# IN THE SUPREME COURT O F TEX AS

4 4 4 4 4 4 4 4 4 4 4 4 

## N O



## . 15-0005

4 4 4 4 4 4 4 4 4 4 4 4



# O N C O R 

# E L E C T R IC 

# D E L IV E R Y 

# C O M P A N Y 

# L L C , E T A L



# . , P E T IT IO N E R S 

# ,

v

.


# P U B L IC 

# U T IL IT Y 

# C O M M IS S IO N O F 

# T E X A S 

# , E T A L



# . , R E S P O N D E N T S

4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4



## O N 

## P E T I T I O N F O R 

## R E V I E W F R O M T H E 

## C O U R T O F 

## A P P E A L S F O R T H E 

## T H I R D 

## D I S T R I C T O F 

## T E X A S



### 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4



## Argued Septem ber 13, 2016

C H I E F 

## J U S T I C E 

## H E C H T 

## delivere d the opinion of the Court.

On J anuar y 1, 2002, the Public Utiliti es Reg ulatory Act (PURA) implemented a competitive

reta il marke t for elec tricity in the Electric Reliability Council of Texas (ERCOT). Eac h incumbent, 1



## vertica lly integ rate d elec tric u t i l ity within the marke t was require d to “unbundle” its business

S e e T E X

. U T IL

. C O D E § § 3 9

. 0 0 1 ( b ) ( 1 ) ( “ T h e l e g i s l a t u r e f i n d s t h a t i t i s i n t h e p u b l i c i n t e r e s t t o

. . . i m p l e m e n t 1

o n J a n u a r y 1 , 2 0 0 2 , a c o m p e t i t i v e r e t a i l e l e c t r i c m a r k e t t h a t a l l o w s e a c h r e t a i l c u s t o m e r t o c h o o s e t h e c u s t o m e r ’ s p r o v i d e r
o f e l e c t r i c i t y a n d t h a t e n c o u r a g e s f u l l a n d f a i r c o m p e t i t i o n a m o n g a l l p r o v i d e r s o f e l e c t r i c i t y ” ) , 3 9

. 0 5 1 ( b ) ( p r o v i d i n g f o r

u n b u n d l i n g b y J a n u a r y 1 , 2 0 0 2 ) , 3 9

. 1 0 2 ( a ) ( p r o v i d i n g f o r r e t a i l c u s t o m e r c h o i c e o n o r a f t e r J a n u a r y 1 , 2 0 0 2 ) ; s e e a l s o i d

. § 3 1

. 0 0 2 ( 5 ) ( “ ‘ E l e c t r i c R e l i a b i l i t y C o u n c i l o f T e x a s ’ o r ‘ E R C O T ’ m e a n s t h e a r e a i n T e x a s s e r v e d b y e l e c t r i c u t i l i t i e s , m u n i c i p a l l y o w n e d u t i l i t i e s , a n d e l e c t r i c c o o p e r a t i v e s t h a t i s n o t s y n c h r o n o u s l y i n t e r c o n n e c t e d w i t h e l e c t r i c u t i l i t i e s
o u t s i d e t h e s t a t e

. ” )

. E R C O T m a n a g e s a b o u t 9 0 % o f t h e s t a t e ’ s e l e c t r i c l o a d , s u p p l y i n g p o w e r t o s o m e 2 4 m i l l i o n T e x a s
c u s t o m e r s

. O u t s i d e E R C O T , T e x a s r e t a i l c u s t o m e r s a r e s e r v e d b y c o o p e r a t i v e s o r v e r t i c a l l y i n t e g r a t e d i n v e s t o r
- o w n e d

e l e c t r i c u t i l i t i e s s u b j e c t t o r e g u l a t i o n ; t h e P u b l i c U t i l i t y C o m m i s s i o n h a s n o t c e r t i f i e d t h a t a n y o f t h o s e a r e a s h a v e m e t P U R A ’ s c o m p e t i t i v e c r i t i e r i a

. P U B

. U T IL

. C O M M ’ N O F T E X

. , R E P O R T T O T H E 8 4 T H L E G IS L A T U R E : S C O P E O F C O M P E T IT IO N
IN E L E C T R IC M A R K E T S IN T E X A S 1 9 , 4 4 n

. 2 0 , 5 2

– 5 3 ( J a n

. 2 0 1 5 ) , h t t p : / / w w w

. p u c

. t e x a s

. g o v / i n d u s t r y / e l e c t r i c / r e p o r t s /

s c o p e / 2 0 1 5 / 2 0 1 5 s c o p e

_ e l e c

. p d f

.

## activities i n t o three separ ate units : a power gene ration company , a transmissi on and dis tribution 2 3



## utilit y (TDU) , and a reta il elec tric provider (REP). Of the three , only TDUs continued to be

4 5



## reg ulated by

the Public Utilit ies Commis sion (PUC). 6



## I n this case , s ev er al p ar t ies to a TDU rate making proce eding seek judicial revie w of the

PUC’s order. A s the ca se come s to us, only three issues remain. We hold that:

• PURA Section 36.351, which require s elec tric utilit ies to discount char g es for s er v i ce 7 

## provided to state colleg e an d u n i versity fac iliti es, does not apply to TDUs beca use they provide ser

vice to REPs, not to t he REPs’ customers;

• former PURA Section 36.060(a) , whi ch require d an elec tric utilit y ’s income taxes to be 8 

## computed as though it had filed a cons o l i d ated return with a group of its aff iliates elig ible

T E X

. U T IL

. C O D E § 3 9

. 0 5 1 ( b ) ; s e e I n r e T X U E l e c

. C o

. , 6 7 S

. W

. 3 d 1 3 0 , 1 3 2 ( T e x

. 2 0 0 1 ) ( p e r c u r i a m )

. 2

T E X

. U T I L

. C O D E § 3 1

. 0 0 2 ( 1 0 ) ( “ ‘ P o w e r g e n e r a t i o n c o m p a n y ’ m e a n s a p e r s o n

. . . t h a t : ( A ) g e n e r a t e s 3

e l e c t r i c i t y t h a t i s i n t e n d e d t o b e s o l d a t w h o l e s a l e

. . . ; ( B ) d o e s n o t o w n a t r a n s m i s s i o n o r d i s t r i b u t i o n f a c i l i t y i n t h i s
s t a t e

. . . ; a n d ( C ) d o e s n o t h a v e a c e r t i f i c a t e d s e r v i c e a r e a

. . . . ” )

.

I d

. § 3 1

. 0 0 2 ( 1 9 ) ( “ ‘ T r a n s m i s s i o n a n d d i s t r i b u t i o n u t i l i t y ’ m e a n s a p e r s o n

. . . t h a t o w n s o r o p e r a t e s f o r 4

c o m p e n s a t i o n i n t h i s s t a t e e q u i p m e n t o r f a c i l i t i e s t o t r a n s m i t o r d i s t r i b u t e e l e c t r i c i t y

. . . . ” )

.

I d

. § 3 3

. 0 0 1 ( 1 7 ) ( “ ‘ R e t a i l e l e c t r i c p r o v i d e r ’ m e a n s a p e r s o n t h a t s e l l s e l e c t r i c e n e r g y t o r e t a i l c u s t o m e r s i n t h i s 5

s t a t e

. A r e t a i l e l e c t r i c p r o v i d e r m a y n o t o w n o r o p e r a t e g e n e r a t i o n a s s e t s

. ” )

.

I d

. § 3 1

. 0 0 2 ( 6 ) ( d e f

i n i n g “ e l e c t r i c u t i l i t y ” t o m e a n a p e r s o n t h a t “ o w n s o r o p e r a t e s f o r c o m p e n s a t i o n i n t h i s 6

s t a t e e q u i p m e n t t o p r o d u c e , g e n e r a t e , t r a n s m i t , d i s t r i b u t e , s e l l o r f u r n i s h e l e c t r i c i t y i n t h i s s t a t e ”

— t h u s i n c l u d i n g T D U s

— b u t e x p r e s s l y e x c l u d i n g , i n ( G ) a n d ( H ) , p o w e r g e n e r a t i o n c o m p a n i e s a n d R E P s ) ; s e e a l s o i d

. § § 3 2

. 0 0 1 ( a ) ( e s t a b l i s h i n g t h e P U C ’ s o r i g i n a l j u r i s d i c t i o n “ o v e r t h e r a t e s , o p e r a t i o n s a n d s e r v i c e s o f a n e l e c t r i c u t i l i t y ” ) , a n d 3 6

. 0 0 1 ( p r o v i d i n g a u t h o r i t y t o “ e s t a b l i s h a n d r e g u l a t e r a t e s o f a n e l e c t r i c u t i l i t y ” a n d a d o p t r e l a t e d r u l e s )

.

I d

. § 3 6

. 3 5 1

. 7

A c t o f M a y 8 , 1 9 9 7 , 7 5 t h L e g

. , R

. S

. , c h

. 1 6 6 , § 1 , 1 9 9 7 T e x

. G e n

. L a w s 7 1 3 , 7 7 4 [ S B 1 7 5 1 ] ( n o n s u b s t a n t i v e l y 8

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

o r m e r T E X

. R E V

. C IV

. S T A T

. A N N

. a r t

. 1 4 4 6 c
- 0 , § 2

. 2 0 8 ( c ) )

. S e c t i o n 3 6

. 0 6 0 ( a ) w a s r e w r i t t e n i n 2 0 1 3

. S e e A c t o f M a y 2 0 , 2 0 1 3 , 8 3 d L e g

. , R

. S

. , c h

. 7 8 7 , § 1 , 2 0 1 3 T e x

. G e n

. L a w s 2 0 0 3 [ S B 1 3 6 4 ] ( “ I f a n e x p e n s e i s

a l l o w e d t o b e i n c l u d e d i n u t i l i t y r a t e s o r a n i n v e s t m e n t i s i n c l u d e d i n t h e u t i l i t y r a t e b a s e , t h e r e l a t e d i n c o m e t a x b e n e f i t

m u s t b e i n c l u d e d i n t h e c o m p u t a t i o n o f i n c o m e t a x e x p e n s e t o r e d u c e t h e r a t e s

. I f a n e x p e n s e i s n o t a l l o w e d t o b e i n c l u d e d i n u t i l i t y r a t e s o r a n i n v e s t m e n t i s n o t i n c l u d e d i n t h e u t i l i t y r a t e b a s e , t h e r e l a t e d i n c o m e t a x b e n e f i t m a y n o t b e i n c l u d e d i n t h e c o m p u t a t i o n o f i n c o m e t a x e x p e n s e t o r e d u c e t h e r a t e s

. T h e i n c o m e t a x e x p e n s e s h a l l b e c o m p u t e d

u s i n g t h e s t a t u t o r y i n c o m e t a x r a t e s

. ” )

.


### 2

## to do so under fede ral tax law, did not require a utilit y to adopt a corpor ate structure so as to

be par t of the g roup; and

• the evidenc e here establishes that fr an ch ise char g es neg otiated by the TDU with various municipalities were rea sonable a nd nece ssary

opera ting e x penses unde r PURA § 33.008. 9



## We a ffirm the judgme nt of the court of appea ls in part and reve rse it in part, and rema nd the case 1 0


## to the PUC for proce eding s consistent with this opi nion.

I

Oncor Electric Deliver

y Co., L L C (“O ncor” ) is the larg est TDU in Texas and the six th larg est

in the United States. I ts 14,600 mil es of transmission l ines and 102,000 miles of distribution lines

cover 53,300 square miles and rea ch 7 milli on consumers in 401 cities and 91 cou n t ies within

ERCOT. Be fore dere g ulation, Oncor’ s sy stem was par t of TXU Ele ctric Co., an integ rate d utilit y

.
Oncor is reg ulated by the PUC. I n J une 2008, Oncor initiated a rate making proce eding with

the Co m m i s s ion, its first reque st for a compre hensive rate incre ase since dere g ulation. Oncor

reque sted a $ 2 5 3 milli on incre ase beca use of the larg e investment it had made in its sy stem, its

mountin g opera

tions costs, and its anticipated need to make capital expenditures. Severa l parties

intervene d. After extensive hear ings, the administrative law judge s rec ommended only a $30 milli on

rate incre ase. The PUC ult imately approve d a $115 million increase

.
Oncor and other parties to the admini strative procee ding sued for judicial revie w and then

ap p ea l ed to the court of appea ls. The disputes have been winnowed to three , and we limi t o u r

discussion to them. The PUC concluded that:

T E X

. U T IL

. C O D E § 3 3

. 0 0 8

. 9

4 5 0 S

. W

. 3 d 6 1 5 ( T e x

. A p p

. — A u s t i n 2 0 1 4 )

. 10



### 3

## • PURA does not require Oncor to discount its rate s for transmitting and distr ib uting elec tricity

purcha sed by

state colleg es and unive rsities;

• PURA does not re q u i re that Oncor ’s fede ral income tax expense be calc ulated as if it had fi l ed a consolidated return with its aff iliates, and the expense should be deter mined as if Oncor wer e a sta

nd-alone corpor ation; and

• Oncor failed to show that cer tain municipal fra

nchise char g es wer e rea sonable and nece ssary expenses.

The trial court ag ree d with the PUC on the tax issue but di s agr ee d on the other two. The court of

appea ls ag ree d with the PUC on the discount and fra nchise fe e issues but not on the tax i ssue. 1 1



## Three petitions for revie w wer e filed w ith this Court:

• The State of Texas, which has universities in Oncor’s s er v i ce are as, seeks revie w of the appellate court’s resolution of the discount issue. The State’s petition is opposed by Oncor , the PUC, and CenterPoint Energ y Houston Electric , L L C, another TDU. E ight state

u n i versities in CenterPoint’s service are a filed an amicus brief in support of the Stat e’ s petition. We refe r to the State and its amici as “ State Universities”.

1 2 1 3

I d

. a t 6 6 2 , 6 3 0

– 6 3 1 , 6 5 4 , 6 5 9 , 6 6 5

. 11

A m i c i c u r i a e a r e t h e U n i v e r s i t y o f T e x a s M D A n d e r s o n C a n c e r C e n t e r a t H o u s t o n , t h e U n i v e r s i t y o f T e x a s 12
H e a l t h S c i e n c e C e n t e r a t H o u s t o n , t h e U n i v e r s i t y o f T e x a s M e d i c a l B r a n c h a t G a l v e s t o n , t h e U n i v e r s i t y o f H o u s t o n S y s t e m , T e x a s A & M U n i v e r s i t y a t G a l v e s t o n , T e x a s A & M H e a l t h S c i e n c e C e n t e r
- I n s t i t u t e o f B i o s c i e n c e s & T e c h n o l o g y , T e x a s E n g i n e e r i n g E x t e n s i o n S e r v i c e a t G a l v e s t o n , a n d P r a i r i e V i e w A & M N u r s i n g S c h o o l

.

T h e g o v e r n m e n t s o f t h e S t a t e a r e u n u s u a l l y d i v i d e d i n t h i s c a s e

. T h e S t a t e s u e d f o r j u d i c i a l r e v i e w i n t h e t r i a l 13

c o u r t i n i t s o w n n a m e , a s s e r t i n g t h e c o n s u m e r i n t e r e s t o f i t s i n s t i t u t i o n s o f h i g h e r e d u c a t i o n i n t h e s t a t u t o r y d i s c o u n t

. T h e S t a t e a l s o h a s a n i n t e r e s t i n u t i l i t y r a t e m a k i n g t h r o u g h i t s a g e n c y , t h e P U C , w h i c h c o n c l u d e d t h a t O n c o r i s n o t r e q u i r e d
t o a p p l y t h e d i s c o u n t t o i t s r a t e s

. T h e S t a t e a n d t h e P U C , w i t h t h e i r c o n f l i c t i n g p o s i t i o n s , a r e b o t h r e p r e s e n t e d b y t h e A t t o r n e y G e n e r a l

. T h e S t a t e h a s s i n c e a d o p t e d t h e a l i a s , “ S t a t e o f T e x a s A g e n c i e s a n d I n s t i t u t i o n s o f H i g h e r E d u c a t i o n ” , s h o r t e n e d t o “ S t a t e A g e n c i e s ” , a p p a r e n t l y t o m o r e c l e a r l y d i s t i n g u i s h b e t w e e n t h e S t a t e ’ s c o n f l i c t i n g i n t e r e s t s a s b o t h

c o n s u m e r a n d r e g u l a t o r

. B u t t h a t a g n o m e n s u g g e s t s t h a t s t a t e a g e n c i e s o t h e r t h a n e d u c a t i o n a l i n s t i t u t i o n s h a v e a n i n t e r e s t i n t h e d i s c o u n t , w h i c h , a s w e e x p l a i n b e l o w , i s i n c o r r e c t

. N o r i s t h e S t a t e ’ s c o n s u m e r i n t e r e s t d i f f e r e n t f r o m t h e i n t e r e s t

o f t h e a m i c i S t a t e U n i v e r s i t i e s

. W e t h i n k t h e S t a t e a n d i t s a m i c i a r e m o r e c l e a r l y d e s i g n a t e d “ S t a t e U n i v e r s i t i e s ” , b y

w h i c h w e m e a n a l l e n t i t i e s c l a i m i n g t h e s t a t u t o r y d i s c o u n t

.


### 4

## • Oncor seeks review of the appel l at e co u rt ’s resolution of t he tax issue. Oncor ’s petit ion is

opposed by t h e Of

fice of Public Utility Counsel (OPUC); municipalities within Oncor ’s 1 4 

## service are a, which ref

er to themselves as “The Steering Commi ttee o f C i t i es Served by Oncor ” (“ Citi es”) ; and the Te x as I ndustrial Energ y Consumers (TI EC).

• Oncor and C ities seek review of the appellate court’s resolution of t h e fra nchise fee issue. Their pe tition i s opposed by the PUC.
The issues, ruling s, and par ties’ positions are summarized in this scorec ard:

I ssue PUC TC CA PFR Respondent
Must Oncor discount its rates to state universities? No Yes No State Oncor PUC CenterPoint
Must Oncor’s inc ome tax ex pense be calc ulated as if it filed a c onsolidated retur n with affiliates? No No Yes Oncor OPUC 1 5 

## Citi es TI EC

Are fra nchise fe es paid by

Oncor rea sonable &

nece ssary ? No Yes No Oncor Citi es PUC

We gr anted a ll three pe titions

. We addre ss the issues in the order listed. 1 6



## II

Wit h exceptions not rele v an t here , PURA Section 36.351 require s an elec tric utilit y to

“discount char g es for elec tric service provided to a fac ility of a four- y ear state university , upper- level

O P U C i s a n a g e n c y c r e a t e d b y s t a t u t e t o r e p r e s e n t t h e i n t e r e s t s o f r e s i d e n t i a l a n d s m a l l c o m m e r c i a l 14

c o n s u m e r s

. T E X

. U T IL

. C O D E § § 1 3

. 0 0 1 , . 0 0 3

.

T h e P U C d i d n o t f

i l e a p e t i t i o n f

o r r e v i e w

. T h o u g h t h e P U C a s s e r t s t h a t i t p r o p e r l y i n t e r p r e t e d t h e s t a t u t e , 15 i t s r e s p o n s e a r g u e d t h a t t h e C o u r t n e e d n o t g r a n t r e v i e w o n t h i s i s s u e b e c a u s e t h e s t a t u t e h a s s i n c e b e e n a m e n d e d

.

5 9 T e x

. S u p

. C t

. J

. 3 5 9 ( F e b

. 1 9 , 2 0 1 6 )

. 16



### 5

## instit ution, Texas State Tec h n i cal College , or colleg e.” Under the statute, “[t] he discount is a 1 7



## 20-per cent reduc tion of the utilit y ’s base rate s that would otherwis e b e p ai d u nder the applicable

tariff ed ra te.” 1 8



## Section 36.351 was enac ted in 1995, when, as we noted at the outs et , t h e gen era tion, 1 9



## transmission, distribution, and sale of elec tricity wer e vertical l y i nteg rate d opera tions of single

uti lities fully reg ulated by the PUC. I n 1999, the L eg islature passed Senate Bill 7 “to establish 2 0


## competition in the reta il marke t for elec tricity beg inning J anuar y 1, 2002, and ‘to protec t the public

interest during the transition’ to competition.” Senate Bill 7 un b u n d le d v e r ti cally integ rate d utilit ies 2 1



## in ERCOT, mandating that eac h elec tric utilit y separ ate its business activities i n t o a power

g ener ation com

p a n y , an REP, and a TDU. The statute dere g ulated power g ener ation companies and 2 2



## REPs, cr eating “a competitive reta il e lectric marke t that allows eac h reta il c onsumer to c hoose the

customer’ s provider of elec tricity ”. But TDUs rema i n ed fu lly reg ulated by the PUC. Under 2 3 2 4

T E X

. U T IL

. C O D E § 3 6

. 3 5 1 ( a )

. 17

I d

. § 3 6

. 3 5 1 ( b )

. 18

A c t o f M a y 2 7 , 1 9 9 5 , 7 4 t h L e g

. , R

. S

. , c h

. 7 6 5 , § 2

. 2 0 , 1 9 9 5 T e x

. G e n

. L a w s 3 9 7 2 , 4 0 0 7 [ S B 3 7 3 ] , c o d i f i e d 19

a s T E X

. R E V

. C IV

. S T A T

. A N N

. a r t

. 1 4 4 6 c
- 0 , § 2

. 2 1 4 1 , r e c o d i f i e d i n 1 9 9 7 a s T E X

. U T IL

. C O D E § 3 6

. 3 5 1 , A c t o f M a y 8 , 1 9 9 7 , 7 5 t h L e g

. , R

. S

. c h

. 1 6 6 , § § 1 , 9 , 1 9 9 7 T e x

. G e n

. L a w s 7 1 3 , 7 8 4 , 1 0 1 8 [ S B 1 7 5 1 ]

.

A c t o f M a y 2 7 , 1 9 9 9 , 7 6 t h L e g

. , R

. S

. , c h

. 4 0 5 , § 3 9 , 1 9 9 9 T e x

. G e n

. L a w s 2 5 4 3 [ S B 7 ]

. 20

I n r e T X U E l e c

. C o

. , 6 7 S

. W

. 3 d 1 3 0 , 1 3 2 ( T e x

. 2 0 0 1 ) ( P h i l l i p s , C

. J

. , c o n c u r r i n g ) ( q u o t i n g T E X

. U T IL

. C O D E 21 § 3 9

. 0 0 1 ( a ) )

.

A c t o f M a y 2 7 , 1 9 9 9 , 7 6 t h L e g

. , R

. S

. , c h

. 4 0 5 , § 3 9 , 1 9 9 9 T e x

. G e n

. L a w s 2 5 4 3 , 2 5 5 9 [ S B 7 ] ( c o d i f i e d a s 22 T E X

. U T IL

. C O D E § 3 9

. 0 5 1 ( b ) )

.

I d

. a t 2 5 5 8 [ S B 7 ] ( c o d i f i e d a s T E X

. U T IL

. C O D E § 3 9

. 0 0 1 ( b ) )

. 23

T E X

. U T IL

. C O D E § 3 9

. 0 0 1 ( a )

. 24



### 6

## dere g ulation, TDUs still deliver elec tricity direc tly to th e re t ai l consumer’ s meter and provide

metering s er v i ce s, but the charg es for TDUs’ service s are paid by REPs, which in turn char g e the

consumer. 2 5



## Senate Bill 7 did not chang e the text of Section 36.351, but it did rede fine “ele ctric utilit y ”

to exclude unbundled power g ener ation companies and REPs, there by removing t h em fr o m the

discount require ment. Section 63 of S enate Bill 7 suspended this chang e during the transition to 2 6



## a competitive marke t, fre ezing total rate s paid for elec tricity by state universities cover ed by Section

36.351 at Dec ember

31, 2001 levels until September 1, 2007. 2 7



## W h en Oncor initiated this rate making proce eding in J une 2008, Section 63’s fre eze h ad
expired. Oncor contende d that the Section 36.351 discount no longe r applied to it beca use it did not,

T E X

. U T IL

. C O D E § 3 9

. 1 0 7 ( a ) ( “ O n i n t r o d u c t i o n o f c u s t o m e r c h o i c e i n a s e r v i c e a r e a , m e t e r i n g s e r v i c e s f o r 25
t h e a r e a s h a l l c o n t i n u e t o b e p r o v i d e d b y t h e t r a n s m i s s i o n a n d d i s t r i b u t i o n u t i l i t y

. . . . ” ) , ( d ) ( “ B e g i n n i n g o n t h e d a t e o f i n t r o d u c t i o n o f c u s t o m e r c h o i c e i n a s e r v i c e a r e a , a t r a n s m i s s i o n a n d d i s t r i b u t i o n u t i l i t y , o r a n e l e c t r i c c o o p e r a t i v e o r

m u n i c i p a l l y o w n e d u t i l i t y p r o v i d i n g t h e c u s t o m e r ’ s e n e r g y r e q u i r e m e n t s s h a l l b i l l a c u s t o m e r ’ s r e t a i l e l e c t r i c p r o v i d e r f o r n o n b y p a s s a b l e d e l i v e r y c h a r g e s a s d e t e r m i n e d u n d e r S e c t i o n 3 9

. 2 0 1

. T h e r e t a i l e l e c t r i c p r o v i d e r o r t h e e l e c t r i c
c o o p e r a t i v e o r m u n i c i p a l l y o w n e d u t i l i t y , a s a p p r o p r i a t e , m u s t p a y t h e s e c h a r g e s

. ” )

. T h e A d m i n i s t r a t i v e C o d e e x p l a i n s t h a t “ [ o ] n t h e i n t r o d u c t i o n o f c u s t o m e r c h o i c e i n a s e r v i c e a r e a , m e t e r i n g s e r v i c e s

. . . f o r t h e a r e a s h a l l c o n t i n u e t o b e p r o v i d e d b y t h e t r a n s m i s s i o n a n d d i s t r i b u t i o n u t i l i t y a f f i l i a t e

. . . o f t h e e l e c t r i c u t i l i t y t h a t w a s s e r v i n g t h e a r e a b e f o r e t h e i n t r o d u c t i o n o f c u s t o m e r c h o i c e ”

. 1 6 T E X

. A D M IN

. C O D E § 2 5

. 3 4 6 ( g ) ( 2 )

.

A c t o f M a y 2 7 , 1 9 9 9 , 7 6 t h L e g

. , R

. S

. , c h

. 4 0 5 , § 1 1 , 1 9 9 9 T e x

. G e n

. L a w s 2 5 4 3 , 2 5 4 8 [ S B 7 ] ( a m e n d i n g T E X

. 26 U T IL

. C O D E § 3 1

. 0 0 2 ( 6 ) )

.

S e c t i o n 6 3 o f S e n a t e B i l l 7 p r o v i d e d : 27

N o t w i t h s t a n d i n g a n y o t h e r p r o v i s i o n o f t h i s A c t o r T i t l e 2 , U t i l i t i e s C o d e , a n y p e r s o n o r e n t i t y t h a t p r o v i d e s e l e c t r i c s e r v i c e t o a f o u r
- y e a r s t a t e u n i v e r s i t y , u p p e r
- l e v e l i n s t i t u t i o n , T e x a s s t a t e t e c h n i c a l

c o l l e g e , o r c o l l e g e , a s p r o v i d e d b y S e c t i o n 3 6

. 3 5 1 , U t i l i t i e s C o d e , o n D e c e m b e r 3 1 , 2 0 0 1 , s h a l l

c o n t i n u e t o o f

f e r e l e c t r i c s e r v i c e t o a f o u r
- y e a r s t a t e u n i v e r s i t y , u p p e r
- l e v e l i n s t i t u t i o n , T e x a s s t a t e t e c h n i c a l c o l l e g e , o r c o l l e g e , a s p r o v i d e d b y S e c t i o n 3 6

. 3 5 1 , U t i l i t i e s C o d e , u n t i l S e p t e m b e r 1 , 2 0 0 7 , a t a t o t a l r a t e t h a t i s n o h i g h e r t h a n t h e r a t e a p p l i c a b l e t o t h e u n i v e r s i t y , i n s t i t u t i o n , o r c o l l e g e o n D e c e m b e r 3 1 , 2 0 0 1

.

A c t o f M a y 2 7 , 1 9 9 9 , 7 6 t h L e g

. , R

. S

. , c h

. 4 0 5 , § 6 3 , 1 9 9 9 T e x

. G e n

. L a w s 2 5 4 3 , 2 6 2 5 [ S B 7 ] ( u n c o d i f i e d )

.


### 7

## in the statute’s words, “cha rg e[] for elec tric service provided t o a fac ility ” of any reta il customer,
including state universities. Oncor arg ued that only REPs provide elec tric servi ce to reta il customers.

The State Universities opposed Oncor ’s position. The PUC ag ree d wi t h Oncor. Concluding that
Section 36.351 is ambiguous, the c ourt of appe als defe rre d to the PUC’s interpreta tion. 2 8



## We do not ag ree that Section 36.351 is ambig uous. PURA is quite clea r: in dere g ulated are as

of the state, a TDU “may not sell elec tricity ”; only REPs can. TDUs cannot char g e consumers for 2 9 3 0



## elec tric service ; T DUs char g e wholesale tariff ed rate s set by the PUC to REPs, who in tur n char g e

customers neg otiated, competitive reta il rate s. I t follows that TDUs cannot discount rate s to

consumers but only to REPs. But Section 36

. 3 5 1 does not require a discount to REPs. The State

Universities acknow ledg e that an REP may not have a leg al obliga tion to pass along a TDU’s

d i s co u n t to consumers but stress that as a prac tical matter, universities neg otiate with REPs fo r a
straig ht pass-throug h of the TDU char g es without any mark-up. The point rema ins that if universities

continue to rec eive a discount, it is beca use of neg otiation, not beca use of Section 36.351. REPs’

4 5 0 S

. W

. 3 d 6 1 5 , 6 2 9 ( T e x

. A p p

. — A u s t i n 2 0 1 4 )

. S e e T h o m p s o n v

. T

e x

. D e p ’ t o f L i c e n s i n g & R e g u l a t i o n , 28 4 5 5 S

. W

. 3 d 5 6 9 , 5 7 1 ( T e x

. 2 0 1 4 ) ( “ W e d e f e r t o a g e n c y i n t e r p r e t a t i o n s o f s t a t u t e s o n l y i f t h e y a r e a m b i g u o u s , p r o v i d e d
t h a t t h e a g e n c y ’ s i n t e r p r e t a t i o n i s r e a s o n a b l e a n d d o e s n o t c o n f l i c t w i t h t h e p l a i n l a n g u a g e o f t h e s t a t u t e

. ” ) ; R

. R

. C o m m ’ n

o f T e x

. v

. T e x

. C i t i z e n s f

o r a S a f e F u t u r e & C l e a n W

a t e r , 3 3 6 S

. W

. 3 d 6 1 9 , 6 2 4

– 6 2 5 ( T e x

. 2 0 1 1 ) ( s u m m a r i z i n g t h e c a s e l a w o n g i v i n g “ s o m e d e f e r e n c e ” o r “ s e r i o u s c o n s i d e r a t i o n ” t o a n a g e n c y ’ s i n t e r p r e t a t i o n o f a s t a t u t e , a n d c o n c l u d i n g t h a t t h e C o u r t w o u l d u p h o l d t h e C o m m i s s i o n ’ s i n t e r p r e t a t i o n i f i t w a s r e a s o n a b l e a n d i n a c c o r d w i t h t h e p l a i n l a n g u a g e o f
t h e s t a t u t e )

.

T E X

. U T IL

. C O D E § 3 9

. 1 0 5 ( a )

. 29

I d

. § 3 9

. 3 5 2 ( a ) ( “ A f

t e r t h e d a t e o f c u s t o m e r c h o i c e , a p e r s o n , i n c l u d i n g a n a f f i l i a t e o f a n e l e c t r i c u t i l i t y , m a y 30

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

. ” )

.


### 8

## lack of any obliga tion to pass along TDU discounts to consum ers further ill ustrates that TDUs do

not char g e consume rs for e lectric service

.
Nor do TDUs provide elec tric service to consumers. The State Universities arg ue that TDUs’

tran s m i s s ion and distribution of elec tricity to consumers’ service meters is a provision of elec tric

service to consumers’ fac iliti es under Section 36.351 beca use TDUs’ lines connec t t o m et ers

installed and maintained by TDUs at eac h reta il consumer’ s fac iliti es. But while TDUs do provide

elec tric service —the phy sical deli v er y o f elec tricity to consumers’ premises—they provide this 3 1



## service to REPs. Only REPs can acc ess the el ec t ricity delivere d by TDUs. Consumers obtain

elec tricity throug h the servic e provide d by REPs.

The State Universities ar gu e t h at to interpre t Section 36.351 as not apply ing to TDUs in

dere g ulated are as produce s an absurd result: a state university fac ility in a reg ulated are a of the state

—outside ERCOT, wher e vertica lly integ rate d elec tric utilit ies still exis t and are subject to Section

36.351—would be entitled to a discount, while a fa cility in ERCOT would not be. The Univer sity

of Texas at El Paso would rec eive the discount; the University of Texas at Arling ton would not. But

we ag ree with Oncor and the PUC that leaving any disco unt to neg otiation is consistent with the
competitive marke t under de reg ulation.

The PUC arg ues that the L eg islature rec og nized the Section 36.351 discount woul d not
survive dereg ulation an d en acted Section 63 of S enate Bill 7 to extend its eff ect while the m arke t

transitioned to competition. The State Universities counter that Section 63 froze the total rate s paid

I d

. § 1 1

. 0 0 3 ( 1 9 ) ( “ ‘ S e r v i c e ’ h a s i t s b r o a d e s t a n d m o s t i n c l u s i v e m e a n i n g

. T h e t e r m i n c l u d e s a n y a c t 31
p e r f o r m e d , a n y t h i n g s u p p l i e d , a n d a n y f a c i l i t i e s u s e d o r s u p p l i e d b y a p u b l i c u t i l i t y i n t h e p e r f o r m a n c e o f t h e u t i l i t y ’ s d u t i e s

. . . t o i t s p a t r o n s , e m p l o y e e s , o t h e r p u b l i c u t i l i t i e s , a n e l e c t r i c c o o p e r a t i v e , a n d t h e p u b l i c

. ” )

.


### 9

## by state universities, not m er el y t he discount. But the discount was included in the frozen rate s.

Section 63 prese rved the discount while capping total rate s. I ndeed, Section 63 repe atedly ref ere nced

Section 36.351. We think the PUC has the be tter of the a rg ument. 3 2


## Finally , the State Universities point to PURA Section 36.354 as evidenc e that Section 36.351
applies to TDUs. Section 36.354 require s elec tric utilit ies to discount rate s to milit ary bases but only

“in an are a wher e customer choice is not available .” Thus, the statute does not apply to TDUs. The 3 3



## State Universities arg ue that when the L eg islature wanted to exclude TDUs fr o m a discount
provision, it did so expli citly , and no corr esponding lang uag e appea rs in Secti o n 3 6

. 3 5 1

. But in

1995, when Section 36.351 wa s enac ted, it was clea rly intended to apply to integ rate d utilit ies,
including their transmission and distribution opera tions. Senate Bill 7’s chang e in the definition of

“ele ctric utilit y ” made Section 36.351, as we have interpre ted the provision, ina pplicable to T DUs

but for Section 63, which expired by its own terms in 2007. No chang e in Section 36.351’s text was

neede d to re m o v e its application to TDUs. Section 36.354 was not enac ted until 2003. At that 3 4


## point, the limit ation of its application to are as outside ERCOT, still under reg ulation, was perf ectly

consistent with Section 36.351.

T h e S t a t e U n i v e r s i t i e s a r g u e t h a t t h e P U C ’ s c u r r e n t p o s i t i o n i s i n c o n s i s t e n t w i t h i t s d e t e r m i n a t i o n i n a 2 0 0 1 32

r a t e m a k i n g c a s e t h a t t h e T D U w a s r e q u i r e d t o d i s c o u n t i t s r a t e s u n d e r S e c t i o n 3 6

. 3 5 1

. S e e P u b

. U t i l

. C o m m ’ n o f T e x

. , A p p l i c a t i o n o

f C e n t

. P o w e r & L i g h t C o

. f o r A p p r o v a l o f U n b u n d l e d C o s t o

f S e r v

. R a t e P u r s u a n t t o P U R A § 3 9

. 2 0 1 & P u b

. U t i l

. C o m m ’ n S u b s t a n t i v e R u l e § 2 5

. 3 4 4 , D o c k e t N o

. 2 2 3 5 2 , O r d e r ( O c t

. 5 , 2 0 0 1 )

. B u t w h e n t h e P U C d e c i d e d t h a t

c a s e , S e c t i o n 6 3 w a s s t i l l i n e f f e c t

.

T E X

. U T IL

. C O D E § 3 6

. 3 5 4 ( a )

. 33

A c t o f M a y 1 5 , 2 0 0 3 , 7 8 t h L e g

. , R

. S

. , c h

. 1 4 9 , § 2 1 , 2 0 0 3 T e x

. G e n

. L a w s 2 0 9 , 2 2 2

– 2 2 3 [ S B 6 5 2 ) ] , a m e n d e d 34 b y A c t o f M a y 2 3 , 2 0 1 3 , 8 3 d L e g

. , R

. S

. , c h

. 1 2 1 7 , § 3

. 2 3 , 2 0 1 3 T e x

. G e n

. L a w s 3 0 3 2 , 3 0 7 1 [ S B 1 5 3 6 ] ( a m e n d i n g T E X

. U T IL

. C O D E § 3 6

. 3 5 4 ( g ) )

.


### 1 0

## We ag ree with the PUC that S ection 36.351 does not a pply to TDUs in dere g ulated ar eas.

III

The PUC was require d to deter mine Oncor ’s projec ted expenses and set rate s at a level that 3 5



## would allow Oncor a rea sonable return on its investment. One expense wa s On cor’ s future tax 3 6


## liability

. Oncor contende d that its tax expense should be deter mine d as i f i t we re a separ ate 3 7



## corpor ation. OPUC, Cities, and TI EC a rg ued that Oncor ’s tax liability should be calc ulated as if it

were i ncluded in its pare nt’s consolidated tax return. The PUC ag ree d with Oncor

. The court of

appea ls rever sed. 3 8


## Filing a consolidate d fede ral income tax return allows aff iliated companies to shar e losses

and there by lower their collective tax liability

. PURA Section 36.060 require s that the tax saving s 3 9



## from filing a consolidated return benef it rate pay ers. At the time Oncor ’s rate making proce eding

4 0



## was pe nding in the PUC, Section 36.060(a ) provided in pe rtinent part:

Unless it is shown to the satisfac tion of the reg ulatory authority that it was rea sonable to choose not to consolidate returns, an elec tric utilit y ’s income t ax es s h all be

S e e S t a t e v

. P u b

. U t i l

. C o m m ’ n , 8 8 3 S

. W

. 2 d 1 9 0 , 1 9 8

– 1 9 9 ( T e x

. 1 9 9 4 ) ( “ F u n d a m e n t a l i n t h e u t i l i t y 35

r a t e m a k i n g p r o c e s s i s t h e p r i n c i p l e t h a t u t i l i t y r a t e s a r e s e t f o r t h e f u t u r e , a n d n o t t h e p a s t

. ” )

.

T E X

. U T IL

. C O D E § 3 6

. 0 5 1

. 36

P u b

. U t i l

. C o m m ’ n v

. G T E

- S w

. , I n c

. , 9 0 1 S

. W

. 2 d 4 0 1 , 4 1 1 ( T e x

. 1 9 9 5 ) ( “ T h e i n c o m e t a x c a l c u l a t i o n i s n o 37 d i f f e r e n t t h a n o t h e r e l e m e n t s o f u t i l i t y r a t e m a k i n g

. ” )

.

4 5 0 S

. W

. 3 d 6 1 5 , 6 2 9 ( T e x

. A p p

. — A u s t i n 2 0 1 4 )

. 38

S e e 2 6 U

. S

. C

. § § 1 5 0 1 , 1 5 0 3 , 1 5 5 2 ; 2 6 C

. F

. R

. § 1

. 1 5 0 2

– 1 1

. 39

S e e C i t i e s o

f C o r p u s C h r i s t i v

. P u b

. U t i l

. C o m m ’ n , N o

. 0 3

- 0 6

- 0 0 5 8 5

- C V , 2 0 0 8 W L 6 1 5 4 1 7 , a t * 9 ( T e x

. A p p

. 40

— A u s t i n M a r

. 5 , 2 0 0 8 , n o p e t

. ) ( m e m

. o p

. ) ( “ B e c a u s e t h e p o t e n t i a l f o r s u b s t a n t i a l s a v i n g s e x i s t s w h e n a c o r p o r a t i o n f i l e s

a c o n s o l i d a t e d t a x r e t u r n , s e c t i o n 3 6

. 0 6 0 o f t h e P U R A r e q u i r e s t h e C o m m i s s i o n t o c o n s i d e r s u c h s a v i n g s w h e n s e t t i n g

a u t i l i t y ’ s r a t e s

. ” )

.


### 1 1

## computed as though a consolidated return had been filed and the utilit y had rea liz ed

its fair shar e of the saving s resulting from that re turn, if:
(1) t h e u t i l i t y is a member of an aff iliated g roup elig ible to file a consolidated income tax return; and (2) it is advantag eous to the utility to do so. 4 1



## Oncor arg ues that it does not meet condition (1).

Under fede ral tax law, a pare nt corpor ation and cer tain of its subsidiary corpor ations are an

aff iliated g roup that is allowed to file a consolidated return. When Oncor initiated this proce eding 4 2



## in J une 2008, it was a wholly owned subsidiary of Energ y Future Holdings Corporation (EF H). I n 4 3



## 2007, EFH and its aff

iliates, including Oncor , filed a consolidated tax return, as EFH ’s and Oncor ’s
prede cessor s had done for y ear s. Oncor , beca use it was wholly owned by EFH , was d ee m ed a
“disreg arde d” entity and trea ted as a division of EFH under fede ral tax law. Ha d On cor filed 4 4



## separ ately , its tax liability would have been $151 milli on, but EFH ’s aff i l i at ed g roup share d

A c t o f M a y 8 , 1 9 9 7 , 7 5 t h L e g

. , R

. S

. , c h

. 1 6 6 , § 1 , 1 9 9 7 T e x

. G e n

. L a w s 7 1 3 , 7 7 4 [ S B 1 7 5 1 ] , a m e n d e d b y 41 A c t o f M a y 2 0 , 2 0 1 3 , 8 3 d L e g

. , R

. S

. , c h

. 7 8 7 , § 1 , 2 0 1 3 T e x

. G e n

. L a w s 2 0 0 3 [ S B 1 3 6 4 ]

. A l l f u r t h e r r e f

e r e n c e s t o S e c t i o n 3 6

. 0 6 0 a r e t o t h e 1 9 9 7 v e r s i o n o f t h e s t a t u t e

.

2 6 U

. S

. C

. § 1 5 0 4 ( a ) ( 1 ) ( “ T h e t e r m ‘ a f f i l i a t e d g r o u p ’ m e a n s

– ( A ) 1 o r m o r e c h a i n s o f i n c l u d i b l e c o r p o r a t i o n s 42

c o n n e c t e d t h r o u g h s t o c k o w n e r s h i p w i t h a c o m m o n p a r e n t c o r p o r a t i o n w h i c h i s a n i n c l u d i b l e c o r p o r a t i o n , b u t o n l y i f

– ( B ) ( i ) t h e c o m m o n p a r e n t o w n s d i r e c t l y s t o c k m e e t i n g t h e r e q u i r e m e n t s o f p a r a g r a p h ( 2 ) i n a t l e a s t 1 o f t h e o t h e r i n c l u d i b l e c o r p o r a t i o n s , a n d ( i i ) s t o c k m e e t i n g t h e r e q u i r e m e n t s o f p a r a g r a p h ( 2 ) i n e a c h o f t h e i n c l u d i b l e c o r p o r a t i o n s ( e x c e p t t h e c o m m o n p a r e n t ) i s o w n e d d i r e c t l y b y 1 o r m o r e o f t h e o t h e r i n c l u d i b l e c o r p o r a t i o n s

. ” ) , ( 2 ) ( “ T h e o w n e r s h i p
o f s t o c k o f a n y c o r p o r a t i o n m e e t s t h e r e q u i r e m e n t s o f t h i s p a r a g r a p h i f i t

– ( A ) p o s s e s s e s a t l e a s t 8 0 p e r c e n t o f t h e t o t a l

v o t i n g p o w e r o f t h e s t o c k o f s u c h c o r p o r a t i o n , a n d ( B ) h a s a v a l u e e q u a l t o a t l e a s t 8 0 p e r c e n t o f t h e t o t a l v a l u e o f t h e
s t o c k o f s u c h c o r p o r a t i o n

. ” ) ; s e e a l s o 2 6 C

. F

. R

. § 1

. 1 5 0 2

– 1 ( a ) , ( b ) , a n d ( h ) ( c o n s o l i d a t e d r e t u r n r e g u l a t i o n s d e f i n i n g

“ g r o u p ” , “ m e m b e r ” , a n d “ c o n s o l i d a t e d g r o u p ” )

.

B e f o r e O c t o b e r 2 0 0 7 , O n c o r ’ s p r e d e c e s s o r , T e x a s U t i l i t i e s ( T X U ) E l e c t r i c D e l i v e r y C o m p a n y , w a s a T e x a s 43

c o r p o r a t i o n w h o l l y o w n e d b y E F H ’ s p r e d e c e s s o r , T X U C o r p o r a t i o n

. I n O c t o b e r 2 0 0 7 , O n c o r b e c a m e a D e l a w a r e l i m i t e d l i a b i l i t y c o r p o r a t i o n

.

S e e 2 6 C

. F

. R

. § 3 0 1

. 7 7 0 1

- 2 ( a ) ( “ A b u s i n e s s e n t i t y w i t h o n l y o n e o w n e r i s c l a s s i f i e d a s a c o r p o r a t i o n o r i s 44 d i s r e g a r d e d ; i f

t h e e n t i t y i s d i s r e g a r d e d , i t s a c t i v i t i e s a r e t r e a t e d i n t h e s a m e m a n n e r a s a s o l e p r o p r i e t o r s h i p , b r a n c h , o r d i v i s i o n o f t h e o w n e r

. ” )

.


### 1 2

## opera ting losses and, as a result, paid no taxes. Using 2007 as the test y ear , and apply ing Section 4 5


## 36.060(a) , Oncor ’s projec ted tax ex pense w as much lowe r.

But in November 2008, while this proce eding was sti l l p en d i n g in the PUC, EFH sold a

19.96% interest in Oncor to two international investors. At that point, Oncor was a “par tnership” for

fede ral tax purposes, and, beca use it no longe r had a single owner , could not be “‘disre g arde d’ as 4 6



## an entity separ ate from its owner .” Fe dera l tax law permit t ed On co r to elec t to be trea ted as a 4 7



## corpo ra t i o n, which would have allowed Oncor to be included in the aff iliated g roup elig ible for 4 8



## EFH ’s consoli dated tax return. But Oncor did n o t make that elec tion, and so by defa ult it would 4 9

O n c o r d i d p a y E F H $ 1 5 1 m i l l i o n u n d e r t h e i r t a x
- s h a r i n g a g r e e m e n t , w h i c h c a l l e d f o r a c o n s o l i d a t e d f

e d e r a l 45 i n c o m e t a x f

i l i n g f o r a l l E F H ’ s a f

f i l i a t e s a n d s u b s i d i a r i e s , b u t s p e c i f i c a l l y “ s e g r e g a t e d o r r i n g
- f e n c e d ” O n c o r f

r o m t h e t a x l i a b i l i t i e s o r b e n e f

i t s o f E F H ’ s a f

f i l i a t e s

. T h e a g r e e m e n t p r o v i d e d t h a t , b e g i n n i n g J a n u a r y 1 , 2 0 0 7 , O n c o r ’ s i n c o m e t a x l i a b i l i t y w o u l d b e c a l c u l a t e d a n d p a i d o n a s t a n d

- a l o n e b a s i s a s i f O n c o r w e r e a c o r p o r a t i o n u n r e l a t e d t o E F H a n d i t s a f f i l i a t e s

. T h i s a g r e e m e n t , o f c o u r s e , d o e s n o t c o n t r o l t h e a p p l i c a t i o n o f S e c t i o n 3 6

. 0 6 0

.

S e e 2 6 C

. F

. R

. § 3 0 1

. 7 7 0 1

- 2 ( c ) ( 1 ) ( “ F o r f e d e r a l t a x p u r p o s e s

. . . [ t ] h e t e r m p a r t n e r s h i p m e a n s a b u s i n e s s 46

e n t i t y t h a t i s n o t a c o r p o r a t i o n u n d e r p a r a g r a p h ( b ) o f t h i s s e c t i o n a n d t h a t h a s a t l e a s t t w o m e m b e r s

. ” ( e m p h a s i s i n
o r i g i n a l ) )

.

S e e i d

. § 3 0 1

. 7 7 0 1

- 2 ( c ) ( 2 ) ( “ E x c e p t a s o t h e r w i s e p r o v i d e d i n t h i s p a r a g r a p h ( c ) , a b u s i n e s s e n t i t y t h a t h a s a

47

s i n g l e o w n e r a n d i s n o t a c o r p o r a t i o n u n d e r p a r a g r a p h ( b ) o f t h i s s e c t i o n i s d i s r e g a r d e d a s a n e n t i t y s e p a r a t e f r o m i t s
o w n e r

. ” )

.

S e e i d

. § § 3 0 1

. 7 7 0 1

- 2 ( a ) ( “ A b u s i n e s s e n t i t y w i t h t w o o r m o r e m e m b e r s i s c l a s s i f i e d f o r f e d e r a l t a x p u r p o s e s 48

a s e i t h e r a c o r p o r a t i o n o r a p a r t n e r s h i p

. ” ) , ( b ) ( 2 ) ( “ F o r f e d e r a l t a x p u r p o s e s , t h e t e r m c o r p o r a t i o n m e a n s

. . . [ a ] n

a s s o c i a t i o n ( a s d e t e r m i n e d u n d e r § 3 0 1

. 7 7 0 1

- 3 ) ” ( e m p h a s i s i n o r i g i n a l ) ) ; s e e a l s o i d

. § 3 0 1

. 7 7 0 1

- 3 ( a ) ( “ A b u s i n e s s e n t i t y t h a t i s n o t c l a s s i f

i e d a s a c o r p o r a t i o n [ u n d e r c e r t a i n r e g u l a t i o n s ] ( a n e l i g i b l e e n t i t y ) c a n e l e c t i t s c l a s s i f

i c a t i o n f o r f e d e r a l
t a x p u r p o s e s a s p r o v i d e d i n t h i s s e c t i o n

. A n e l i g i b l e e n t i t y w i t h a t l e a s t t w o m e m b e r s c a n e l e c t t o b e c l a s s i f i e d a s e i t h e r

a n a s s o c i a t i o n ( a n d t h u s a c o r p o r a t i o n u n d e r § 3 0 1

. 7 7 0 1

- 2 ( b ) ( 2 ) ) o r a p a r t n e r s h i p , a n d a n e l i g i b l e e n t i t y w i t h a s i n g l e
o w n e r c a n e l e c t t o b e c l a s s i f i e d a s a n a s s o c i a t i o n o r t o b e d i s r e g a r d e d a s a n e n t i t y s e p a r a t e f r o m i t s o w n e r

. ” ( e m p h a s i s i n o r i g i n a l ) ) , a n d ( b ) ( 1 ) ( “ E x c e p t a s p r o v i d e d i n p a r a g r a p h ( b ) ( 3 ) o f t h i s s e c t i o n [ r e c o g n i z i n g p r e
- e x i s t i n g c l a s s i f i c a t i o n s ] , u n l e s s t h e e n t i t y e l e c t s o t h e r w i s e , a d o m e s t i c e l i g i b l e e n t i t y i s — ( i ) A p a r t n e r s h i p i f i t h a s t w o o r m o r e m e m b e r s ; o r ( i i ) D i s r e g a r d e d a s a n e n t i t y s e p a r a t e f r o m i t s o w n e r i f i t h a s a s i n g l e o w n e r

. ” )

.

S e e 2 6 U

. S

. C

. § 1 5 0 4 ( a ) ( 2 ) ( “ 8 0

- p e r c e n t v o t i n g a n d v a l u e t e s t ” )

. 49



### 1 3

## be taxed as a partne rship and could not be included in EFH ’s consolidated tax return. The chang e 5 0


## did not impact EFH f

inancially . EFH included its income as a partne r in Oncor

in its consolidated

tax return, offse t this income with othe r losses, and rea liz ed the same sort of tax saving s as befor e.

The PUC deter

mined that:

• Oncor ’s tax expense should not be based on 2007 but on its situation afte r November 2008;

• afte r Novem b er 2 0 0 8 , Oncor was no longe r a member of a g roup elig ible to file a consolidated tax return within the m eaning of Section 36.060(a ), and the ref ore tha t statute did not require calc ulating its tax re t u rn as t houg h it wer e still included in EFH ’s consolidated tax return; and

• althoug h Oncor would be tax ed as a partne rship, its tax expense should be calculated as if it were a stand-a lone cor

poration.

The court of appeals held that beca use Onc or could ha ve ele cted to be tax ed as a corporation, and

there was no impediment to its doing so, it rema ined a member of an aff iliated g roup elig ible to file

a consolidated tax return. There fore , the court conclude d, the PUC should have used the 2007 test 5 1



## y ear and applied Sec tion 34.060(a). 5 2



## We disag ree

. Section 3 6

. 0 6 0(a) very plainly applies onl y to a uti lity that “ is ” a member of

an aff iliated g roup elig ible to file a consolidated tax re turn, not a utilit y that could be

. The court of

appea ls was troubled that Oncor could use its chang e of owner ship and fede ral tax law to g ive EFH

the saving s rate pay ers had rec eived when Oncor was included, as a “disreg arde d” entity , on EFH ’s

consolidated tax return. But that conce rn cannot be used to rea d Section 36.060(a) contra ry to its

S e e i d

. § § 1 5 0 1 , 1 5 0 4

. 50

4 5 0 S

. W

. 3 d 6 1 5 , 6 5 4 ( T e x

. A p p

. — A u s t i n 2 0 1 4 )

. 51

I d

. 52



### 1 4

## plain text

. TI EC arg ues that t h e statute should apply beca use Oncor was “elig ible” to be part of a

g roup filing a consolidate d tax return. But that misrea ds the provision. I t is the g roup that must be
elig ible to file a consolidated return, not the utilit y

. The utilit y m u s t b e a member of an elig ible

g roup, and a fter N ovember 2008, Oncor

was not. 5 3



## The developments of November 2008 wer e “known and measura ble chang es” the PUC was
require d to take into acc ount, an d i t corr ectly interpre ted Section 36.060(a)

. OPUC, Citi es, and 5 4



## TI EC never

theless arg ue that the PU C err ed in calc ulating Oncor ’s tax expense as if it wer e a

corpor ation when it is taxed as a partne rship—that is, its income is passed throug h to its owner s, who

bear the tax. For that rea son, they insist, Oncor ’s tax expense is minimal. We reje cted this arg ument

in Suburban Utility Corp. v. Public Utility Commission of Texas

. There, we h el d t hat a utilit y 5 5



## structure d as a Subcha

pter S corpor ation could include, as re asonable and nec essar y expenses in a

rate making proce eding , the income taxes paid by its share holders on the utilit y ’s taxable income. 5 6



## Citi ng prec edent f

rom the C ommissi on, we ex plained that income tax es paid by share holders of a
pass-throug h entity “ar e inesca pable business outlay s and ar e d i re ctly compar able with simil ar

corp o ra t e taxes which would have been impos ed if the ut ility opera tions had been carried on by a

corpor ation.” Fa irness “entitled” the owner of a pass-throug h entity “to a rea sonable cost of service

5 7

S e c t i o n 3 6

. 0 6 0 h a s b e e n c h a n g e d , a n d h o w i t w o u l d n o w a p p l y i s n o t a n i s s u e i n t h e c a s e

. 53

S e e 1 6 T E X

. A D M IN

. C O D E § 2 5

. 2 3 1 ( b ) ( “ I n c o m p u t i n g a n e l e c t r i c u t i l i t y ’ s a l l o w a b l e e x p e n s e s , o n l y t h e 54

e l e c t r i c u t i l i t y ’ s h i s t o r i c a l t e s t y e a r e x p e n s e s a s a d j u s t e d f o r k n o w n a n d m e a s u r a b l e c h a n g e s w i l l b e c o n s i d e r e d

. . . . ” )

.

6 5 2 S

. W

. 2 d 3 5 8 ( T e x

. 1 9 8 3 )

. 55

I d

. a t 3 6 3

– 3 6 4

. 56

I d

. a t 3 6 4

. 57



### 1 5

## allowanc e for fede ral income taxes actua lly paid by its shareholder s on [i ts] taxable income or for

taxes it would be re quired to pay as a c onventional cor

poration, whiche ver is less.” 5 8



## The P UC’s deter

mination to calc ulate Oncor’s t ax ex pense as if it wer e a corpor ation was

not arbitrar

y or ca pricious. 5 9



## IV
Municipalities f

ranc hise to utilities the use of streets, alley s, and other public are as. PURA

states that it “does not restric t the rig hts and power s of a municipality to g rant or ref use a fra nchise

to use the streets and alley s in the municipali t y o r t o make a statutory char g e for that use.” But 6 0



## Senate Bi l l 7 ad d ed PURA Section 33.008, which addre sses fra nchise char g es. As rela ted to this

case :

• Subsection (a) rec og nizes that a municipality may impose a rea sonable fra nchise char g e on a TDU under c ompetition. 6 1

I d

. W e l a t e r c l a r i f

i e d t h a t t h e C o m m i s s i o n i s n o t b o u n d b y t h e t a x e s a c t u a l l y p a i d b e c a u s e t h e s t a t u t e a l l o w e d 58
t h e C o m m i s s i o n d i s c r e t i o n i n d e t e r m i n i n g t h e u t i l i t y ’ s “ f a i r s h a r e ” o f t a x s a v i n g s f r o m a c t u a l o r h y p o t h e t i c a l c o n s o l i d a t e d
t a x r e t u r n s , a n d i n w e i g h i n g p o t e n t i a l f u t u r e t a x e x p e n s e s f

r o m f u t u r e i n c o m e

. P u b

. U t i l

. C o m m ’ n v

. G T E

- S w

. , I n c

. , 9 0 1 S

. W

. 2 d 4 0 1 , 4 1 0

– 4 1 1 ( T e x

. 1 9 9 5 )

.

T E X

. G O V ’ T C O D E § 2 0 0 1

. 1 7 4 ( 2 ) ( F ) ; S t a t e v

. P u b l i c U t i l i t y C o m m ’ n , 3 4 4 S

. W

. 3 d 3 4 9 , 3 5 6 ( T e x

. 2 0 1 1 ) ; G u l f 59 S t a t e s U t i l i t i e s C o

. v

. P u b l i c U t i l i t y C o m m ’ n , 9 4 7 S

. W

. 2 d 8 8 7 , 8 9 0 ( T e x

. 1 9 9 7 )

.

T E X

. U T IL

. C O D E § 1 4

. 0 0 8 ( a )

. 60

S e c t i o n 3 3

. 0 0 8 ( a ) o f t h e T e x a s U t i l i t i e s C o d e s t a t e s : 61

F o l l o w i n g t h e e n d o f t h e f r e e z e p e r i o d f

o r a m u n i c i p a l i t y t h a t h a s b e e n s e r v e d b y a n e l e c t r i c

u t i l i t y , a n d f

o l l o w i n g t h e d a t e a m u n i c i p a l l y o w n e d u t i l i t y o r a n e l e c t r i c c o o p e r a t i v e h a s i m p l e m e n t e d

c u s t o m e r c h o i c e f

o r a m u n i c i p a l i t y t h a t h a s b e e n s e r v e d b y t h a t m u n i c i p a l l y o w n e d u t i l i t y o r e l e c t r i c
c o o p e r a t i v e , a m u n i c i p a l i t y m a y i m p o s e o n a n e l e c t r i c u t i l i t y , t r a n s m i s s i o n a n d d i s t r i b u t i o n u t i l i t y , m u n i c i p a l l y o w n e d u t i l i t y , o r e l e c t r i c c o o p e r a t i v e , a s a p p r o p r i a t e , t h a t p r o v i d e s d i s t r i b u t i o n s e r v i c e

w i t h i n t h e m u n i c i p a l i t y a r e a s o n a b l e c h a r g e a s s p e c i f i e d i n S u b s e c t i o n ( b ) f

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

s t r e e t , a l l e y , o r p u b l i c w a y t o d e l i v e r e l e c t r i c i t y t o a r e t a i l c u s t o m e r

. A m u n i c i p a l i t y m a y n o t i m p o s e

a c h a r g e o n :



### 1 6

## • Subsection (b) allows a municipality that imposed fra

nchise c harg es bef

ore c ompetition to continue to char g e per kilowatt hour of elec tricity deli v ere d within the municipality the

aver ag e such c harg e imposed in 1998. 6 2



## • Subsection (c) provides that such char g es are rea sonable and nece ssary opera ting expenses of the utility

and may be passe d on to REPs

. 6 3

( 1 ) a n e l e c t r i c u t i l i t y , o r t r a n s m i s s i o n a n d d i s t r i b u t i o n u t i l i t y , m u n i c i p a l l y o w n e d u t i l i t y , o r
e l e c t r i c c o o p e r a t i v e f

o r e l e c t r i c s e r v i c e p r o v i d e d o u t s i d e t h e m u n i c i p a l i t y ; ( 2 ) a q u a l i f

y i n g f a c i l i t y ; ( 3 ) a n e x e m p t w h o l e s a l e g e n e r a t o r ; ( 4 ) a p o w e r m a r k e t e r ; ( 5 ) a r e t a i l e l e c t r i c p r o v i d e r ; ( 6 ) a p o w e r g e n e r a t i o n c o m p a n y ; ( 7 ) a p e r s o n t h a t g e n e r a t e s e l e c t r i c i t y o n a n d a f t e r J a n u a r y 1 , 2 0 0 2 ; o r ( 8 ) a n a g g r e g a t o r , a s t h a t t e r m i s d e f i n e d b y S e c t i o n 3 9

. 3 5 3

.

T h e “ f r e e z e p e r i o d ” e n d e d w h e n c o m p e t i t i o n b e g a n

. I d

. § 3 1

. 0 0 2 ( 8 ) ( “ ‘ F r e e z e p e r i o d ’ m e a n s t h e p e r i o d b e g i n n i n g o n J a n u a r y 1 , 1 9 9 9 , a n d e n d i n g o n D e c e m b e r 3 1 , 2 0 0 1

. ” )

.

S e c t i o n 3 3

. 0 0 8 ( b ) s t a t e s : 62

I f a m u n i c i p a l i t y c o l l e c t e d a c h a r g e o r f e e f o r a f r a n c h i s e t o u s e a m u n i c i p a l s t r e e t , a l l e y , o r p u b l i c w a y f

r o m a n e l e c t r i c u t i l i t y , a m u n i c i p a l l y o w n e d u t i l i t y , o r a n e l e c t r i c c o o p e r a t i v e b e f o r e t h e
e n d o f t h e f

r e e z e p e r i o d , t h e m u n i c i p a l i t y , a f t e r t h e e n d o f t h e f

r e e z e p e r i o d o r a f

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

r o m e a c h e l e c t r i c u t i l i t y , t r a n s m i s s i o n a n d d i s t r i b u t i o n u t i l i t y , m u n i c i p a l l y o w n e d u t i l i t y , o r e l e c t r i c c o o p e r a t i v e t h a t u s e s t h e m u n i c i p a l i t y ’ s s t r e e t s , a l l e y s , o r p u b l i c w a y s t o p r o v i d e d i s t r i b u t i o n s e r v i c e a c h a r g e b a s e d o n e a c h k i l o w a t t h o u r o f e l e c t r i c i t y d e l i v e r e d b y t h e u t i l i t y t o e a c h

r e t a i l c u s t o m e r w h o s e c o n s u m i n g f a c i l i t y ’ s p o i n t o f d e l i v e r y i s l o c a t e d w i t h i n t h e m u n i c i p a l i t y ’ s b o u n d a r i e s

. T h e c h a r g e i m p o s e d s h a l l b e e q u a l t o t h e t o t a l e l e c t r i c f r a n c h i s e f

e e r e v e n u e d u e t h e

m u n i c i p a l i t y f

r o m e l e c t r i c u t i l i t i e s , m u n i c i p a l l y o w n e d u t i l i t i e s , o r e l e c t r i c c o o p e r a t i v e s , a s

a p p r o p r i a t e , f

o r c a l e n d a r y e a r 1 9 9 8 d i v i d e d b y t h e t o t a l k i l o w a t t h o u r s d e l i v e r e d d u r i n g 1 9 9 8 b y t h e

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

a c i l i t i e s ’ p o i n t s o f d e l i v e r y w e r e l o c a t e d w i t h i n t h e m u n i c i p a l i t y ’ s b o u n d a r i e s

. T h e
c o m p e n s a t i o n a m u n i c i p a l i t y m a y c o l l e c t f r o m e a c h e l e c t r i c u t i l i t y , t r a n s m i s s i o n a n d d i s t r i b u t i o n

u t i l i t y , m u n i c i p a l l y o w n e d u t i l i t y , o r e l e c t r i c c o o p e r a t i v e p r o v i d i n g d i s t r i b u t i o n s e r v i c e s h a l l b e e q u a l
t o t h e c h a r g e p e r k i l o w a t t h o u r d e t e r m i n e d f o r 1 9 9 8 m u l t i p l i e d t i m e s t h e n u m b e r o f k i l o w a t t h o u r s d e l i v e r e d w i t h i n t h e m u n i c i p a l i t y ’ s b o u n d a r i e s

.

S e c t i o n 3 3

. 0 0 8 ( c ) s t a t e s : 63

T h e m u n i c i p a l f r a n c h i s e c h a r g e s a u t h o r i z e d b y t h i s s e c t i o n s h a l l b e c o n s i d e r e d a r e a s o n a b l e

a n d n e c e s s a r y o p e r a t i n g e x p e n s e o f e a c h e l e c t r i c u t i l i t y , t r a n s m i s s i o n a n d d i s t r i b u t i o n u t i l i t y , m u n i c i p a l l y o w n e d u t i l i t y , o r e l e c t r i c c o o p e r a t i v e t h a t i s s u b j e c t t o a c h a r g e u n d e r t h i s s e c t i o n

. T h e
c h a r g e s h a l l b e i n c l u d e d i n t h e n o n b y p a s s a b l e d e l i v e r y c h a r g e s t h a t a c u s t o m e r ’ s r e t a i l e l e c t r i c p r o v i d e r m u s t p a y u n d e r S e c t i o n 3 9

. 1 0 7 t o t h e u t i l i t y s e r v i n g t h e c u s t o m e r

.


### 1 7

## • Subsection (f) sta tes:
Notwithstanding any other provision of this section, on the expiration of a fra nchise ag ree ment exis ting on September 1, 1999, an elec tric utilit y , transmission and distribution utilit y , municipally owned utilit y , or elec tric cooper ative and a municipality may mutually ag ree to a differ ent level of compensa tion or to a differ ent method for deter

mining the amo u n t t h e municipality may char g e for the use of a municipal street, alley , or public way in connec tion with the delivery of elec tricity at reta il within t he municipality

. 6 4



## Sect i o n 6 2 (a ) o f Senate Bill 7 added: “Nothing in this Act shall restric t or limit a municipality ’s

historical rig ht to control and rec eive rea sonable compensa tion for use o f p u b lic streets, alley s,
rig hts-of-wa

y , or other public pr operty to convey

or provide e lectric ity .”

I n it s a p p lication to the PUC, Oncor proposed to include $253,884,976 of municip a l f r a n c h is e

char g es as a rea sonable and nece ssary opera ting expense. Of this amount, almost $5.7 milli on was

a 5% incre ase rec ently neg otiated betwee n Oncor an d Citi es. The PUC reje cted Oncor ’s reque st,
concluding that a utility

cannot pa

y more than the char g e set out in Section 33.008(b). I n the court

of appea ls, the PUC abandone d that position, which is direc tly contra dicted by Section 33.008(f) ’s
phrase , “[n] otwithstanding any other provision”. I nstead , t h e P UC arg ued, citing the lang uag e in

subsection (f) , that Oncor could include in its expenses a char g e descr ibed in Section 33.008(f) only

if it proved that the char g e was ag ree d to “on the expiration of a fra nchise ag ree ment exis ting on
September 1, 1999”. The PUC arg ued that Oncor failed to meet its burden of proof beca use there 6 5



## was less than a scintilla of evidenc e that Oncor had ag ree ments with the Citi es befor e September 1,

I d

. § 3 3

. 0 0 8 ( f

)

. 64

4 5 0 S

. W

. 3 d 6 1 5 , 6 5 8

– 6 5 9 ( T e x

. A p p

. — A u s t i n 2 0 1 4 )

. 65



### 1 8

## and that these ag ree ments expi red the rea fter. T he cour t of appe als ag ree d. 6 6



## But the e x piration of a f

ranc hise ag ree ment exis ting on Septembe r 1, 1999, cannot be re ad

as a condition to ag ree ing to a differ ent char g e. I f it wer e, a municipality that had no fra nchise

ag ree ment with a T DU o n t h at date could never impose a fra nchise char g e in the future. A
municipality with a fr an ch i s e ag ree ment in eff ect on that date could rene g otiate it only once and

never ag ain af terwa rd. These restric tions would sever ely limit “a municipa lity ’s historical rig ht to

control and rec eive rea sonable compensa tion” for the use of public proper ty , in direc t contra diction
of Section 62(a ) of Sena te B ill 7.

Section 33.008(f) does not restric t rene g otiated fra nchise char g es to only those ag ree d to on

the expiration of fra

nchise agr ee m en ts exis ting on September 1, 1999. The provision simply

prec lud es t h e i n fer ence that Section 33.008(b) is exclusive. Reading the para g raphs of Section

33.008 toge ther, as we must, they confirm that municipal i t i es may continue to impose fra nchise

char g es afte r co m p et i t i on, that char g es per kilowatt hour equal to the aver ag e amount char g ed in

1998 must be considere d rea sonable and nece ssary , and t h at u t i lities may continue to rene g otiate

fran ch i s e ch ar g es, t houg h they must demonstrate that the charg es are reasonable and necessar y in

order to pass them along to REPs

.
The court of appea ls misint erpr eted Section 33.008(f)

. The PUC’s disallowance of Oncor ’s

rene g otiated fra

nchise c harg es wa s err or.

I d

. 66



### 1 9

## * * * * *

Acc ording ly , the judgme nt of the court of appea ls is aff irmed in part and reve rsed in part, and

the ca se is rema

nded to the PUC for proc eeding s consistent with this opi nion.

Nathan L . Hec ht Chief J ustice
Opinion delivere d: J anuar y 6, 2017

2 0