FindLaw Caselaw Texas TXCt. App. NUCORSTEEL v. PUBLICUTILITY COMMISSIONOFTEXASTXUTXU

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NUCOR STEEL v. PUBLIC UTILITY COMMISSIONOF

TEXAS TXU TXU

Court of Appeals of Texas,Austin.

NUCOR STEEL and Cities of Arlington, et. al./Office of Public Utility Council; and

Public Utility Commission of Texas, Appellants, v. PUBLIC UTILITY

COMMISSION OF TEXAS and TXU Electric Company/ TXU Electric Company, Appellees.

No. 03-99-00698-CV.

Decided: August 31, 2000

Before Chief Justice ABOUSSIE, Justices KIDDand B.A. SMITH. Mark C. Davis,Brickfield, Burchette &

Ritts, P.C., Austin, for Nucor. Douglas Fraser, Elizabeth R. B. Sterling, Asst. Attys. Gen., Natural

Resources Division, Austin, for P.U.C. Steven A. Porter, Lloyd, Gosselink, Blevins, Rochelle, Baldwin &

Townsend, P.C., Austin, for Cities. David C. Duggins, Clark, Thomas &Winters, Austin, Howard V.

Fisher, Dallas, for TXU.

Thisis an appeal from a fuel reconciliation proceeding under the Public Utility Regulatory Act

(“PURA”).1 See Tex. Util.Code Ann. § 36.203 (West 1998) (hereinafter “PURA § _”). The district

court affirmed in part and reversed and remanded in part an order of the Public Utility Commission of

Texas(“the Commission”). We will reverse in part and render judgment in accordance with the

Commission's order.

STATUTORY OVERVIEW

Under PURA, a regulated electric utility such as appellee TXUElectric Company (“TXU”) 2 may not

automatically passits actual fuelcoststhrough to itscustomers. See PURA § 36.201 (West

Supp.2000). Instead, the Commission designs a rate for the utility that takesinto account projected

fuelcostsin the form of a fixed “fuel factor”; the Commission periodically adjuststhisfactor and

reconcilesfuelcoststhe utility charged using the factor against fuelcoststhe utility actually incurred.

See id. § 36.203 (West 1998).

Section 36.203, entitled “Fuel Cost Recovery; Adjustment of Fuel Factor,” provides, “The commission

by rule shall provide for the reconciliation of a utility'sfuelcosts on a timely basis.” Id. § 36.203(e).

According to an undisputed conclusion of law, thiscase was governed by the pre-1993 version ofrule

23.23(b)(2)(H). That rule placed on the utility the burden of proving that: (1) it generated efficiently;

(2) it maintained effective cost controls; and (3) it negotiated the lowest reasonable fuelcost for its

non-affiliated contracts. See 17 Tex. Reg. 7067 (1992), amended, 18 Tex. Reg. 836 (1993). For fuels

acquired from affiliated entities, the utility also carried the burden of establishing that (1) the affiliate's

fuel-related expenses were reasonable and necessary and (2) the affiliate charged the utility no more

than it charged othersfor items of the same class. See id. The rule disallowed recovery of profit or

return on equity to the affiliate; authorized the Commission to investigate the affiliate's operations;

required the affiliate to maintain specific financial records, which would be available to the

Commission; and disallowed reconciliation of an affiliate'sincreased fuelcost when the events and

conditionsthat caused the increased costs were within the utility'scontrol. See id.

PROCEDURAL BACKGROUND3

In December 1995, TXUsought to reconcile itstotal fuel and purchased power costsfor the period

between July 1, 1992 and June 30, 1995.4 Appellants Nucor Steel (“Nucor”), the Office of Public Utility Counsel (“OPUC”),5 and the Cities of Arlington, et al.6 were among the entitiesthat intervened

in the proceeding. Only two issuesfrom the reconciliation proceeding are implicated in this appeal:

(1) whether TXUshould have been allowed to recover fuel expensesincurred under pre-1983 longterm gascontracts entered into by its affiliate Texas Utilities Fuel Company (TUFCO) and (2) whether

TXUshould have been allowed to recover the cost of fuel used to replace lost capacity resulting from a

chimney collapse and nineteen-month outage of TXU's Monticello Steam Electric Station unit three

(“MOSESThree”).

An administrative law judge (“ALJ”) at the State Office of Administrative Hearingsconducted a

contested case hearing and issued a proposal for decision (“PFD”) that recommended allowing TXUto

recover the costs of the replacement fuel for MOSESThree. The ALJ also recommended disallowing

specific, imprudently incurred fuelcosts; allowing TXUto recover for other gas purchased from

TUFCO; and concluding that resjudicata barred attacks on TUFCO's pre-1983 long-term gascontracts

for alleged conflicts with federal law.

With respect to the long-term gascontracts, the Commission agreed with the ALJ and concluded that

resjudicata barred consideration ofwhether the contractsconflicted with federal law.7 The

Commission adopted findings and conclusions disallowing the imprudently incurred costs and allowing

recovery of the remaining amounts paid to TUFCO. But the Commission disagreed with the ALJ

regarding the MOSESThree replacement fuel, finding instead that “[t]he $66,982,000 in replacement

power costs associated with the MOSESUnit No. 3 chimney collapse is not reasonable and should be

disallowed.”

TXU, the Cities, and Nucor each filed suit for judicial review of the Commission's order. See PURA §

15.001 (West 1998); Tex. Gov't Code Ann. § 2001.17 4 (West 2000). The district court denied all of

the Cities' and Nucor'schallenges and affirmed the portion of the order awarding the costsincurred

under the long-term gascontracts. The district court overruled one of TXU's points of error but

sustained the rest and reversed the Commission's order in part, remanding the cause to the

Commission for entry of an order allowing TXUto recover the additional fuelcostsresulting from the

chimney collapse. The Commission, the OPUC,8 the Cities, and Nucor then filed appeals with this

Court.

DISCUSSION

Pre-1983 Gas Contracts

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NUCOR STEEL v. PUBLIC UTILITY COMMISSION OF TEXAS TXU TXU - FindLaw 7/29/2014

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The Commission found that TXUpurchased gasthrough TUFCOand that TUFCO's pre-1983 long-term

well-head production contracts without market-out provisions 9 were a factor causing TXU's gascosts

during the reconciliation period to exceed the average gascosts of other investor-owned utilitiesin

Texas. In their first issues, Nucor and the Cities argue that the Commission erred in allowing TXUto

recover costsincurred under these long-term contracts.

Res Judicata

In its order, the Commission concluded that “[a]ll issuesregarding the prudent negotiation of the

contracts executed during a prior reconciliation period should have been litigated in the fuel

proceeding covering that reconciliation period.” Nucor and the Citiescontend that the Commission

erred in applying the doctrine ofresjudicata in thissituation because fuel reconciliations are separate

proceedingslimited to finite periods of time and the result in one proceeding cannot be resjudicata as

to another. They further contend that this argument was not ripe before 1990 and could not have

been raised in a previousreconciliation. We disagree.

The Cities' and Nucor's argument to the Commission isstated in Nucor's brief:

During the period November 1978 through August 1981, federal law, the Power Plant and Industrial

Fuel Use Act of1978(FUA), [Act ofNovember 9, 1978, Pub.L. No. 95-620, 92 Stat. 3289 (since

amended),] prohibited the use of natural gas as a primary fuel in existing electric utility plants on or

after January 1, 1990. [See id., § 301, 92 Stat. 3289, 3305 (repealed 1981).] In spite of that

prohibition, during that same period, TUFCOentered into more than 70 long-term contracts without market-outs with terms extending beyond January 1, 1990. Indeed, even before the FUA became

law, during the period in which it was under seriousconsideration by Congress(April 20, 197 7

through November 1978), TUFCOentered into 26 long-term contracts without market-outs with terms

extending beyond January 1, 1990. Overall, these decisionsresulted in around $208 million of

excessive coststhat a prudent utility would not have incurred under the circumstances and that Texas

consumersshould not be required to bear.

(Footnotes omitted.)

These same gascontracts were the subject ofDocket 9300, in which TXUalso sought to recover

expensesincurred thereunder and in which Nucor and the Cities10 intervened. The question of whether TXUwasreasonable in entering these contracts was at issue in that Docket. See Texas Utils.

Elec. Co. v. Public Util. Comm'n, 881 S.W.2d 387 , 413 (Tex.App.-Austin 1994), aff'd in part and rev'd in

part, 935 S.W.2d 109 (Tex.1996). Indeed, TXUraised the Fuel Use Act to explain in part its decision

to enter these contracts. See Application of Texas Utils. Elec. Co. for Auth. to Change Rates, Docket No. 9300, 17 P.U.C. Bull.2057 , 257 6 (1991).

The quoted argument addressesthe issue ofwhether TXUand TUFCOwere imprudent when they

entered into twenty-year contractsfor gas, expecting that for the last ten years of the contractsthe gas would not have been usable as a boiler fuel. Therefore, this argument should have been raised in Docket 9300 when TXUfirst sought to recover expensesincurred under these contracts.11 Res

judicata prohibitsrelitigating historical investment factssuch asthe prudence of entering a long-term

contract. See Coalition of Citiesfor Affordable Util. Rates v. Public Util. Comm'n, 7 98 S.W.2d 560, 565

(Tex.1990).1 2 We overrule appellants'first issuesto the extent they contend that resjudicata did not

bar consideration of their Fuel Use Act argument.

Prudence Standard

Nucor also contendsthat the Commission erred in applying only a “prudence” standard because the

legislature has mandated that the Commission “disallow those fuelcoststhat are ‘unreasonable,

unnecessary or not in the public interest[.]’ Tex. Util.Code § 36.062(4).”

Section 36.062 does not by itsterms apply to fuelcosts.1 3 Instead, fuel factors and reconciliation

thereof are controlled by section 36.203, which does not contain the language Nucor quotes and

simply chargesthe Commission with adopting a rule to govern reconciliation proceedings. See PURA

§ 36.203(e). For affiliate purchases, the applicable rule required TXUto prove that “all fuel-related

affiliate expenses[were]reasonable and necessary.” 17 Tex. Reg. 7067 (1992), amended, 18 Tex.

Reg. 836 (1993). Nucor claimsthat an affiliate expense may be prudently incurred but still not be

“reasonable and necessary.” Thus, Nucor challengesthe Commission'sinterpretation of thisrule.

We defer to an agency'sinterpretation of its own regulations unlessthe agency'sinterpretation “is

plainly erroneous or inconsistent with the regulation.” Public Util. Comm'n v. Gulf States Utils., 809

S.W.2d 201, 207 (Tex.1991) (quoting United States v. Larionoff, 431 U.S. 864, 87 2, 97 S.Ct. 2150, 53

L.Ed.2d 48 (197 7 )). If the agency interpretation failsto comport with the clear, unambiguous

language of its own regulation, we must reverse its action as arbitrary and capricious. See Sam

Houston Elec. Coop., Inc. v. Public Util. Comm'n, 7 33 S.W.2d 905, 913 (Tex.App.-Austin 1987 , writ

denied).

Based on agency precedent, the Commission defined prudence in conclusion of law eleven as“the

exercise of that judgment and the choosing of one of that select range of options which a reasonable

utility manager would exercise or choose in the same or similar circumstances given the information

or alternatives available at the point in time such judgment is exercised or option ischosen.”

(Emphasis added.) Nucor did not challenge this definition. The “prudence” standard explicitly

incorporates a utility'sreasonableness and, by speaking in terms of available alternatives, implicitly

recognizesthat an expense must be necessary. Because the Commission'sinterpretation comports with the clear, unambiguouslanguage of the regulation, we will defer to the Commission's

interpretation of“reasonable and necessary” as being that which is prudent. We overrule Nucor'sfirst

issue to the extent it contests application of the prudence standard.

Prudence ofmaintaining relationship with TUFCO

Nucor also contendsthat the Commission erred in finding that TXU“was prudent in maintaining its

affiliate relationship with TUFCO.” Specifically, Nucor arguesthat the Commission ignored the issue

ofwhether TXUprudently managed itsrelationship with TUFCO. Nucor also arguesthat TXUdid

nothing to control the pricesit paid TUFCOand that TXUcould have escaped liability under the longterm contracts by terminating itsrelationship with TUFCObecause TXUis not bound by TUFCO's

contracts.

In essence, Nucor arguesthat the Commission'sfinding is not supported by substantial evidence. In

a substantial evidence review, we first determine whether the evidence as a whole issuch that

reasonable mindscould have reached the conclusion the agency must have reached in order to take

the disputed action. See Texas State Bd. ofDental Exam'rs v. Sizemore, 7 59 S.W.2d 114, 116

(Tex.1988). The test is not whether the agency made the correct conclusion but whether some

reasonable basis existsin the record to support the agency's action. See Texas Health Facilities v.

Charter Medical-Dallas, Inc., 665 S.W.2d 446, 452 (Tex.1984). We may not substitute our judgment

for that of the agency and may consider only the record on which the agency based its decision. See

Sizemore, 7 59 S.W.2d at 116. Furthermore, we are prohibited from substituting our judgment asto

the weight of the evidence on questionscommitted to agency discretion. See Charter Medical-Dallas,

Inc., 665 S.W.2d at 452.

Nucor'scontentionsthat the Commission ignored the issue ofwhether TXUprudently managed its

relationship with TUFCOand that TXUfailed to take any stepsto control gascosts are unfounded. The

Commission found that the relationship between these partiesis defined by the Fuel Trust Agreement

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and the Gas Supply Agreement, both ofwhich were in evidence. In addition, the Commission found

that TXUhas a right to oversee TUFCOand that TUFCO's officers are responsible to TXUexecutives.

The Commission also found that TUFCOhasformal action plansto monitor and controlcosts and that it

conducts monthly reviewsto identify and remedy cost variances. Finally, the Commission found that

TUServices'internal audit department monitors TUFCOto ensure that effective controls are in place

and that TXUpolicies are followed as well asto ensure that contract terms are met. The record

contains evidence supporting all of these findings.

In addition, the record containssubstantial evidence that TXUisindeed bound by TUFCO'scontracts with third party suppliers. The Fuel Trust Agreement statesthat TUFCOis a wholly owned subsidiary

of TXUand wasspecifically created to supply TXUwith fuel. The agreement further providesthat

TUFCOacquiresfuel “for the use of[TXU]” and that all of TUFCO'sfuel acquisitions are “solely for the

benefit of[TXU].” The agreement explicitly providesthat “all rights, titles, and interests held by

[TUFCO] in the properties and contractsidentified (as well as any other fuel properties and

contractual rights hereafter acquired by [TUFCO] ), are dedicated to, and held for the benefit of, and in

trust for, [TXU].” (Emphasis added.) This agreement gives TUFCOactual authority to acquire fuel for

TXUand supportsthe Commission'sfinding that TXUcould not escape liability by simply terminating

itsrelationship with TUFCO. See, e.g., Spring Garden 7 9U, Inc. v. Stewart Title Co., 87 4 S.W.2d 945,

948 (Tex.App.-Houston [1st Dist.]1994, no writ); Currey v. Lone Star Steel Co., 67 6 S.W.2d 205, 209

(Tex.App.-Fort Worth 1984, no writ) (principal liable for acts of agent for which agent has actual

authority).

Although Nucor adduced evidence indicating that TXUcould have been more efficient or taken

additionalsteps, that evidence does not alter the conclusion that substantial evidence supportsthe

Commission'sfinding. See Star Houston, Inc. v. Texas Dept. of Transp., 957 S.W.2d 102, 109

(Tex.App.-Austin 1997 , pet. denied) (agency alone has power to weigh evidence and assesscredibility

ofwitnesses); Sizemore, 7 59 S.W.2d at 117 (court may not supplant agency's assessment of evidence

unlessreasonable mindscould not have reached agency'sconclusion).

Whether TXU/TUFCOprudently managed contracts during reconciliation period

Finally, Nucor contendsthat TXUfailed to establish that its overall management of the long-term gas

contracts was prudent because TXUadduced no evidence of an overall plan and because TXU's management was not reasonable under the circumstances.

The prudence or reasonable and necessary standard does not mandate that TXUand TUFCOundertake

any specific course of action, nor doesthe test specifically require that a utility adduce evidence of a

long-term plan as Nucor suggests. What is prudent, reasonable, and necessary depends on

circumstances. The prudence standard does not require perfection. The Commission allowed TXU

to recover certain costs but disallowed other costs when the evidence did not establish TXU's

prudence. The fact that TXUadduced evidence that it complied with the terms of itscontractsissome

evidence that TXUwasreasonable. We overrule the last ofNucor's arguments under itsfirst issue. Nucor and the Cities'first issueschallenging TXU'srecovery ofcostsincurred under the long-term gas

contracts are overruled.

MOSESThree

The other issue in this appealconcerns whether the Commission erred in disallowing fuelcoststhat

TXUincurred because of a nineteen-month outage of MOSESThree.

TXUburnslignite in the MOSESThree boilersto produce steam-generated electricity. Part of the

exhaust gascreated in the generation processis drawn into a flue gas desulfurization system or

scrubber where it issprayed with limestone slurry to remove sulfur dioxide. Mist eliminatorscatch

the slurry mist and drop it to the bottom of the scrubber tower. However, some slurry remainsin the

flue gas and leavesthe scrubber. When it dries, thiscarryover slurry iscalled “sludge.” At MOSES

Three, the scrubbed gas passesthrough a horizontal bridge or breach duct and enters a chimney where

it is vented into the atmosphere.

Over time, sludge built up along the breach duct and on the chimney wall opposite and slightly above

the breach duct's opening. The sludge build-up on the chimney wall formed a large, belly-shaped

“cyst” that was approximately fifty feet tall and extended two thirds of the way around the chimney.

Thiscyst wasten to twelve feet deep at itsthickest point but thinned out toward the edges. The mass waslocated between 100 and 150 feet above ground level. TXUundertook effortsto remove the

build-up, and by November 13, the sludge was only three to six feet thick. On the evening of November 13, a large portion of the sludge mass broke loose and fell to the ground. The next day,

after crews had been working for approximately half an hour, another portion of the massfell away.

Shortly thereafter, the remaining masscame loose from the wall and fell to the ground, compressing

the air in the base of the chimney and thrusting the inner brick liner of the chimney outward; the liner

in turn ruptured the chimney's outer concrete shell. Asthe outer layer of the chimney collapsed, it

toppled to the side and fell on other parts of the plant causing damage and killing a member of the

cleaning crew. The unit was off-line for nineteen monthsfollowing the collapse. In order to offset

lost generating capacity during this period, TXUspent $66,982,000 to purchase additional natural gas

for use in other facilities. TXUsought to recover these replacement costsin the reconciliation.

The ALJ applied a proximate cause standard and evaluated whether TXU's actions were the cause in

fact of the collapse and whether the collapse was a foreseeable result of TXU's actions. The ALJ noted

the sludge mass“was a cause in fact of the collapse of the MOSESUnit 3 chimney” and that “[i]n

retrospect, it isclear that the massthat existed the night before the chimney collapsed was affected by

the prior cleaning in such a manner that it detached and fell from the liner.” Nonetheless, the ALJ

concluded that the effect ofcleaning efforts on the sludge mass“was not an obviouscondition which made the continued cleaning operationsimprudent.” The ALJ recommended finding that “[t]he

accident could not have been anticipated,” that TXU'scontractor was prudent in selecting methodsto

clean the chimney, and that “an engineer evaluating the potential damage from the entire massfalling

to the bottom of the chimney would not [have anticipated] that there would be major structural

damage to the chimney.”

The Commission disagreed with the ALJ's use of the proximate cause standard. Instead, the

Commission held that agency precedent required a determination of(1) whether TXUwas prudent in

its actions and decisions and (2) whether such imprudence, if any, resulted in the collapse of the MOSES

Three chimney. The Commission found that TXUwasimprudent and that the utility'simprudence led

to the collapse of the chimney. In the alternative, the Commission found that even if the collapse did

not result from TXU'simprudence, TXUshould not be allowed to recover the replacement fuelcosts

because the rates paid by TXU'scustomers during the outage included a return on the utility's

investment in MOSESThree. The Commission reasoned that TXUcustomersshould not be required to

pay for MOSESThree during the time it was not generating and be required to pay for replacement fuel

costs. The Commission decided that either TXU'simprudence or a balancing of the equitiesrequired

that TXU'sshareholders, rather than itscustomers, absorb the replacement fuelcosts; it therefore

disallowed recovery of the approximately $67 million expense.

TXUappealed to the district court on the issues of(1) whether foreseeability wasthe appropriate

causation standard to be applied to a utility's alleged imprudence; (2) whether substantial evidence

supported the Commission's decision that TXU'simprudence led to the collapse; and (3) whether the

Commission could balance the equitiesin determining whether to allow TXUto recover fuelcosts.1 4

The district court reversed the portion of the Commission's order disallowing the replacement fuel

costs associated with the collapse. The Commission now appealscontending that: (1) under a

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balancing of the equities approach, TXU'sshareholdersrather than itscustomersshould be required to

bear the excessfuelcostsincurred; and (2)substantial evidence supportsthe Commission'sfinding

that TXU'simprudence led to the MOSESThree collapse.

Prudence

In itssecond issue, the Commission arguesthat proximate cause is not the proper standard to apply in

determining whether TXU's actionsled to the MOSESThree collapse. In rejecting the ALJ's proposed

findings, the Commission rejected application of the principle of proximate cause-i.e., cause in fact and

foreseeability. The Commission contendsthat this was a policy choice and that we should review it

for an abuse of discretion. See West Tex. Utils. Co. v. Office of Pub. Util. Counsel, 896 S.W.2d 261, 27 2

(Tex.App.-Austin 1995, no writ). TXUrespondsthat the Commission's own prudence standard

contains an element of foreseeability. TXU's argument isthus a challenge to the Commission's

interpretation of its own rules, to which we defer unlessthat interpretation isclearly erroneous or

inconsistent with the regulation. See Gulf States Utils., 809 S.W.2d at 207 ; Sam Houston Elec. Coop.,

7 33 S.W.2d at 913.

Under either standard ofreview, we hold that the Commission properly rejected the proximate cause

determination. From a policy standpoint, a fuel reconciliation proceeding differs greatly from a tort

action, and nothing suggeststhe same law should govern both proceedings. In a tort action, the

plaintiff hasthe burden of establishing that the defendant had a duty to the plaintiff, that the defendant

failed in its duty by failing to act reasonably under the circumstances, and that the defendant'sfailure

did in fact cause harm to the plaintiff of a foreseeable nature. See Greater Houston Transp. Co. v.

Phillips, 801 S.W.2d 523, 525 (Tex.1990); Sisters of Charity ofIncarnate Word, Houston, Tex. v.

Gobert, 992 S.W.2d 25, 28 (Tex.App.-Houston [1st Dist.]1997 , no pet.). The theory is grounded on

the principle that a person should only be held responsible for causing harm of a type that a person of

ordinary intelligence should anticipate. See Travis v. City of Mesquite, 830 S.W.2d 94, 98 (Tex.1992);

Sisters of Charity, 992 S.W.2d at 30. In a fuel reconciliation proceeding, on the other hand, the utility

isseeking to avoid responsibility for fuelcosts and passthem on to consumers, a matter on which the

utility carriesthe burden. Unlike the plaintiff in a tort case, a utility seeking reconciliation need not

prove that another acted unreasonably but must instead establish that the utility itself acted

reasonably. We uphold the Commission'srejection of the tort law principle on the groundsthat tort

law and fuel reconciliations have different histories and purposes.

We will now examine the prudence standard articulated in the Commission's order to determine if

that standard necessarily implies an element of foreseeability. We reiterate the three conclusions of

law TXUquotesin its brief:

11. Prudence isthe exercise of that judgment and the choosing of one of that select range of options which a reasonable utility manager would exercise or choose in the same or similar circumstances

given the information or alternatives available at the point in time such judgment is exercised or

option ischosen. [Citations omitted.]

12. There may be more than one prudent option within the range available to a utility in any given

context. Any choice within the select range ofreasonable optionsis prudent, and the Commission

should not substitute itsjudgment for that of the utility. The reasonableness of an action or decision must be judged in light of the circumstances, information, and available options existing at the time, without benefit of hindsight. [Citations omitted.]

13. The reasonableness of the decision must be determined from an analysis of options available at

the time the decision was made. [Citations omitted.]

The quoted conclusionsrequire an assessment of the utility's actions and decisions under the

circumstancesto determine whether the utility acted prudently. These conclusions do not state,

however, that in the event the Commission findsthe utility failed to establish prudence, the

Commission must nonetheless allow the utility to recover itscosts unlessthe Commission further finds

that the costs were a foreseeable result of the imprudence. Neither doesrule 23.23(b)(2)(H)contain

an element of foreseeability. On the whole, TXU's argument neglectsto take into account who bears

the burden in a fuel reconciliation. Neither the rule nor the Commission'sinterpretation providesthat

a utility shall recover fuelcosts unlessthe Commission provesthat the costs were imprudently

incurred. Instead, it isthe utility that must prove that it was acting prudently. See 17 Tex. Reg.

7067 (1992), amended, 18 Tex. Reg. 836 (1993). If the utility failsto carry its burden, it cannot

recover itscosts. It was TXU's burden to establish that its actions were prudent. We hold that the

Commission did not abuse its discretion by refusing to assume a burden not given it by rule or

Commission precedent. See Pedernales Elec. Coop., Inc. v. Public Util. Comm'n, 809 S.W.2d 332, 337

(Tex.App.-Austin 1991, no writ) (Commission'sfailure to find in utility'sfavor despite evidence

supporting utility's position merely meant utility failed to carry burden of proof and was not arbitrary

and capricious). We must now examine the record to see ifsubstantial evidence supportsthe

Commission'sfinding that TXUfailed to meet the burden of establishing that its actions were prudent.

Substantial Evidence

The Commission made the following undisputed findings: The sludge massin the MOSESThree

chimney on October 31, 1993 was of unprecedented size; TXUdid not consult a structural engineer to

evaluate “the effect that the existence or falling of the unprecedented sludge masscould have on the

structural integrity of the chimney”; TXUdid not perform a risk assessment or analyze alternativesto

standard cleaning procedures; and TXUassigned the clean-up project to an inexperienced supervisor who had never before managed or witnessed a chimney cleaning operation. All of these findings are

supported by the record and support the Commission's basic premise that TXUwas not prudent to

proceed with “business as usual” in the face ofsuch extraordinary circumstances.

TXUrespondsthat the sludge had been reduced to less-than-unprecedented levels by the time of the

collapse. The utility pointsto witnesstestimony indicating that it was not standard practice to

perform a risk assessment and that any such assessment probably would have failed to predict the

unexpected rotation of the sludge mass during itsfall or the resulting piston effect. While the

testimony constitutessome evidence that TXUacted prudently, it does not alter our conclusion that

the record containssubstantial evidence from which the Commission could fail to find that TXU

established that it was prudent. See Charter Medical-Dallas, Inc., 665 S.W.2d at 452 (courts may not

substitute their judgment asto weight of evidence of questionscommitted to agency discretion);

Pedernales Elec. Coop., 809 S.W.2d at 337 (Commission'sfailure to find in utility'sfavor supported by

substantial evidence despite presence of evidence supporting utility's position); see also Lewis v. Metropolitan Sav. &Loan Ass'n, 550 S.W.2d 11, 13 (Tex.197 7 ); Texas Dep't of Pub. Safety v. Latimer,

939 S.W.2d 240, 244 (Tex.App.-Austin 1997 , no writ) (evidence in record may preponderate against

agency's decision and nevertheless amount to substantial evidence). We sustain the Commission's

second issue.

Balancing of the Equities

In itsfirst issue, the Commission contendsthat under a “reasonable and necessary” standard, the

Commission may disallow fuelcostsif it determines after balancing the equitiesthat it would be more

fair to require a utility'sshareholdersto bear the cost rather than consumers. The Commission's

order relied on this argument as an alternative reason for disallowing recovery of the replacement fuel

costs. Because we have determined that the Commission wasjustified in disallowing these costs based

on itsfinding that TXUfailed to establish it acted prudently, we need not addressthisissue. See

Tex.R.App. P. 47 .1.

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CONCLUSION

We reverse that portion of the district court judgment that reversed the Commission's order

disallowing recovery ofreplacement fuelcosts associated with the MOSESThree collapse and render

judgment affirming the Commission's order. We affirm the remainder of the district court'sjudgment.

FOOTNOTES

1. Tex. Util.Code Ann. § 11.001-64.158 (West 1998 &Supp.2000).

2. At the time it applied for reconciliation, TXUwas known as Texas Utilities Electric Company.

3. Because review of these issuesrequires evaluation ofwhether the record containssubstantial

evidence to support the Commission'sfindings, we will reserve our description of the factual

background pertaining to each issue to itsrespective portion of the discussion.

4. TXUalso sought a special exception to recover otherwise unrecoverable costs. The special

exception is not at issue in this appeal.

5. The Office of Public Utility Counsel is an independent entity charged with representing the

interests ofresidential and smallcommercialconsumers. See PURA § 13.001 (West 1998).

6. The intervening and appealing cities are Arlington, Belton, Burkburnett, Cleburne, Grand Prairie, McKinney, Pantego, Plano, Richardson, Rockwall, Sulphur Springs, and Venus. We will refer to them

collectively as“the Cities.”

7 . Although the Commission disagreed with a portion of the ALJ'srationale regarding resjudicata

and did not adopt all of the ALJ'sfindings, those differences are not material to this appeal.

8. The OPUCfiled a statement of position in lieu of a brief, supporting the position and arguments of

the brief the Commission filed as appellant.

9. Market-out provisions allow a fuel purchaser to seek a lower price or get out of a contract in

response to differences between the market price and the contract price.

10. Sulphur Springs wasthe only one of the Citiesthat did not intervene in Docket 9300.

11. We disagree with Nucor and the Cities'contention that this argument could not have been raised

until TXUactually purchased gas after January 1, 1990. As noted, if the argument were correct, the

contracts were imprudent from their formation and any expense incurred thereunder could have been

challenged on that basis.

12. The Cities and Nucor do not contend that TXUwasimprudent in purchasing gas under these

contracts because the Fuel Use Act currently prohibitsthem from using the gas. Indeed, they cannot make such an argument because the “off gas” portion of the Act wasrepealed over ten years before this

reconciliation period began. See Act of August 13, 1981, Pub.L. No. 97 -35, § 1021, 95 Stat. 614.

13. Section 36.062, entitled “Consideration of Certain Expenses,” listscertain expensesthat the

Commission may not consider for ratemaking purposes. See PURA § 36.062 (West 1998). The listed

expensesinclude lobbying expenses, most payments made arising from accidents and equipment

failures occurring at facilities owned by an entity that does not sell power in thisstate, and the costs of

processing certain refunds or credits. See id. The finalsubsection providesthat the Commission also

cannot consider “any other expenditure, including an executive salary, advertising expense, legal

expense, or civil penalty or fine, the regulatory authority findsto be unreasonable, unnecessary, or

not in the public interest.” Id. Fuelcosts are not of the same kind or class asthe listed expenses. We

therefore disagree with Nucor's assertion that the legislature intended section 36.062 to apply to fuel

costs. See County of Harris v. Eaton, 57 3 S.W.2d 17 7 , 17 9 (Tex.1978); Johnson v. Texas Dep't of

Transp., 905 S.W.2d 394, 399 (Tex.App.-Austin 1995, no writ) (under rule of ejusdem generis, courts

interpret statute containing illustrative list to include only items ofsame kind or class asthose

expressly mentioned).

14. Nothing in the record clearly delineatesthe basesfor the district court's decision. The

judgment statesthat the court sustained TXU'sfirst three points of error and overruled itsfourth. But

TXU's pleading does not contain enumerated points. TXU's motion for rehearing at the Commissionattached to and referred to by its pleading-doescontain enumerated points, but it containssixteen of

them. The reporter'srecord indicatesthat the reporter was dismissed after the administrative record wasfiled with the district court but before argument commenced. Because no party claimsthat

another failed to preserve an argument by presenting it in the district court and because we review the

agency's order rather than the district court's decision, these omissions do not affect our review.

MARILYNABOUSSIE, Chief Justice.

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NUCOR STEEL v. PUBLIC UTILITY COMMISSION OF TEXAS TXU TXU - FindLaw 7/29/2014

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