ulation, the Commi ssion conclude d that the J oint Applica nts’ stranded- cost rec overy alre ady included rec overy for depre ciation for the 2002-2003 per iod. Accor dingly , the Commi ssion de termined that a llowing theI n its order , the Commiss ion conce ded that neither the utiliti es code nor the a dminist rative 51 code a uthorizes a reduc tion to a utili ty ’s capa city -auc tion true -up awa rd to preve nt an over

rec overy of strande d costs. Acc ordi n g ly , the Commiss ion reduc ed the stra nded-c ost awar d rathe r than the capa city -auc tion true-up aw ard. 103 J oint Applicants to recove r the full amount of both awa rds amounted to an ove rre cover y of strande d costs. Consequently , the Commi ssion r educe d the J oint Applica nts’ stranded- cost rec overy by the amount of depr eciation recove red throug h the ca pacity -auc tion awar d. 51 I n attacking the Commi ssion’s r eduction, the J oint Applica nts e ssentially

em p loy three sets of ar g uments. First, they argue that the c apac ity -auc tion true-up does not pro v i d e for a return of stranded c osts. Second, they contend that even if it does, the Commiss ion does not have the a uth or ity to r e du c e the ir str and e d c os ts to a c c ount fo r that re c ov e ry . I n oth e r wo rd s, the y ins ist that reg ardle ss of whether they rec overe d some of their stranded c osts through the capa city -auc tion true-up, the Commi ssion does not have the au thority to reduc e a utility ’s strande d-cost aw ard. Finally , in attackingthe Commiss ion’s reduc tion, the J oint Ap p l i cants pose a hy pothetical compar ison betwee n the re cover ies of two diffe rent utilities and insist t hat this comparison de mon str a te s th a t th e Com mis sio n’ s in te rp re tatio n o f t he re le va nt s tatut e s w ill lead t o in e qu ita ble and ar bitrary results.

TheCap ac ity -A uc tio n R e c ov e ry In c lud es a Pa rti al R e c ov e ry

for Stran de d Co sts I n thei r fi rs t s et of arg uments, the J oint Applicants argue that the Commission’s reduc tion was err oneous bec ause the capa city -auc tion true-up and t he st rande d-cost true -up provide independe nt sources of

rec overy and, more importantly , beca use the capa city -auc tion process doe s not provide for

a re turn of strande d costs. I n light of this, t he J oint Applicants i nsist that stranded

c os ts a re c omp letel y ir re le va

nt t o a uti lity ’s c a

pa c ity -a uc tio n r e c ov e ry . A s su

pp or t f or the se104

propos i t i o n s , the J oint Applicants rely heavily on our Re lia nt I

opinion in which we stated that stranded c osts and the other true -up items are distinct concepts tre ated diff ere ntly by the utilit ies code and that the leg islature chose not to include capac ity -auc tion rec overy “in i ts definition of strande d costs or to incorpor ate [that rec overy ] into the m ethods it presc ribes for calc ulating stra

nded costs.” 101 S.W .3d at 140.

For the reasons that follow, we disagr ee with the J oint Applicants’ assertions. The supreme c ourt previously cautioned that t h e d esi g n of the c apac ity -auc tion true-up mig ht allow utilit ies to rec over a

portion of their stra

nded costs. See Ce nterPoint Energy, I nc. , 143 S.W .3d 81. I n CenterPoint Energy, I

nc. , the supreme court was fac ed, in par t, with determining the proprie ty of a rule that a ll o w e d

u ti li ti e s to r e c o v e r

in te r e s t o ns tr an d e d

c o s ts f r o m t h e d a te o f th e f in a l t r u e - up order rathe r than the f

irst da y of der egulation. Id. at 83. Althoug h the issue of whe ther utilities may

rec over por

tions of the i r stranded c osts through the capa city auctions and true -ups was not be fore it at th e tim e , th e su

pr e me c ourt

c omm e nte d th a t: [T] he ca pacity auction true -up proc edure set forth in t he [ utilit ies code] may include a compone nt for re turn of or on stranded c osts in 2002 and 2003.

. . . What can be gleane d from the rec ord i n this proce eding is that some portion of the marg in that results from the c apac ity auction true -up m ay contain a component that allows a re turn of or on str and e d c os ts.

. . . Ba sed on the re cord be fore us it appear s that the desig n of the c apac ity auction true

up may have pe rmitted g ener ation companies to re cover during 2002 and 2003 at le a st a po rt ion of the ir fi xed c os ts, inc lud ingstr and e d c os ts.105

Id. a t 84 , 87 (e mph ases added ); se e als o R e lia nt I , 1 01 S.W. 3d

a t 14 0 ( no tin g that r e latio ns hip betwee n capa city -auc tion costs and stranded c osts was closer than re lationships between stra nded costs and other

true-up items). Although the opinion was primarily conce rned w ith the rec overy of int e re st, the su

pr e me c ourt ’s us e of

the wo rd “ of ” in t he ph ra se “ wh e the r p ro c e e ds fr om a c a pa c ity auction true -up had a

component for return on or of stranded c osts” indicates that the supr eme c ourt believed that a ca

pacity -auc tion awar d might include a portion of a utility ’s strande d costs. When making the se comments, the supre me cour t no doubt recog nized the common purp os e of

the tw o tr

ue -u ps . T he ov e ra ll p ur

po se fo r e na c ti ng th e va

ri ou s tr ue -u p s tatut e s w a s to fa ci l i t ate the transition to a dere g ulated mar ket by enablingutilit ies to “re cover the diffe renc e betwee n what their g ener ation assets would be w orth under c ontinued regulation and what they are worth in a c ompetitive market.” T ex . P u b

. Ut il. Com m’n, Pe tit ion of C oa lit ion of R ate

pa y e rs for Ru le ma k ing to A me nd

P. U. C. S ub sta nti v e R. 25 .2 63 (

i) , Docke t No. 28677, at 3 (Oc t. 21, 2003) (Joi nt A pp lic ants ’ r e ply to pe tit ion ). Al tho ug h th e le g isl a tur e de c ide d to de re g ulate the ind us tr y int o

a c omp e tit ive mark e t and

to al low c omp e tit ive fo rc e s to det e rm ine the va lue of the uti lit ie s’ se rv ic e s, it wa s aw ar e t h a tt h e d e r e g u l a t i o np r o c e s s m i g h ti n i t i a l l y d e c r e a s e t h e v a l u e o f

t h e u t i l i t i e s’ g ener ation assets. Id. Stated differ ently , the leg islature re alized that conce rn about the via bility of the new, c omp et i tive marke t might dissuade investors f rom investing in the f

ormerly regulated utilit ies. Id. This pote ntial investor conce rn mig ht artificially lower the marke t value of the utilit y ’s assets below the value the a ssets would be appr aised at in a more de veloped mar ket. Id. I n light of this possibilit y , the leg islature chose to “split the valuation proce ss into two parts” r ather

than estimate the ma

rket va lue of the utilities’ g en er at i o n as s et s on the first day of competition in 2002. Id. One pa rt of the va luation proce ss occur s in 2004 and utiliz es one of theDuringthe true- up, J eff ry Pollock, one of the Customers’ witnesse s, testified that the 52 capa city -auc tion true -up ensure s that utili ties “re ceive their re g ulated cost of se rvice for 2002 a nd 2003.” He further

testified that the capa city -auc tion a war d was nece ssary beca

use the final mar

ket valuation did not occur

until 2004. 106 previously

discussed valuation tools listed in subsections 39.262(h) and (i) to estimate t he mar ket value of a utility ’s g ener ation assets. Id. The sec ond part of the valuation proc ess occ urs duringthe ca pacity -auc tion true-up and conc erns the two- y ear period a fter c ompetition bega n. Id. Th ro ug h the c a

pa c ity auc tio ns , utilit ies wer e re quired to auction off entitlements to the ir g ener ation capa city

. Tex. Util . Code Ann. § 39 .1 53 (a ). I n oth e r wo rd s, uti lit ie s we re re qu ir e d to se ll p ow e r e nti tle me nts in a wh ole sa le mark e t. I n addition to fostering competition, the leg islature intended the capa city auctions to pr o v i d e t he uti lit ie s w itha

wa y to r e c ov e r s ome of

the ir str and e d c os ts f

or the 20 02 -2 00 3 pe ri od

. So lon g a s a utilit y is able to auction off

entitlements for a

n amount that exceeds the utility ’s oper ating costs, the utilit y will be able to rec over a portion of its stranded c osts. See Tex. P ub. Util. Com m’n, Re po rt to t he75 th L e

gis latur e, V

olu me1, El e c tri c Po we r I nd us try Sc op e of C

om pe tit ion an d P ote nti all

y Stran da bleIn v estm e nt R e po rt , at VI -3 to VI -4 (Jan. 1997)

. Howeve r, the same economic f orce s that h a d t h e p o t e n t i a l t o art i f

i c i a l l y l o w e r

t h e v a l u e o f

a u t i l i t y’ s g e n e r a t i o na s s e t s d u r i n g t h e o p e n i n g d ays of com p et i t i on also had the pote ntial to artificially lower the price for the sa le of powe r. Acc ording ly , the leg islature ena cted the c apac ity -auc tion true-up to ensure that utilit ies rec eive the full value of the entitlements that the utilit y would have rec eived in 2002 and 2003 had r egulation continued. Se e Pe tit ion of C oa lit ion of R ate

pa y e rs , Docke t No. 28677, at 3 (e x plaining that 52 purpose of

capa city -auc tion true-up is to make utilities whole for 2002 a nd 2003).107 To faci l i t at e t h i s re co v er y , t h e l egis lature a uthorized a compar ison betwee n the regulated price of power previously estimated by

the ECOM model and the a ctual re venue obta ined thr ou g h th e sa le of

po we r i n th e c a

pa c ity a uc tio ns . Sp e c if

ic a lly , th e le g isl a tur e pr ov ide d th a t a uti lity is e nti tle d to re c ov e r “ any dif fe re nc e be tw e e n th e pr ic e of po wer obta ine d thro ug h th e c a pa c ity

a uc tio ns . . . a

nd the po we r c os t pr oje c tio ns that we re e mpl oy e d

. . . in t he ECO M mo de l to e sti mate str and e d c os ts. ” Te x. Ut il. Cod e Ann. § 3 9. 26 2( d) (2 ); see Tex. P ub. Util. Com m’n, Application of Texas-New Me

xico Power Company

to Finalize Stranded Cost s u n der PURA § 39.262 , Docke t No. 29206, at 3 (Ma

rch 3, 2004) (supplemental pr eliminary orde r)

. Under

this provision, t he leg islature eff

ectively g uara

nteed that utilit ies would be able to rec over the full amount predicte d by the ECOM model and wo u l d b e entitled to an a war d to elevate their re cover y to that level if they

wer e unable to auction their powe r entitlements for the predic ted value.

As discussed pre viously , the ECOM model estim at es t h e diffe renc e betwe en a utilit y ’s “g ener ation-re lated cost-of -ser vice rev enues” under r egulation and the “ma rket-ba sed

re ve nu e s” un de r a

c omp e tit ive mark e t or , a lte rn ativ e ly , “ the dif fe re nc e be tw e e n a

ut i lity ’s fi xed

c os ts and the c ontributions to fix ed costs of utility sales under

competitive conditions.” Report to the 75 th L e gis latur e , at VI -2 to VI -3. A utility ’s fix ed costs consist of , among other thing s, depre ciation of its g ener ation assets and a return on “existi ng g ener ation-re lated investment ca pital.” Id. at VI -4. By ensuringrec overy

up to the projec ted EC OM level, the leg islature ensur ed “that [] uti lit [ie s] ultim a te ly re c e ive [] the same fi xed c os t con tr ibutio n fr om the c a pa c ity a uc tio n p ro c e ss as the ECOM model predic ted it would.” Pe tit ion of C oa lit ion of R ate

pa y e rs , Docke t No. 28677,

a t 4; see also id. at 3 (desc ribing how capacity -auc tion true-up considers “what contribution to fix ed

c os ts” the uti lity ’s g e ne ratio n a sse ts “ sh ou ld g e ne rate in 2 00 2- 2003 ” ); Application of T exas- New108

Mex ico Pow er Company , D o c k e tN o . 2 9 2 0 6 , a t3 ( “ c a p a c i t y- a u c t i o nt r u e - u p e n s u r e s t h a ta [ ] [ u t i l i t y] with significa

nt investment in g ener ation assets will rec over the power costs that the Commiss ion had proje cted, in the 2001 ECOM model, would be recove red for t he 2002-2003 period”) . I n other words, the c apac ity -auc tion true-up ensur es that a utility will be made whole from the sale of elec tricity in the competiti ve mar

ket duringthe time betwee n when a n initial estim ate of

the utility ’s net bo ok va lue and

str and e d c os ts w a s ma de and the tim e of

the fi na l stra

nd e d- c os t deter mination in 2004.

T h e C o m m i s s i o n c l ar i f

i e d w h a t a u t i l i t y i s e n t i t l e d t o r e c o v e r

t h r o u g h t h e c a

p a c i t yauction true -up whe n it promulgated its true-up rule . Rather than pr oviding a strict compar ison of the value obta ined in the ca pacity auctions with the ECOM value, the Commi ssion’s r ule re quires that two compar isons be made. F irst, a utility ’s predicted revenue for the sale of pow er is compa red to its predicted fue l costs. Second, the utility ’s ac tual reve nue from the sale of pow er is compa red to its actual fuel c osts. The true-up awa rd is de termined by

calc ulating the differ ence betwee n the results obtained in the two c omparisons. Specifi cally , the Commiss ion’s rule provide s that the

c a pa c ity -a uc tio n a wa rd wi ll b e c a lc ulate d b y

us ingthe fo llo wi ngfo rm ula : (ECOM [projected] marke t r evenue s - ECOM [projected] fuel costs) - (re venue f rom c a pa c ity a uc tio ns - a c tua l f

ue l c os ts)

See 16 Tex. Admin. C ode § 25.263(i)( 1).

By compar ing the ECOM projecte d r e v e n u e w it h th e p r o je cted f uel costs, the first pa

rt of the e quation produce s a pre dicted “ma rg in” that the uti lity is g uara nteed that it will recove r and be able to us e t o co n t ri b ute to its fix ed costs, including depre ciation. Petition of Coal ition109

of R ate pa y e rs , D oc ke t N o. 28 67 7, a t 4; see also CenterPoint , 143 S.W .3d at 97 (quoting from documents filed by J oint Applica nts that state that purpose of ca pacity -auc tion true-up is to ensure that util it ie s o b ta in

ma r g in p r e d ic te d b y th e E CO M mo d e l “ to b e a v a il a b le to c o n tr ib u te to f

ix ed costs and ther efor e to re duce stra nded costs” a

nd that contain examples of how amount obtained throug h capa city

auction should be used to r educe stranded costs). I f a utility obtains less than the pr e d ic te d ma r g in thr o u g h it s c a

p a c it y a u c ti o n s , th e u ti li ty

is e n ti tl e d

to r e c o v e r

a c a p a c it y - a u c ti on true-up awa

rd to e levate its re cover

y to the predic ted marg in. Pe tit ion of C oa lit ion of R ate

pa y e rs , Docke t No. 28677, at 4.

Al tho ug h a ut il it y is all owe d t o rec ov er an awardun der c ert ain cir cum st ances, a uti lit y is not entitl ed to a c apac ity -auc tion awar d if the aw ard is not neede d to elevate t he utility ’s re cover y to the p r e d ic te d

ma rg in. See Ce nterPoint Energy , 143 S.W .3d at 96 (e x plaining that capa city -auc tion tr ue -u p a wa rd e sse nti a lly

g ua ra nte e s “ c on sume rs and po we r c omp anie s th a t [] po we r c omp an[ie s] will rece ive no mo re an d n o le ss than [t he] ma

rg in” calc ulated by

ECOM model (emphasis adde d)). State d d if fe re ntl y , if

a uti lity ob ta ins the pr e dic te d ma rg in t hr ou g h it s c a

pa c ity a uc tio ns , th e uti lity will not be entitled to recove r a capa city -auc tion awa rd. Fur ther, if a utilit y obtains more than the pr e dic te d ma

rg in t hr ou g h it s a

uc tio ns , th e uti lity

wi ll b e re qu ir e d to re fu

nd that ov e rr e c ov e ry

to i ts customers or, alter

natively , apply

that amount to reduc e its stranded c osts. Petition of Coal ition of Ra te pa y e rs , D oc ke t N o. 28 67 7, a t 4; see also Application of Texas-New Me xico Power Company , Docke t No. 29206, at 3 (e x plaining that capa city -auc tion true -u p preve nts util ities from

ov e rr e c ov e ri ngthr ou g h tr ue -u p b y pr oh ibi tin g uti lit ie s fr om re ta ini ng a mou nt obt a ine d in c a

pa c ity auctions that excee ds amount predicte d by ECOM model).As su pp or t f or the ir argume nt t

hat uti lit ie s do no t re c ov e r po rt ion s of the ir str and e d c os ts 53 throug h capa city

auctions , t h e J o i nt Applicants point to a more re cent or der issued by the C o m m i s s i o ni nw h i c h i ts t a t e d t h a t t h e d e f i n i t i o no f s t r an d e d c o s t s d o e s n o ti n c l u d e t h e c a p a c i t yauction true -up and final-f uel balanc e. Tex. Pub. Util. Comm ’n, Application of CenterPoint Energy Houston Electric, LLC for a Financing Order , Docke t No. 30485, at 6 (De c. 20, 2004) ( “Preliminary Or de r” ). Ho we ve r, the fa c t that th e de fi nit ion s are no t sy no ny mou s d oe s n ot p re c lud e the po ssi bil ity that a po rt ion of str and e d c os ts m ig ht b e re c ov e re d thro ug h th e c a pa c ity -a uc tio n p ro c e ss. 110 B e c a us e the int e nd e d de sig n o f t he c a pa c ity -a uc tio n tr ue -u p e ns ur e s th a t ut ili tie s w ill be g iven no more a

nd no less than a predic ted m arg in to contribute to their fix ed costs, we cannot conclude that the Commi ssion’s de termination that the capa city -auc tion pr ocess a nd true-up a llows utilit ies to rec over some of their strande d costs, particula rly depre ciation, i s err oneous. F urther, the J oint Applicants’ re liance on Re lia nt I as st anding for the pr oposition t hat the ca pacity -auc tion awar d has nothing to do w ith stranded costs is misplaced. In rea ching our dec ision in Re lia nt I , w e did no te that the utiliti es code “see ms to contemplate two par allel true- up trac ks—one for stranded c osts and one for th e s e v e r a l o th e r tr u e - u p it e ms ” an d th a t s tr an d e d c o s ts an d th e o th e r tr u e - u p c o sts “are distinct concepts tre ated separately in the statute.” Re lia nt I , 101 S.W .3d at 140-41. How ever , we

ma de no de te rm ination r e g ard ingwh e the r i t w a s p os sib le that a uti lity mig ht r e c ov e r s ome of

its strand ed co s ts through one or more of the other non- stranded- cost true- ups, nor did we c onsider wh e the r i t w a s p ro pe r t o r e du c e a uti lity ’s str and e d- c os t awa rd to a c c ount fo r the fa c t that th e uti lity

was a ctually

able to re cover

a portion of its strande d costs throug h a manne r that is distinct from the stranded- cost true- up. 53

TheCom mi

ssi on ha s th e Au tho rit

yto R e du c e the

J oin t A pp lic an ts’

Awa rd I n their sec ond set of ar g uments, the J oint Applicants assert th at ev en if they wer e111

able to rec over some of their stranded costs throug h the capa city -auc tion pr ocess, the Commission did not have the authority to r educe their strande d-cost re cover y . Specifica lly , they

argue that neither the uti lit ie s c od e no r t

he a dmi nis tr a tiv e c od e a llo w f or thi s ty pe of of fs e t. A s su

pp or t f or thi s proposition, the J oint Applica nts a g ain re ly

on our Re lia nt I

op ini on , in

wh ic h w e c on c lud e d th a t if the marke t value of a

utilit y ’s g ener ation assets excee ded the ne t book value of the as s ets, the Commi ssion could not apply the s urplus from the stra

nded-c ost true-up to diminish the util ity ’s other true-up r ecove ries. 101 S.W.3d at 141.

I n a sim ila

r a rgume nt, the Joint

Ap pli c ants c on te nd

tha t th e y we re e nti tle d to the fu ll,

no n- re du c e d s tr and e d- c os t awa rd b e c a u s e t h e l e g i s l a t u r e s p e c if ic a lly a uth or ize d th e m to re c ov e r b oth

a str and e d- c os t aw ard and a c a pa c ity -a uc tio n aw ard

. I n lig ht of thi s all ow anc e , the Joint Ap pli c ants insist t hat re cover ing f

or both awa

rds is not an overr ecove ry beca use re cover

y for both wa s the leg islature’s e x press de sire.

As a pre liminary

matter, we note that the Joi nt Applicants are no t contesting the specif i c amount of the Commi ssion’s reduc tion. I n other wor ds, the J oint Applicants are not

asser ting that the Commi ssion’s r eduction is not supported by substantial e vidence . Rather, they are seekinga re solution t o a pure question of law: whe ther the Commission has the authority to reduc e

a utilit y ’s stranded- cost awa rd to ac count for the fac t that the utilit y was a ble to rec over a

portion of its stranded costs throug h the ca pacity -auc tion process. For the rea sons that follow, we be lieve the Com mis sio n’ s in te rp re tatio n o f t he va ri ou s uti lit ie s c od e pr ov isi on s a s g ra nti ngthe Com mis sio n th is

a u th o r it y is c o r r e c t an d c o n s is te n t w it

h th e la n g u a g e o f th e r e le v an t sta tutes. See Coppoc k , 21 5 S. W.3 d at 56 3 ( no tin g that w he n s tatut e s c on c e rn particu larl y

c omp lic a te d s ub

je c t matte rs ,Much of the J oint Applicants’ ar g uments seem to re st on the premise that onc e a stra nded- 54 cost ca lculation is perfor

med, there can be no modification to that amount and that a utility is entitled to that amount no matter the c ircumstance s. However, these arguments ignor e the leg islative mandate that u tilit ies not be allowe d to overre cover during the true- up proce eding s. See Tex. Util . Code Ann. § 39.262(a ) (West 2007). 112 ag ency ’s construc tion of those statutes is give n due conside ration).

First, sec tion 39.262(a) mandates that utilit ies “not be pe rm i t t ed to over rec over stranded c osts through the procedure s established by this section or throug h the application of the

measure s provided by

the other se ctions of this chapter .” Te x . Util. Code Ann. § 39.262(a) (empha sis added)

. Rather than limit ing the deter mination of whether a utility overr ecove rs strande d costs to the s trande d-cost true-up alone, the code seems to require the C ommissi on to assess whe ther a utility is overre cover ing its strande d costs in light of a ll the true-ups and proce dures c onducted a s part of the transition to competition. Th is i de a is a lso su pp or te d b y the dir e c tiv e that a

“ uti lity is 54

a llo we d to re c ov e r a ll o f i ts net , verifia ble, nonmitigable stra

nded costs.” Id. § 3 9. 25 2( a ) ( e mph a sis added) . The use of

the word “ net” in sec tion 39.252 i s s o m e indication that conside ration of a utilit y ’s potential reco v er y o f stranded c osts from the other pr ocee dings is mandated. Moreove r, allowing a re duction in light of a n alternative source of re cover y seems consistent with the ver y

conce pt of strande d costs: if the utilit y is able to rec over for these costs, in whateve r manne r, then the c os ts are no lon g e r str and e d or un re c ov e ra

ble . T he re fo re , to the e xten t th a t th e Joint Ap pli c ants

a sse rt that th e y are e nti tle d to a

no n- re du c e d s tr and ed- c os t r e c ov e ry de sp ite the fa c t th a t it

wo uld amount to a double re cover y , we disag ree with that assertion. Se c on d, the su

pr e me c ourt

pr e vio us ly

op ine d th a t th e Com mis sio n s ho uld dim ini sh

a uti lit y ’s ul t i m a t e t r

u e - u p r e c o v e r y i f t h e u t i l i t y

i s a b l e t o r e c o v e r

a p o rt i o no f

i t s s t r an d e d

c o sts113

thr ou g h th e c a

pa c ity a uc tio n. Spe c if

ic a lly , th e su

pr e me c ourt

state d th a t:

Th e a mou nt of str and e d co st re c ov e ry , if any , thr ou g h ca pa c ity a uc tio n tr ue -u ps wi ll have to b e c on sid e re d .

. . to e ns ur e that th e re is n o o ve rr e c ov e ry of str and e d c os ts.

. . . [ T h e opinion in Re lia nt I ] d o e s n o t f

o r e c l o s e t h e C o m m i s s i o n f r o m t a k i ng int o acc ount a ny return of or on stranded c osts that the marg in from the ca pacity auction tr ue -u p c on ta ins

.

. . . Preventingan over

rec o v ery of strande d costs require s a dete rmination, on a company -by -compa

ny basis, of whe th e r

p r o c e e d s f

r om a ca pacity auction true -up had a compone nt for re turn on or of str and e d c os ts. CenterPoint Energy, I

nc. , 143 S.W .3d at 84, 87. Third, the Joi nt Applicants’ re liance on Re lia nt I as a bar to the Commission’s reduc tion is m isplaced. In Re lia nt I , w e ha d to c on sid e r v ari ous chal len ge s ma de to a ru le promulg ated by

the Commiss ion. At the time the case was de cided, the 2001 ECOM model p r e d ic te d th a t th e u ti li ti e s w o u ld h a v e n o s tr an d e d c o s ts o r “ n e g a ti v e s tr an ded costs.” Re lia nt I , 101 S.W .3d at 141. In other wor ds, the utilit ies wer e pre dicted to need no stranded- cost rec overy be c a us e the mark e t va lue of

the a sse ts e xce e de d th e ir bo ok va lue

. On e of the c ha lle ng e s to the ru le involved whether

the Commiss ion could apply the unex pecte d surplus to offset the utility ’s re cover y under the other true -up proc eeding s. Id. at 138-39. Stated diff ere ntly , t h e u t i l i ty

challeng ed the propriety of employing the “neg ative” stra nded costs to reduce the utilit y ’s non-strandedcost rec overy . This Court ulti mately decide d that it woul d b e i mproper to a pply the unexpected114

surplus to dimi nish the rec overy for the othe r costs that t h e l egi slature de termined utilities were entitled to rec over a s part of the transition to a competitive marke t. Id. at 14 1. I n ma kin g thi s decision, we noted that the uti lities code does not require that a uti lity “re fund a ne g ative ca lculation of strande d costs to ratepa y ers” and desc ribed how a neg ative strande d-cost ca lculati on has no signific ance and shoul d not otherwise be considered ex cept for the fa ct that it means a utility is not entitled to a strande d-cost aw ard. Id. Ex plained another way , a utilit y ’s rec overy for the other true

up s sh ou ld n ot b e dim ini sh e d s imp ly be c a us e the ma

rk e t va lue of

the uti lity ’s a sse ts une xpe c te dly tur ne d o ut t o b e g re a te r t

ha n th e bo ok

va lue of the a sse ts. We a re not f ace d with the same situation he re. I n this c ase, it is undi sputed that the Joint Ap pli c ants have po sit ive str and e d co sts
. I n othe r wo rd s, the Joint Ap pli c ants we re e nti tle d to a strande d-cost aw ard, a

nd no one is arguing that the J oint Applicants’ re cover ies u n d er t h e other true-ups should be diminished as a result of their recover y for stranded costs. On the c ontrary , we

are fac ed with deciding whether it is appropriate to reduc e the Joint Applicants’ stra nded-c ost awar d beca use they wer e able to rec over some of their strande d costs throug h another proce eding

. TheCom mi

ssi on ’s In te rp re tat ion will Not Le ad to I ne qu ita bleor

Arbit ra ry Re su lts I n th e ir thi rd se t of ar g ume nts , the Joint Ap pli c ants po se a

hy po the tic a l th a t th e y

ins ist sh ow s th a t th e Com mis sio n’ s in te rp re tatio n of the va ri ou s sta tut e s w ou ld l e a d to ine qu ita ble re su lts

. Essentially , throug h their hy pothetical, the Joint Applicants attempt to show that the Commis sion’s interpre tation unfairly

authorizes a re duction to a utility ’s strande d-cost re cover y if th e uti li ty is give n

a ca pacity -auc tion awar d but prohibits a reduc tion to a uti lity ’s recover y if the utility

is not given a capa city -auc tion awar d.115 I n their example, the J oint Applica nts compare the ca

pacity -auc tion true-ups for two hy pothetical utilit ies that sell the same numbe r of e ntitlements. The first utilit y is unable to auc tion i t s e n t i t l e m e n t s f

o r t h e a m o u n tp r e d i c t e d b y t h e E C O M m o d e l an d t h e r e f o r e i s e n t i t l e d

t o a c a p a c i t yauctio n aw ar d

. T h e s e c o n d u ti li ty a u c ti o n s it s e n ti tl e me n ts f

o r th e e xa c t a mo u n t p r e d ic te d b y the ECO M mo de l and

is the re fo re no t e nti tle d to a c a pa c ity -a uc tio n awa

rd

. Al tho ug h the se c on d u til ity did not rece ive a c apac ity -auc tion awar d, the ac tual amount of money collecte d by eac h utilit y for the sale of its entitl ements is the same be cause the first compa ny rec eived the differ ence betwee n the predic ted sale va lue and the amount actua lly obtained at auction throug h the ca pacity -auc tion awar d. The Joint Applicants insist that under the Commi ssion’s interpretation, the Commi ssion would be allowed to reduc e the first utilit y ’s s trande d-cost recove ry to acc ount for any alleg ed double rec overy obtained in the capacity -auc tion-true-up, but it would be unable to make a simil ar r eduction to the sec ond utilit y ’s re cover y b eca use the sec ond utilit y

did not rece ive a capa city -auc tion awar d. The Joint Applicants insist that an interpre tation allowing f or this ty pe of disparate treatment is not reasonable and ca nnot be upheld. We fail to see why

the J oint Applicants’ example prov es t hat the Commissi on’s int e rp re ta tio n of the statut e s wo uld ne c e ssa ri ly le a d to ine qu ita

ble or arb itr ary re su lts . T he e xamp le g iven by the J oint Applicants distinguishes utiliti es that ar e able to rec over the ir predic ted price of power throug h the ca

pacity actions and thos e that mus t be re imbursed throug h a ca pacity -auc tion

awa rd and , in lig ht o f t

his dis tin c tio n, pr e su

pp os e s th a t r e du c ingstr and e d- c os t r ecov ery is appropr iate only

if a c apa ci t y -auc tion awar d is recove red. We find no support f or this presupposition.116 We ag ree that it is possible that a utilit y could auction off entitlements to power f or

an amou nt t hat me e ts or e xce e ds the a mou nt pr e dic te d thr ou g h the ECO M mode l. I f t he uti lity se lls

e nti tle me nts to i ts g e ne ratio n c a pa c ity and ob ta ins the e xac t mar g in pr e dic te d by the ECO M mo de l, the uti lity wi ll n ot b e e nti tle d to re c e ive a c a pa c ity -a uc tio n a wa rd

. I f the uti lity se lls the e nti tle me nts and obtains an am o u n t t hat exceeds the predic ted marg in, the utilit y would not be entitled to a capa city -auc tion a

war d and would have to r efund any amount that is in excess of the pre dicted value to i ts c us tom e rs or

a pp ly that amou

nt t o r e du c e its str and e d c os ts. Ho we ve r, the fa c t that a uti lity is not enti tl e d

to a c a p a c it y - a u c ti o naw ar d

d o e s n o t s e e m t o b e d is p o s it iv e o f w h e th e r th e u tilit y ’s stranded- cost rec overy

should be reduc ed. I n f a c t, u nd e r t he Com mis sio n’ s in te rp re tatio n, it i s im mate ri a l w he the r a uti lity

a c tua lly re c ov e rs a

c a pa c ity -a uc tio n a wa rd be c a us e the fo c us of

the inq uir y is w het her th e uti lity

re c ov e re d a

po rt ion of its str and e d c os ts thr ou g h th e e nti re ty of the c a pa c ity -a uc tio n tr ue -u p p ro c e ss. I n other wor ds, the fac t that a uti l i t y i s not entitled to recove r a c apac ity -auc tion awar d would not seem to neg ate the possibility that the utility

rec overe d a portion of i t s stranded c osts through the capa city -auc tion process.

On the contr ary , g iven that the capa city -auc tion true -up ensure s that a utility rec eive

no more a nd no less than a spe cific ma rg in to contribute to its fix ed costs, the utility will sti ll recove r

a po rt ion of its str and e d c os ts thr ou g h th e c a pa c ity a uc tio ns e ve n th ou g h th e uti lity is not e nti tle d to

a c a p a c it y - a u c ti o n aw ar d

. Co n s e qu e n tl y , a ll th e r e a s o n s p r e v io u s ly d is c u s s e d a s s u p p o rting the Commi ssion’s reduc tion in thi s appea l wou l d s ee m t o have e qual applica bility to reduc ing the stranded- cost awa

rd of a utilit y that is not entitl ed to a c apac i t y -a u ct ion awar d. Acc ording ly , the117

Commi ssion’s interpretation does not arbitrar ily or inequit ab l y d i s criminate be tween utilities that

are entitled to a ca

pacity -auc tion awar d and those that a re not. I n light of a ll the r ea s o n s previously g iven, we c onclude that the Commission’s reduc tion to st rande d costs was c onsistent with the gove rning statutes. There fore , we c onclude that t h e d i s t r i c tc o u rtp r o p e r l y a f f i r m e d t h a tp o rt i o no f

t h e C o m m i s s i o n ’ s o r d e r an d , a c c o r d i n g l y,

ov e rr ule the Joint

Ap pli c ants ’ f

ina l is su e on

a pp e a l.

CO NC LU SION For the re asons pre viou s l y gi v en, we aff irm in part and r ever se in part the district court’s judg ment. Specifica lly , we conclude that the district court prope rly aff irmed the Commi ssion’s use of an alternative valuation m ethod for estimating the va lue of Ge nco’s g ener ation

a sse ts a nd its de c isi on s to : li mit

to i ts a lte rn a tiv e ho ldi ng th e ded uc tio n f or the op tio n g ive n to Reliant, reduc e the Joint Applicants’ recove ry to acc ount for tax benef its given to them, a llow the J oint Applicants to recove r the va lue of c onstruction works in prog ress and plants held for f uture use, allow the Joi nt Applicants t o re cover ca rry ing c osts on its capa city -auc tion awar d, and re duce the Joint Ap pli c ants ’ s tr and e d- c os t r e c ov e ry to a c c ount f

or the pa rt ia l r e c overy of st ra

nd e d c os ts ob ta ine d thro ug h th e c a

pa c ity -a uc tio n p ro c e ss. We a lso c onclu de that th e dis tr ic t c ourt pr op e rl y

reve rsed the Commis s i o n ’s d ecision t o prohibit the J oint Applicants from re cover ing inter est on excess mitigation cr edits g iven to reta il electric providers othe r than Reliant.

Howeve r, we further

conclude that t h e district cour t improperly

aff irmed the Com mis sio n’ s d e c isi on

to a llo w the Joint

Ap pli c ants to r e c ov e r t

he va lue of

e xce ss m iti g a

t i o n c r e dit s that wer e g iven to Reliant and not passed on to their price- to-beat customers, im proper ly reve rsed118

the Commiss ion’s decision to de ny rec overy for the interest on the excess mitigation cre dits given to R e liant and

no t pa sse d o n to the Joint Ap pli c ants ’ p ri c e -t o- be a t c us tom e rs , a nd imp ro pe rl y

re ve rs e d the Com mis sio n’ s us e of an a lte rn a tiv e me tho d fo r de te rm ini ng the Jo in t App lic ants ’ capa city -auc tion awar d.

Ac co rd i n gl y , we re m an d

t h i s p ro ce ed i n g b a ckt o t h e d i s t ri ct co u rt fo r p ro ce ed i n gs consis t en t with this opi nion. Furthe rmore, in lig ht of the Joi nt Applicants and the Commission’s

a g re e me nt t

hat we sh ou ld re mand

to t he Com mis sio n th e iss ue of wh e the r t he Commis sio n s ho uld provide a reme dy to acc ount for the possibil ity that the Interna l Revenue Ser vice mig ht later

co n cl ude that ce rtain deduc tions resulted in normalization viol ations, we re mand this issue to the dis tr ic t c ourt

wi th i ns tr

uc tio ns that it re mand the iss ue to the Com mis sio n for fu rt he r p ro c e e din g s.

David Pury ear , J ustice Be fore Chief J ustice L aw, Justi ces Pury ear and He nson Affir med in part; Rever sed and Rema nded in par

t on Motion for Rehear ing Filed: Apr il 17, 2008