Tex. Util . Code Ann. §§ 11.001-64.158 ( West 2007). 1 

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

NO. 03-0 6 -00 503 -CV

The St at e of Te xa s, appe ar ing by a nd t hr oug h t he Offic e of t he At to r ne y G e ne r al, Consume r P rote ction and Public Health Divisi on, Public Agency Re presentat ion Section; Citie s of Dicki nson , F riendsw ood, La Marque, League City, Lewis ville and T exas City; Texas-Ne w Mexico P ower Com pany; FirstChoice P ower, Inc.;

and T exas G enerat ing Co., L.P., Appellants

v. P ublic Ut ili tyCo m m iss ion of Te xa s, r e pr e se nt e d by t he Offic e of t he At to r ne y G e ne r al, Natural Re sources Division; and T exas Indu strial Energy Consum ers , Appellees

F ROM THE DISTRICT CO URT OF TRAVIS COUNTY , 53RD JUDICIAL DISTRICT NO. D-1- GN-05- 0034 99 , HO NORAB LE SCO TT H. JENK INS , JUDGE PRESIDI NG

O P I N I O N This appea l a

rises from the district c ourt’s judgme nt a ffirming the final orde r of the Public Utili ty

Commi ssion in the true-up proc eedingto final i z e “s trande d costs” for Texas-New Me xico Pow e r C omp any , F ir st C ho ic e Pow e r, I nc ., and Te xas G e ne ratin g Com pa ny , L .P. (colle ct i v el y

“TNMP”) under se ction 39.262 of the Public Utility Reg ulatory

Act (“ PURA”) and 1 PUC S ubstantive Rule 25.263. Be cause we conclude the Commi ssion’s final order was c onsistent with the plain lang uag e of the rele vant statutes and wa s supported by substantial evidence , we a ffirm the judg ment of the district cour t affir ming the Commission’s final order
.Se c tio n 3 9. 25 1( 7) de fi ne s th e te rm “ str and e d c os ts” a s: 2 the positive excess of the net book value of g ener ation assets over the marke t value of t h e a s s e ts , ta

k in g in to a c c o u n t a ll o f

th e e le c tr ic u ti li ty ’ s g e n e r a ti o na s s e ts , any above mark et purcha sed powe r costs, and a ny defe rre d debit related to a utility ’s discontinuance of the a

pplication o f S tatement of F inancial Ac counting Standards No
. 7 1 (“ Accounting f or the Ef

fec ts of Certain Ty

pes of Regulation”) for g ener ation-re lated asse ts if require d by the provisions of this chapter
. For purposes of Section 39.262, book value shall be established as of Dec ember 31, 2001, or the date a marke t value is established through a marke t valuation method under Sec tion 39.262(h), whic hever

is earlier , and shall include stra nded costs i n cu rr ed under Section 39.263. Id. § 39.251(7). 2

F ACTUAL AND P ROCEDURAL BACK GR OUND I n 1 99 9, the le g isl a ture ena c te d Se nate B ill 7 ( “ SB 7” ), wh ic h ame nd e d th e PUR A to restruc ture a

nd partially

dere g ulate the Te x as re tail electr ic power industry
. SeeAct of Ma

y 27, 19 99 , 76 th L e g ., R.S. , c h. 40 5, 19 99 Te x. Ge n. L a ws 25 43 ; see also CenterPoint Energy Houston Electric, LLC v. Gulf Coast Coalit ion of Ci ties , No. 03-05-00557- CV, 2007 Tex. App. L EXI S 9919, at *3-*18 (T ex. Ap p . — Au stin Dec. 20, 2007, no pe t. h.) (desc ribing statutory framework f

or transition to competitive reta il e lectric marke t) (her eaf ter “ CenterPoint ”). A s part of the transition fr om r e g ulatio n to re ta il c omp e tit ion , th e le g isl a tur e a uth or ize d e a c h e le c tr ic uti lity to r e c ov e r “ a ll of its ne t, v e ri fi a

ble , n on mit ig a

ble s t r a n d e d c o s t s inc ur

re d in purc ha sin g po we r a

nd pr ov idi nge le c tr ic g e ne ratio n se rv ic e .” Te x. Ut il. Cod e Ann. § 3 9. 25 2( a ) ( Wes t 20 07 ). Th e te rm “ str and e d c os ts” is de fi ne d in se c tio n 3 9. 25 1 o f t

he PUR A but, g e ne ra lly

sp e a kin g , s tr and e d c os ts r e pr e se nt p ru de ntl y 2 incurre d expenditures ma de by the utiliti es in a re g ulated envir onment—previously rec overa ble over time throug h regulated rates paid by consumers—that have be come unr ecove rable in a competitiveSe e als o Supplemental Preliminary Orde r, PUC Docket No. 29206 ( Public Util. C omm’n 3 Mar. 3, 2004) , available at htt p:/ /in te rc hang e .p uc .s tate .tx.u s/We bApp /Inte rc ha ng e /D oc ume nts / 29 20 6_ 15 6_ 42 93 30 .P DF. TN MP s old

TN P On e to Tw in Oa

ks Pow e r, L L P, a

n a ff ili a te of Se mpr a En e rgy Re so ur c e s. 4 3 marke t. See Reliant Energy, I nc. v. P ublic Util. Comm’n , 1 01 S.W. 3d 12 9, 13 2 ( Te x. Ap p. —Aus tin 2003), r ev ’d on ot her grounds , CenterPoint Energy, I nc. v. P ublic Util. Comm’n , 143 S.W .3d 81 (Tex. 2004) (op. on reh’ g ). Recove ry of st rande d costs is one of the final steps in the transition from traditional cost-of- service regulation to retail competition.

TNM P filed an a

pplication with the Commi ssion seeking to rec over $266,487,442 i nt o t al s t ra n d edco s t s . T NM P al s o s o u gh tre co v ery o f $ 1 0 6 , 5 7 3 , 9 7 3 fo r t h e c ap ac i t y au ct i o nt ru e- u

p. SeeTex. Util . Code Ann. §§ 39.153, .262(d) (West 2007). As a pre liminary matter, the Commission deter mined that TNMP was n o t en t i t led to a ca pacity auction true -up as a

matter of la

w. See id. § 39.153; PUC S ubst. R. 25.381(d). Th e re a ft e r, the Com mis sio n r e fe rr e d T NM P’ s a pp lic a tio n to 3 t h e S t at e O ff

i ce o f A dm i n i s t ra t i v e H ea ri n gs fo r aco n t es t edca s e h ea ri n g. After conducting a hear ing and re viewingthe evidenc e submitted by the par ties, the administrative law judg es issued a proposal for de cision on May 28, 2004, including f

indings of f

act
an d co n cl u s i o n s o f l aw . T h e C o m m i s s i o nad o p t edt h e P FD i np ar tan d m o d i fi edt h e A L J s ’ f

i n d i n gs with respe ct to the following issues: 1) whether the sale of

TNP One—TNMP’s sole g ener ating p l an t

— wa s a b o n a f

i d e, t h i rd -p ar t y

t ra n s ac t i o nu n d er

a c o mp et i t i v e o ff

er i n g; 2 ) w h e t h e r

T N MP 4 purs ue d c omm e rc ia lly

re a so na ble e ff or ts to mi tig a te str and e d c os ts; 3) the g ro ss- up of str and e d- c os t disallowance s; and 4) the inter est rate for c alculatingcar rying c osts on TNMP’s final fuel bala nce.4 The Commission rejected the AL J s’ rec ommendation and deter mined that TNMP’s sale of its TNP One g ener ating plant was not a bona fide, third-pa

rty transac tion under a c ompetitive offe ring within the meaningof sec tion 39.262(h) of the PURA. The Commi ssion co n cluded that TNMP failed to comply

with section 39.262(h) and failed to c arr y its burden of provingthe marke t value of TNP One. Ba sed on the evidence in the r ecor d, the Commiss ion determined that the marke t value of TNP One wa s $180 mill ion. The Commissi on used this market va lue to d et er mine what it r e fe rr e d to a s T NM P’ s pr im ar ystranded c ost balance
. Al te rn a tiv e ly , th e Com mis sio n f ound that, e ven if

it a c c e pte d th e AL Js’
rec ommendation that TNMP’s sale of TNP One wa s a bona f id e, t h i rd -party

transac tion under a
c omp e tit ive of

fe ri ngwi thi n th e me ani ng of se c tio n 3 9. 26 2( h) , T NM P f a ile d to us e c omm e rc ia lly
re a so na ble me ans to m iti g a te its str and e d c os ts a s r e qu ir e d und er sect io n 3 9. 25 2( d) . U nd e r t his alternative finding , the Commiss ion adopted the AL J s’ proposed ma rket va luation of TNP One a nd th e AL J s’ proposed a djustments, with m odifications, to TNMP’s book value to re flec t the lack of
comm e rc ia l r e a so na

ble ne ss. Us ingthi s a

pp ro a c h, the Com mis sio n d e te rm ine d w hat it re fe rr e d to
a s T NM P’ s alternative stranded c ost balance
.

L ess than two months after the Commiss ion rende red its final order, the Te x as Supreme Court issued its opinion in CenterPoint Energy, I nc. v. P ublic Utility Commissi on , 143 S.W .3d 81 (Tex. 2004) (her eaf ter “ CenterPoint Energy ” ). I n its opin ion , th e su pr e me c ourt

he ld that interest on strande d costs must accr ue fr om J anuar

y 1, 2002, not f

rom the date of

the utility ’s final true- up case as provided in PUC Substantive Rule 25.263(l)(3)
. Id. at 84. Acc ording ly , theB a se d on its fin din g that TNM P fa ile d to take c omm e rc ia lly re a so na ble ste ps to m iti g a te 5 stranded c osts, the Comm issi o n ap p roved an alternative stranded c ost balance of $139,834,457. L ike the primar

y stranded c ost ba lance , this amount was further offse t by TNMP’s final fue l balance of $41,504,474 an d ca rr ying c osts on the additional TNP One depr eciation, plus i ntere st due on stranded c osts of $42,514,910. T h e n et amount of stra nded cost re cover

y authorized by

the Commi ssion under this alternative approa ch wa s $124,966,643. 5 Commi s s i o n g rante d rehe aringand re manded the c ase to SOAH f or the AL J s to reca lculate a nd quantify the intere st due TNMP in light of the supre me cour t’s opinion. Th e AL Js i ssu e d a Re mand PF D o n M arc h 1 1, 20 05 , a nd re c omm e nd e d inte re st i n the amount of $41,736,027 on the Commission’s primary stranded c ost balance and $45,304,441 on the Commiss ion’s alternative stranded co s t b alanc e. In its final order, e ntitled “Second Or der on Re he ari ng ,” the Commis sio n a do pte d the Re mand PF D in pa rt , mod if ie d the AL Js’ fi nd in gs with respe ct to the appr opriate inter est rate t o b e ap p lied to TNMP’s stranded c ost balance , and
re c a lc ulate d th e tot a l in te re st d ue TN MP. After rec alculatingthe intere st amount due, the Commissi o n approved a pr im ar y stranded c ost balance o f $128,820,365. This amount was fur ther off set by TNMP’s final fue l balanc e of $41,504,474 a

nd car rying c osts on the additional TNP One de prec iation, plus int ere st due on stranded c osts of $39,166,214. The net am o u n t o f s t rande d cost rec overy authorized by

the Commi ssion was $110,603,855. 5

Severa l parties soug ht judicial reviewin the Travis Count y Di s t ri ct C ourt of the Commi ssion’s Second Orde r on Rehea ring as per

mitted u n der se ction 2001.171 of the Administrative Procedur e Ac t. SeeTex. Gov’t Code Ann. § 2 0 0 1 .171 (West 2000). The district
c o u rt c o n s o li d a te d a ll o f th e s e a p p e a ls in to o n e p r o c e e d in g an d r e n d e r e d ju d g me n t a f f ir mi n g theTh e Te xas I nd us tr ia l E ne rg y Con sume rs (T I EC) su pp or t the Citi e s and

State Ag e nc ie s in 6 thi s is su e , b ut T I EC d id n ot f ile a se pa rate a pp e a l. 6 Commi ssion’s order in al l respec ts on J uly 24, 2006. TNMP, as well as the Cities of Dic kinson, F riend sw oo d, L a Mar qu e, L eague C it y , an d L ewi sv il le ( col lec ti vel y “C it ies ”), a ndtheSta

te of Te xas, on behalf o f a lls tate entities and institutions t hat ar e ele ctricity consumers ( “State Ag encie s”), a ppeal fr om t he dis tr ic t c ourt ’s jud g me nt.
DI SCU SSIO N On appeal, t he parties raise va rious issues challeng ing the Commi ssion’s final order
. The C i t i es an d State Ag encie s argue that the Commission erred in de termining the marke t value of TNMP’s asse ts when TNMP failed to c arr y its burden of proof

on this iss ue. I n two additional

6 issues, the Cities arg ue that the C ommissi on err ed in fa iling to ef fec tuate TNMP’s prior a g ree ment to reduc e strande d costs and in calc ulating the interest owe d on TNMP’s final true- up balanc e. F or its part, TNMP raises thre e issues on appe al, arguing that the Commi ssion e rre d in denying TNMP’s
c a pa c ity a uc tio n tr ue -u p, in “ g ro ssi ng up ” dis a llo wa nc e s fo r a lle g e d fe de ra l inc ome tax be ne fi ts, and in re ducing the net book value of TNMP ’s assets for investment tax credits. The Commission responds that ther e wa s n o er ro r i n its final order a nd the orde r wa s supported by substantial evidenc e.
Stan dard of Revie w

I n th e ir c ha lle ng e s to the Com mis sio n’ s f ina l or de r, the pa

rt ie s h a ve ra ise d a

va ri e ty of iss ue s, wh ic h w e re vie w und e r d if fe re nt s tand ards o f r e vie w. We b ri e fl y summa ri ze t he se7

differ ent standards. As a g ener al matter, we revie w the Commi ssion’s f inal orderu n d er t he substantial e vidence rule. SeeTex. Util . Code Ann. § 15.001 (West 2007); Tex. Gov’t Code Ann. § 2001.174 (West 2000). Under the s ubstantial evidenc e rule, we give sig nificant de fer ence to the ag ency in its field of expertise. Railroad Comm’n v. Torch Ope rating Co. , 912 S.W .2d 7 90, 792 (T e x. 19 95 ); Texas Health Faciliti es Comm’n v . Charter Med.-D allas, Inc. , 665 S.W .2d 446, 452 (T e x. 19 84 ). We p re sume tha t th e a g e nc y ’s or de r i s v a lid and that it s f

ind ing s, inf

e re nc e s, conclusions, and deci sions are suppor ted by substantial evidence
. City of E l P as o v . P ub lic Ut il. Comm’n , 8 83 S.W. 2d

17 9, 18 5 ( Te x. 19 94 ); Charter Med. , 665 S.W .2d at 452. The c omplaining party has the burde n to overc ome this presumption. City of E l P as o , 88 3 S. W.2 d at 18 5; Hammac k v. Public Util. Comm’n , 131 S.W .3d 713, 725 (Tex. App.—Austin 2004, pet. denied). I n conducting a substantial evidenc e re v i ew, we evaluate the entire rec ord to deter mine whether

the evidenc e as
a wh ole is s uc h th a t r e a so na ble min ds c ou ld h a ve re a c he d th e c on c lus ion the a g e nc y

mus t have r eac hed in orde r to take the disputed action. Te x as Sta te Bd

. o f D e nta l E

x am ’r s v . S ize mo re , 75 9 S. W.2 d 1 14 , 1 16 (T e x. 19 88 ); Suburban Util. Cor p. v. Public Util. Comm’n , 652 S.W .2d 358, 364 (Tex. 1983). We may not substit ute our ju d gm en t for that of the ag ency on the weig ht of the evidenc e on questions committed to the ag ency ’s discre ti o n . Tex. Gov’t Code Ann. § 2001.174; Charter Med. , 665 S.W. 2d a t 45 2; H.G. Sledge, Inc. v. Prospective Inv. &Trading Co. , 36 S.W .3d 597, 602 (Tex. App.—Austin 2000, pet. denied).

Under a substantial evidenc e re view, the issue f or the reviewing court is not whether the age ncy ’s decision was corre ct, but whether the record demonstrates some re asonable basis for the ag ency ’s ac tion. Charter Med. , 6 65 S.W. 2d at 45 2; Ce ntral P owe r &Lig ht C o. v . P ub lic Ut il.8

Comm’n , 36 S.W .3d 547, 561 (Tex. A pp.—Austin 2000, pet. denied)
. The e vidence in the rec ord may preponde rate ag ainst the dec ision of the ag ency and neve rt h el es s amount to substantial evidenc e. Charter Med. , 6 65 S.W. 2d a t 45 2; Meie r Infinity v. Motor VehicleBd. , 918 S.W .2d 95, 98 (T e x. Ap p. —Aus tin

19 96 , w ri t de nie d) . We wi ll s us ta in t he agency ’s or de r i f t

he e vid e nc e is
su c h th a t re a so na

ble min ds c ou ld h ave re a c he d th e c on c lus ion that th e a g e nc y

mus t ha ve re a c he d in order to justify its a ction. Charter Medical , 6 65 S.W. 2d a t 45 3; Suburban Util. Cor p. , 652 S.W .2d at 364. We will r ever se the ag ency ’s order if the decision is not rea sonably supported by

substantial evidenc e, in violation of a constitutional or statutory provision, in excess of the a g ency ’s statutory
a uth or ity , ma de thr ou g h unla wf ul pr oc e dure , a ff

e c te d b y oth e r e rr or

of law, arb itr ary

or c a pr ic iou s, or cha rac terized by

an abuse of discre tion. SeeTex. Gov’t Code Ann. § 2001.174(2)( A)-( F)
. Severa l issues raised by

the par ties involve questions of st atutory construction, which
we r eview de novo . Wh e n c on str uin g a statut e , our pr ima

ry g oa l is to d e te rm ine and

g ive e ff e c t to the l eg islature’s intent. City of San Antonio v. Ci ty of Boerne , 111 S.W .3d 22, 25 (Tex. 2003) . To de te rm ine le g isl a tiv e int e nt, we loo k to the statut e a s a who le, a s o pp os e d to iso late d p ro vis ion s. State v. Gonzalez , 8 2 S. W.3 d 322 , 327 (T e x. 20 02 ). We be g in wit h the pla in l angua g e of

the statut e at i ssue and apply its common meaning
. City of S an An ton io , 111 S.W .3d at 25. Where the statutory text is unambiguous, we adopt a c onstruction supported by the s tatute’s plain lang uag e, unless that construction would lea d to an absurd r esult. Fleming Foods of Tex., Inc . v. Ry lander , 6 S.W .3d 278, 28 4 ( Te x. 19 99 ). We g ive se ri ou s c on sid e ratio n to an agency ’s int e rp re tatio n o f t he statut e s it

is char g ed with enf

orcing , so long a s that interpre tation is reasona ble and c onsistent with the statutory lang uag e. Tarra nt A

pp ra isa l D ist
. v . M

oo re , 8 45 S.W. 2d

82 0, 82 3 ( Te x. 19 93 ); Ste e rin g Co mm s.9

for the Citi es Serv ed by TXU Ele c. v. P UC , 42 S.W .3d 296, 300 (Tex. App.—Austin 2001, no pet.). This is particularly

true whe n the statute involves a c omplex subject matter. Ste eri ng Com ms . for Cit ies , 4 2 S
. W
. 3 d a t 3 0 0
. C o u rt s , h o w e v e r , “ d o n o t d e f e r t o a dm i n i s t r a t i v e i n t e r p r e t a t i o n in reg ard to que stions wh ich do not lie within administ rative e x pertise, or deal with a nonte chnica l question of law.” Rylander v. Fisher Controls Int’l, Inc

. , 4 5 S. W.3 d 2 91 , 3 02 (T e x. Ap p. —Aus tin 2001, no pet.). Additionally , s everal issues ra ised by the par ties challeng e the Commission’s authority . The Public Utility Commi ssion “is a cre ature of the L eg islature and ha s no inherent authority .” Public Util. Comm’n v. G TE-SW Corp. , 901 S.W .2d 401, 407 (Tex. 1995) . L ike other state a dmi nis tr a tiv e a g e nc ie s, the Com mis sio n “ ha s o nly tho se po we rs that th e L e g isl a tur e e xpre ssl y confe rs upon it” and “any implied power s that are nece ssary to car ry out the express responsibilities g iven to i t b y t h e L eg islature.” Public Util. Comm’n v. City Pub. Serv . Bd. , 53 S.W .3d 310, 316 (Tex. 2001). I t is not enoug h that the power claimed by the Commiss ion be re asonably useful to the Com mis sio n in dis c ha

rg ing its dutie s; the po we r m us t be e ith e r e xpre ssl y

c on fe rr e d o r n e c e ssa

ri ly implie d b y

statute. The a g ency

may not “exercise what is eff ectively a new power , or a pow er contra dictory

to the statute, on the theory that such a p o we r i s ex pedient for administrative purposes.” Id.
T h es t a tu t o r y s c h e me Be fore addre ssing the issues r aised by the par ties, we provide a brie f over view of the statutory scheme allowing for rec overy of stranded costs. S ee a l s o CenterPoint , 2007 Tex. App. L EXI S 9919, at *3-*18 (for discussion of statutory framework) . I n 1999, the leg islature dete rminedAs pa rt of the tr ans iti on

to r e ta il c omp e tit ion , e a c h e xist in g uti lity wa s r e qu ir e d to 7
“ u n b u n d l e ” t h e s e r

v i c e s i t p r o v i d e d an d s e p ar a t e i t s b u s i n e s s a c t i v i t i e s i n t o t h r e e d i s t inc t un its : a power g ener ation company , a tra nsmissi on and dis t ri bution util ity , and a r etail elec tric provider
. Te x. Ut il. Cod e Ann. § 3 9. 05 1; see City of Corpus Christi v. Public Util. Comm’n , 51 S.W .3d 231, 237 (Tex. 2001). 10 it was in the public interest to par tially dere g ulate the e lectric power industry
. Se e gen era lly Tex. Util. Code Ann. §§ 39.001-.910 (West 2007)
. When the leg islature mandated the t ra n s i tion fr om t ra dit ion a l c os t- of

-s e rv ic e re g ulatio n to re ta il comp eti tio n, it r e c og nize d th a t ma ny uti lity companies ha d m ad e v er y l arge investments to build power g ener ation plants and that while the
c os ts o f t he se po we r p lants mig ht b e re c ov e ra ble fr om ra

te pa y e rs in a re g ulate d e nv ir on me nt, the se
same c osts “might we ll become une conomic and thus unrec overa ble in a compe titive, deregulated power marke t.” CenterPoint Energy , 143 S.W. 3d a t 82 ; se e als o City of C

or pu s Ch ris ti v . P ub lic Util. Comm’n , 51 S.W. 3d 23 1, 23 7- 38 (T e x. 20 01 ). Th e le g isl a tur e c a lled th ese u nec on omi c assets “stra

nded costs.” CenterPoint Energy , 1 43 S.W. 3d a t 82 ; se e als o Tex. Ut i l. Code Ann. §§ 39
. 0 0 1 (b)( 2), .251(7) . As part of the transition to retail compe tition, t he leg islature made an express finding that it was in the publ ic i ntere st to allow ut ility companies to re cover their strande d costs. SeeTex. Util . Code Ann. § 39.001(b) (2). The leg islatur e thus “set forth a compre hensive scheme for e stimating, finalizing, a nd rec overingthose costs.” CenterPoint Energy , 143 S.W .3d at 83 ; see Tex. Util . Code Ann. §§ 39.201, .251-.254, .256- .265, .301-.313 (West 2007).

Th e le g isl a tur e pr ov ide d a me c ha nis m in se c tio n 3 9. 26 2 o f t

he PUR A f or e a c h u til ity t o re cover its stranded costs. See T e x. U ti l. Co d e A n n . § 3 9
. 2 6 2
. T h is me c h an is m r e qu ir es ea ch transmission and dist ri bution util ity , its affiliated re tail electr ic provider , and its aff iliated power g e ne ratio n c omp any

to joi ntl y fi le an a

pp lic a tio n wi th the Com mis sio n to fi na lize str and e d c os ts. 711

Id. § 39.262(c) . The leg islature provide d a formula to calculate the utility ’s strande d costs. Id. § 39.251(7). Unde r this formula, a utili ty ’s s trande d costs equal the excess amount of the ne t book
va lue of g e ne ratio n a sse ts m inu s th e mark e t va lue of tho se a sse ts— i.e. , SC = NBV – MV
. Id. Eac h utilit y

has t h e b u r d en of qua

ntifying its strande d costs using one of four statutory methods. Id. § 39.262(h). These methods are sale-of -asse ts, stock valuation, partial stock va luation,
or exc h an ge o f as s et s. Id. § 39.262(h)( 1)-( 4). TNMP chose to e stablish its stranded c osts using the sa le -of

-a sse ts m e tho d. Un de r t his me tho d, TN MP w a s r e qu ir e d to de mon str a te that it so ld it s g e n e r a ti n g a s s e ts in a “ b o n a f id e th ir d

- p arty tr an s a c ti o n u n d e r a c o mp e ti ti v e o f f e r in g .” Id. § 3 9. 26 2( h) (1 ). On c e thi s sh ow ing has bee n ma de , th e tot a l ne t va lue re a lize d f ro m th e sa le wi ll establish the marke t value of the g ener ation assets sold. Id.

Th e le g isl a tur e re c og nize d, ho we ver, tha t du ri ngthe tr ans iti on

fr om r e g ulatio n to reta il competition, uti lities would not h av e a b u s i ness incentive to r educe their potential strande d costs. Ac cordingly , the leg islature provide d a statutory incentive—the le g islature re quired e ach utili t y t o “pursue commerc ially rea sonable mea

ns to reduce its potential stranded costs, including g ood faith attempts to r eneg otiate above- cost fuel and purcha sed power contra cts or the e x erc ise of normal business pra ctices to prote ct the value of its assets.” Id. § 3 9. 25 2( d) . T he le gisl a tur e a lso require d the Commiss ion to consider each util ity ’s efforts to mitigate pote ntial stranded c osts when d e te r mi n in g th e u ti li ty ’ s f

in a l s tr an d e d c o s t b a la

nce. Id. I n addition, the leg islature re quired the Commi ssion to ensure that ea ch utility does not overr ecove r strande d costs. Id. § 3 9. 26 2( a ); se e als o CenterPoint Energy , 143 S.W .3d at 98-99. W i t h t h i s statutory scheme in mind, we turn to the pa rt ie s’ c omp la int s r e g ard ingthe Com mis sio n’ s d e te rm inatio n o f TNM P’ s st ra nd e d c os ts.12

The Commissio n’

s d e te rminat ion of TN MP ’s strand

e d c os ts Throug h various issues asse rted on appeal, the parties raise two gene ral c halleng es to the Commi ssion’s final order
. Fi rs t , t he Cities and State Ag encie s attack the Commi ssion’s deter minations reg ardingthe marke t value of TN MP’s ge neration assets. Second, t h e Citi es and TNMP challeng e ce rtain ca lculations and adjust m en t s to the book value of TNMP’s g ener ation
a sse ts. I n a dd iti on

to t he se g e ne ra l c ha lle ng es, t he Citi e s argue tha

t th e Com mis sio n e rr e d in its calc ulation of inte re s t o n TNMP’s stranded c ost balance . TNMP also complains that the Com m i s s i o ne r

r o n e o u s l y d e n i e d i t s c a p a c i t y a u c t i o nt r u e - u p an d t h a tt h e C o m m i s s i o ne r r e d in

“ g ro ssi ngup ” dis a llo wa

nc e s to c a ptu re a lle g e d f

e de ra l in c ome ta x be ne fi ts.
1. Ma rk

e t v alu e of T

NM P’ s ge ne ra tio n a sse ts We turn first to the Citi es’ and State Ag encie s’ arguments that the Commi ssion erre d in awar ding stra

nded costs to TNMP beca use TNMP failed to prove the marke t value of TN P One. Specifica lly , the Cit i es an d S t ate Ag encie s argue that the Commission erred in de vising its own
va luatio n me tho d to qu anti fy TN MP’ s str and e d co sts . T he State Ag e nc ie s f ur the r a rgue that be c a

us e TNMP f ailed to prove the ma

rket va lue of TNP One in a “bona fide third-pa

rty transac tion under a competitive offering ” as require d under se ction 39.262(h)( 1) of the PURA, the Commission was not permitted to devise a

n extra-statu t o ry m et h o d of strande d cost rec overy and, in doing so, the Commi ssion violated the parties’ due proc ess rig hts. Be cause we c onclude the Commission acted within its statutory

authority in determining the marke t value of TN MP’s g ener ation assets, we r ejec t the Citi e s’ and

State Ag e nc ie s’ c on te nti on s. Cha pte r 3 9 p ro vid e s f

our s pe c if ic me tho ds that a uti lity may c ho os e fr om to e sta bli shNo ne of the pa rt ie s d isp ute thi s c on c lus ion on a pp e a l. 8 13 the m ar k et value of

its ge neration assets. SeeTe x. Ut il. Cod e Ann. § 3 9. 26 2( h) . T NM P c ho se to
use the “sale -of- assets” method under se ction 39.262(h)( 1). See id. § 39.262(h)( 1). Unde r the sale

of-a ssets method, the m arke t value is define d as t he total value r ealized from a sale if, a ny time after De c e mbe r 3 1, 19 99 , th e uti lity se lls so me or

a ll of its g e ne ra

tio n a sse ts i n a

“ bo na fi de thi rd -p art

y transac tion under a competitive offering .” Id. Ha vin g so ld i ts o nly

g e ne ratio n a sse t, TNP O ne , to Sempra Ene rg y

Resource s, TNMP asserted that the $120 million s ales pric e of TN P One established the mark e t va lue of

its g e ne ratio n a sse ts a s r e qu ir e d in se c tio n 39. 26 2( h) (1 ). Th e AL Js ag re e d w ith TNMP that the sales pric e of TN P One established the ma rket va lue of that a sset as re quired unde r the statut e , b ut t

he Com mis sio n d isa g re e d. Th e Com mis sio n c on c lud e d th a t T NMP fai le d to establish marke t value throug h the sale of TNP One be cause TNMP failed to prove that the sale w as a “bona fide third-pa

rty transac tion under a c ompetitive offer ing” as re q u i red in section 39.262(h)( 1). 8 TNMP’s failure to establish marke t value throug h an asse t sale left the Commission with the difficult task of quantifying TNMP’s stranded costs without a demonstrated, bona fide a sset sale to a thi rd party
. As TNP One ha d been sold, it was impossible for TN MP to use another method in s e c tio n 3 9. 26 2( h) to v a lue the pla nt. Th e Com mis sio n con clu ded , how e ve r, that de nyinga ll
rec overy to T NM P would be contr ary to the leg islature’s de regulation transition plan—of which stranded c ost recove ry

is an integ ral pa

rt. See Tex. Util. Code Ann. § 39.252(a) (allowingutilit ies to rec over net verifia

ble, nonm itigable stranded costs). The Cities and State Ag encie s argue that the14

Commi ssion lacked statutory authority to de termine the marke t va lue of TNP One when the me thod selec ted by

the utility

fails to produce a prope r marke t value. We disag ree . To deter mine the scope of the Commi ssion’s a uthority , we must re ad the PURA as a whole to de termin e the leg islature’s intent. State v. Public Util. Comm’n , 883 S.W .3d 190, 196 (Tex. 1994). The c ontemporane ous construction of a st atute by the administrative ag ency char g ed with enforc ing it is entitled to g reat weig ht. Id. ; see also Dodd v . Meno , 8 7 0 S .W.2d 4, 7 (T e x. 19 94 ); Tar

ra nt A pp ra isa l D ist
. , 845 S.W .2d at 823. The leg islature set for th a compre hensive scheme throug h which it ha s char g ed the Commi ssion with authority to de termine eac h utilit y ’s final stranded cost balanc e. Se e ge ne ra lly Tex. Util . Code Ann. §§ 39.001-.910. The leg islature provide d that eac h utilit y

“is allowed to re cover all of its net, verifia ble, nonmitigable stranded c osts.” Tex. Util . Code Ann. § 39.252(a ).

I n this Court ’s re c e nt CenterPoint decision, we considere d a similar situation. See CenterPoint , 2007 Tex. App. L EXI S 9919, at *35-*52 (discussing CenterPoint’s failure to satisfy require ments of par

tial stock valuation method). In that case , CenterPoint attempted to establish the marke t valu e o f its ge neration assets using the pa rtial stock valuation method in sec tion 39.262(h)(3). Id. Th e Com mis sio n d e te rm ine d th a t Cen te rP oint did not c omp ly wi th the statut or y re qu ir e me nts be c a us e it fa ile d to de mon str a te that a t le a st 19 % of the tr ans fe rr e d sto c k ha d be e n “ sp un of f a nd so ld to public investors throug h a national stock e x chang e” a s require d in section 39.262(h)( 3). Id. The Co mm is s io n c o n c lu d e d th a t n o n e o f th e o th e r s tatuto r y me th o d s c o u ld b e u s e d to d etermine the marke t value of

CenterPoint’s g ener ation assets bec ause Cente rPoint did not meet the statutory require ments for any of t hose methods. Id. a t *5 2- *6 0. Ac c or din g ly , th e Com mis sio n c ho se to u se15

the utiliti es code definition of “ma rket va lue” to deve lop a substitute valuation method. Id. at *62- *63 (citing Tex. Util . Code Ann. § 39.251(4) ). I n the abse nce of a mar ket valuation esta

blished under one of the pre scribed me thods in section 39.262(h), we upheld the Commi s s i o n ’s implied authority to consider a

nd use alternative methods for de termining marke t value in orde r to ca rry out the “strongleg islative mandate” of strande d cost rec overy . Id. at *63-*67. In addition, we re jected claims by OPC and the customers of CenterPoint that, having fa i l ed t o meet its burden of proof, CenterPoint was not entitled to any stranded c ost recove ry

at all. Id. at *60-*62. I n this case, a s in CenterPoint , the Commiss ion determined—a nd none of the parties dispute—that TNMP failed to establish the marke t value of TN P One bec ause it fa iled to meet the statutory require ments of sec tion 39.2629(h)(1). I n light of TN MP’s failure to satisfy the statutory require ments, the Comm i s sion turned to the utiliti es code definition of “mar ket value” in section 39.251(4) to dete rmine t he appropriate valuation of TNMP ’s gene ration asse ts. Section 39.251(4) de fi ne s “ mark e t va lue ” a s “ the va lue the a sse ts would have if boug ht and sold in a bona fide thirdparty transac tion on the open m arke t.” Tex. Util . Code Ann. § 39.251(4) . Ba sed on this definition, the Commiss ion concluded that it was proper to determine the marke t value TNP One would have if TNMP had initially

conducte d a bona f

ide transa ction in compliance w ith section 39.262(h)(1)
. Consist ent with our dec ision in CenterPoint , we ho ld t hat th e Com mis sio n p ro pe rl y considere d an alter

native valuation method based on the de finit i o n o f m ar k et value in se ction 39.251 ( 4 ) w h e nT N M P f a il e d to e s ta b li s hth e ma

r k e t v a lu e o f

it s g e n e r a ti o na s s e ts in

c o mpliance with one of the four m ethods in section 39.262(h). See Ce nterPoint , 2007 Tex. App. L EXI S 9919, at *52-67. L ikewise, we conc lude that, g iven TNMP’s fa ilure to establish marke t value of TN P One16

using one of the four m et h o d s i n section 39.262(h) , the Commiss ion did not ex cee d its statutory authority when it deve loped an a lternative va luat i on method based on the statutory definition of marke t value in sec tion 39.251(4). See id. at *62-*63.

We next consider whether the Commiss ion’s deter minati o n of marke t value wa s
rea sonable a

nd supported by

substantial evidence . I n conductinga substantial e vidence revie w, we must determine whe ther the e vidence as a whole is such that re asonable minds could have rea ched the conc lusion reac hed by the Commiss ion—namely , that the marke t value of TN P One was $180 milli on. City

of E l P as o , 88 3 S .W .2 d at 18 6; Siz e mo re , 759 S.W .2d at 116. The true test is not whether the ag ency rea ched the corr ect conclusion, but whether some rea sonable ba sis ex ists in t he
rec ord for the ac tion taken by the age ncy . Charter Med. , 665 S.W .2d at 452. When weig hing the te stimo ny , th e Com mis sio n ma y a c c e pt o r r e

je c t pa rt or a ll o f e a c h w itn e ss’ s c on c lus ion s; i t is the final judge reg arding the credibility and validit y of such testimony
. Central Power & Light Co. , 36 S.W. 3d

a t 56 1; Southern Union Gas Co. v. R ailroad Comm’n , 692 S.W .2d 137, 141-42 (Tex. App.—Austin 1985, writ ref’ d n.r.e.)
.

The Commission determined tha t i f TN M P’ s flawe d auction proc ess produc ed a sa les price of $120 million, t hen a bona fide sale would have produce d a highe r price for TNP One. The
rec ord re flec ts that severa l parties pre sented e vidence on the value of TNP One a

nd the sales pr ice TNMP would have rec eived if it ha d conducte d a prope r sale. SeeTex. Util . Code Ann. § 39.251(4)
. I n the ana ly sis prepar ed by TNMP witness Patrick Br idge s, and re lied on by the AL J s, a re cent runup in t he pr ic e s o f n a tur a l g a s sh ow e d an inc re a sin g va lue fo r TNP O ne and a po te nti a l va lue to bid de rs of a pp ro xima te ly

$1 74 mil lio n. Th e AL Js al so re fe re nc e d n ote s ma de by a TN MP w itn e ss,17

Rhonda L enar d, during the sales ne g otiations with S empra wher e TNMP ag ain re fer red to a value of $180 million for TNP One—a va lue that TNMP repe atedly stated i t held as a re asonable value f or TNP One. The rec ord also showe d that Austpro, another potential buy er for TNP One, indica ted a possible bid o f $188 m illion. Alt houg h Austpro neve r submitted a written bid, the Commission considere d this amount to be in the upper rang e of price s that a bona f ide sale w ould have pr oduced. Severa l parties also sug g ested a lternative va lues for TNP One. TI EC witness, Steve Wey el, per formed nume rous ca lculations using “ spark spre ad” disc ounted c as h fl o w ana ly sis and testified that these c alculations sug g ested a rang e of $255 t o $ 3 1 6 milli on. Citi es witness, L ane Kollen, also provided te stimony on the marke t va lue of TNP One. B ut these ana ly ses also pre sumed
a de lay e d s a le of

TN P On e . T he Com mis sio n r e je c te d th e te sti mony

of Weye l and

Ko lle n b e c a

us e it concluded that TN MP should not be penalized for its fa ilure to de lay the sale of TNP One. B ased on the re cord e vidence , the Commiss ion concluded that a bona fide competitive offe ring would have captur ed the r ece nt run-up in natura l ga s prices a nd would have pr oduced a sales pric e of $180 milli on, net of e x penses. Ac cording ly , the Commiss ion det e r mi n e d th a t t h e a p p ropriate marke t value for TN P One was $180 million.

Th e re c or d b e fo re the Com mis sio n w a s e xten sive, an d th e Com mis sio n h a d ampl e evidenc e on which to ba se its determination of mar ket value. T he evide nce r eg ardingthe mar k et value of TNP One sug g ested a valuation betwee n $174 milli on and $316 milli on. We conclude that the re cord c ontains substantial evidence to support a market value for TNP One within the ra ng e of evidenc e befor e the Commi ssion. Given the a dmitted complex ity of dete rmining the marke t value of TNP One a

nd the defere nce owed to the Commiss ion in its are a of e x pertise, we hold that there18

is a r e a s o n a

b le b a s is f

o r th e Co mm is s io n , in it s d is c r e ti o n , to s e le c t a ma r k e t v a lu e for TN P One within the rang e of e vidence prese nted by the par ties. Se e City

of E l P as o , 883 S. W
. 2 d at 186 (af firming ag ency

decision to selec t value within rang e of e vidence in the rec ord). We c onclude that the Commiss ion’s marke t valuation of TNP One is supporte d by substantial evidence . We further conclude that the Commiss ion’s deter min at i o n o f m arke t value wa s consistent with its s tatutory authority under the PURA and that the Commissi on d i d not cre ate a n extra-statutory

method of st rand ed co st reco very . W e ov erru le th e Ci ti es’ fi rst is su e and th e S tat e Agenci es’ is su es 1A an d 1 B.
2. Du e Pr oc ess The State A g e n c ie s f

u r th e r a ll e g e th a t t h e Commissi on’s cr eation of a n extra-statutory method of strande d cost rec overy violates Due Proc ess. Havin g d et ermined that the Commi ssion d i d n o te x c e e d i t s s t a tu t o r

y a u t h o r i t y o r

c r e a t e an e x t r a - s t a tu t o r

y m e t h o d o f s t r an d e d c o s tr e c o v e r

y,
we re je c t th e State Ag e nc ie s c la im that th e Com mis sio n v iol ate d D ue Pr oc e ss. We ove rr ule the State Ag e nc ie s’ iss ue 1C.
3. Adjustments to Book Value A) Acc elerated de

preciation I n th e ir se c on d is su e, the Citi e s argue that th e Com mis sio n f a ile d to e ff

e c tuate TNMP’s prior ag ree ment to reduc e strande d costs. This issue arises from TNMP’s ag ree ment in a previous proc eedingbefor e the Commi ssion to apply acc eler ated deprec iation to the book value of TNP One a s a m ea n s to reduc e strande d costs. See A pplication of T

exas- New Mex ico Power Company for Approval of a Transit ion Plan and Statement of Intent to Dec rease Rate s , Docke t19

No. 17 7 5 1 (T ex . P u b . Util. Com m’n Nov. 4, 1998) ( order on reh’ g ). B eca

use we conclude the Commi ssion’s reduc tion to the net book value of T NP On e by $19,340,031 for a cce lerated de pr e c iatio n w a s r e a so na

ble and su pp or te d by su bs tanti a l evi de nc e , we re

je c t th e Citi e s’ argume nt. To understa

nd the Cities’ argument on this iss ue, it is nece ssary to exam i ne the Commis s io n ’ s p r io r o r d e r an d th e s ti p u lati o n a g r e e d to b y T N M P. I n 1 9 9 7 , in an ti c ip a ti o n of dere g ulation, TNMP filed an application with the Com mission i n Docke t No. 17751 seeking approva l of TNMP’s plan to transition to a dere g ulated ele ctric ma rket. See id. The parties in that proce eding rea ched a stipulated ag ree ment on TNMP’s transition plan and submitted that stipulation to the Commi ssion for appr oval. The Commission incorporat ed the sti pulation as part of the transition plan ap p ro v ed in i ts final order
. See id. Under the transition plan appr oved by the Commi ssion in Docket No. 17751, TNMP was to a pply a total of $75 m i l lion in acce lerated depre ciation t o the book value of TNP One—$15 mil lion per y ear from 1999 throug h 2002, plus an
a dd iti on a l $1 5 mi lli on

—to re du c e str and e d c os ts:
I n addition to normal deprecia tion, TNMP shall recover additional depre ciation on T N P O n e i nt h e am o u n to f $ 1 5 , 0 0 0 , 0 0 0 e a c hy e ar f o r t h e y e ar s 1 9 9 9

- 2 0 0 2
. In addition, TNMP shall recor d addit i o n al depr eciation on TNP One of up to a total cumulative amount of $15,000,000 ove r the y ear s 1998-2002, based on the amount ava ila ble and c a lc ulate d purs ua

nt to the e arn ing s sh ari ng me c ha nis m a pp ro ve d in

thi s Orde r.
Id. After

the Commiss ion approve d TNMP’s transition plan i n Docke t No. 17751, the leg islature passe d SB 7, which deregulated the reta il elec tric m arke t. Chapter 39 of t he utilities code differ ed fr om the stipulation agr eed to by TNMP in Docket No. 17751. One of the primar yThe Commi s s i o n’s final orde r in Docke t No. 17751 expressly states that TNMP’s 1998 9 transition plan must be rec onciled with any l at er -ena cted de regulation leg islation. Application of Te x as -N e w M e x ic o P owe r Co mp an

yfor Ap pr ov al o f a T ra ns iti on Plan an d S

tate me nt o f I nte nt to Dec rease Rate

s , Docke t No. 17751 (Tex. Pub. Util . Comm’n Nov. 4, 1998) (orde r on re h’g ). The Commission di d not require TNMP to apply acc eler ated depre ciation for 2002, sinc e 10 reta il competition bega

n J anuar y 1st of that y ear .

20 differ ence s was that reta il c ompetition beg an in 2002, not 2003 as conte mplated by the stipulation. See Tex. Util. Code Ann. § 39.001(b)( 1) (implementing customer c hoice on January 1, 2002). Ove r the ensuingy ear s, the Commis sion dealt with severa l proce eding s trying to r econc ile the promises made by TNMP in D o ck et No
. 1 7 751 with Chapter 39. I n this final stranded c ost true-up 9 proce eding , the Commiss ion ag ain fa ced the need to r econc ile the stipulation and trans i t i on plan approve d in Docket No. 17751 w ith the require ments in Chapter 39.

The issue for

the Commiss ion in this case was how to re concile TNMP’s promises to apply acc eler ated depre ciation in the transition plan with the require ment in section 39.261(c) (2) of the PURA to apply

excess ear

nings f rom 1999-2001 to re duce the net book value of g ener ation assets. See id. § 39.261(c) (2). The rec ord ref lects that TNMP ha d excess ear nings of $40,659,969 for 1999- 2001 and did not book the ac cele rated d ep re ci at ion require d under the stipulation and transition plan for these y ear s. Ba sed on TNMP’s stipulation in Docke t No. 17751, the Commiss ion deter mined that TNMP should apply a total of $60 milli on in acc eler ated de prec iation to reduce the
ne t bo ok va lue of TN P On e , the re by re du c ingits str and e d c os ts. The Commission obs erve d that 10 if TNMP had ac tually

booked the a cce lerated depr eciation as require d under the stipulation and tr ans iti on pla

n ap pr ov e d in Doc ke t N o. 17 75 1, TN MP w ou ld n ot h a ve ha d $ 40 .6 mil lio n in e xce ss
e arn ing s f

or 19 99 -2 00 1. Ac c or din gly , th e Commis sio n s ub tr a c te d th e $4 0. 6 mi lli on in e xce ssPublic Utili ty Commi ssion of Tex as, R eport to the Tex as S enate I nterim Commit tee on 11 Electric Restructuring , “Potentia ll y St r a n d a b le Investment (ECOM) Repor t: 1998 Update” ( Apr. 30, 1998) (he rea fter “ 1998 ECOM Report”). 21 ear nings that TNMP alrea dy

applied to r educe its stra

nded costs from the $60 million t otal, leaving $1 9, 34 0, 03 1 in

a dd iti on a l de pr e c iatio n f

or TN MP to a

pp ly to t he ne t bo ok

va lue of TN P On e . T his is the adjustment that the Commi ssion made to the net book value of TNP One.

Se c tio n 3 9. 25 2( a ) a llo ws a uti lity to re c ov e r “ a ll of its ne t, v e ri fi a ble , n on mit ig a

ble stranded c osts.” Tex. Util . Code Ann. § 39.252(a ). Howe ver, the leg islature imposed a statutory duty on e a c h util ity to pur su e c omm e rc ia lly re a so na ble me ans to r e du c e its po te nti a l st ra nd e d c os ts. Id. § 3 9. 25 2( d) . I n add it ion, f or tho se uti lit ie s id e nti fi e d a s h a vin g po sit ive str and e d c os ts i n the Commiss ion’s 1998 ECOM Report to t he Te xas Senat e I nt e ri m Co mmi tte e on El e c tr ic 11 Restructuring , the leg islature re quired those utilities to take additional steps to reduc e the ne t book value of , or “a cce lerate” the r ecove ry of, strande d costs by returning excess ear nings to their Texas customers. Id. §§ 39.254, .257. Under section 39.254, these e x cess e arning s “shall be a pplied to the net book value of

g ener ation assets.” Id. § 39.254. Be cause TNMP was one of the utiliti es identified
a s h avin g po sit ive str and e d c os ts in t he 19 98 ECO M Re po rt , T NM P wa s r e qu ir e d to a pp ly its e xce ss
ear nings f rom annua l reports to re duce the net book value of its ge neration assets. Id. Th e le g isl a tur e c ha

rg e d th e Com mis sio n w ithe nf or c ingthe uti lit ie s’ ob lig a tio ns to mitigate stranded costs. I n section 39.252(a) , the leg islature expressly provided that a utility “may not be per

mitted to overrec over stra nded costs.” Id. § 39.262(a) . T h u s, the Commis sion was require d to e nsure that TNMP pr operly applied its excess ear nings to re duce the net book value of its g e ne ratio n a sse ts.22 The Cities complain that the Commi ssion should not have offse t TNMP’s obligation to a pp ly $6 0 mil lio n in a c c e le rate d de pr e c iatio n wi th TNM P’ s e xce ss e arn ing s mi tig a tio n b e c a us e there is no connec tion between TNMP’s prior ag ree ment to a pply acc eler ated de prec iation in Docket No. 17751 and the e x cess e arning s mit i g ation require ment in Chapter 39 of the PURA. See id. §§ 39 .2 54 , . 25 7, .2 61
. Gi ven th e Com mis sio n’ s o bli g a tio n to e ns ur e tha t T NM P c omp lie s w ith its own obligation to ap p l y ex ce ss ear nings to re duce ne t book value and doe s not overre cover str and e d c os ts, we a g re e wi th t he Com mis sio n th at th is o ff se t w a s re a so na

ble and ne c e ssa ry to a vo id “double c ounting.”

Th e re c or d r e fl e c ts that th e Com mis sio n’ s or de r in Do c ke t N o. 17 75 1 r e qu ir e d it to
re c on c ile T N M P ’ s p r o m i s e t o a p p l y a c c e l e r a t e d

d e p r e c i a t i o na s a

m e an s t o r e d

u c e s t r an d e d

c os ts with the leg islature’s de regulation plan i n Chapter 39 of t he P URA. The re cord f urther r efle cts that if TNMP had booked the acc eler ated de prec iation require d under the stipulation and transition plan
a pp ro ve d in Do c ke t No. 17 75 1, TN MP wou ld not have ha d $40 .6 mil lio n in e xce ss e arn ing s w ith which it could have further mitigated stranded costs as required under s ection 39.254 of the PURA. We theref ore c onclude that the Commi ssion’s de cision to of fset TNMP’s promise to reduc e strande d
c os ts by $6 0 mil lio n wi th TN MP’ s $4 0. 6 mil lio n in e xce ss e arn ing s f or 19 99 -2 00 1 w a s r e a so na

ble
and c omp or ts w iththe Com mis sio n’ s o bli g a tio n to e ns ur e that T NM P a pp lie s it s e xce ss e arn ing s to reduc e net book value and does not ove rre cover stranded costs. See Tex. Util. Code Ann. §§ 39.254, .2 52 (a ), (d ), .2 62 (a ); s ee a l s o In re Entergy , 142 S.W .3d 316, 324 (Tex. 2004) (Commissi on ha s e xclu siv e ju ri sd iction t o a dju dic a te dis pute s ari sin g fr om a g re e me nts inc or po ra te d in to23

Com mis sio n o rd e rs ); Public Util. Comm’n v. Southwestern Be ll Tel. Co. , 960 S.W .2d 116, 119-20 (Tex. A pp.—Austin 1997, no pet.) (Commissi on has discretion to f ormulate and awa rd reme dy
nece ssary to effe ctuate pa

rties’ a g ree ment). We overr ule the Cities’ second issue. B) In v estm e nt T

ax Cre dit s I n its third issue, TNMP claims that the Commis sion erre d in reduc ing TNMP’s net book value by $6,490,000 for investment tax cr edits. TNMP c laims that the C o m m i s s i o n lacke d authority to make this reduc tion because section 39.251(7) of the P UR A— t h e section defining stranded c osts—fails to refe renc e investment t ax cre dits. Be cause we conclude the Commission’s tr e a tme nt o f i nv e stm e nt t a x cr e dit s w a s p ro pe r, we re je c t T NM P’ s c la im. L ike ac cele rate d depre ci ation, Congr ess cr eate d investment tax cre dits to spur economic d ev el o p m en t
. See, e .g. , Central Power & Light Co. v. Bullock, 696 S.W .2d 30, 31 (T e x. Ap p. —Aus tin

19 84 , n o w ri t) ; see ge nerally Application of Normaliz ation Accounting Rules to B ala nc es o

f E x c ess D e fe rred In c om e Tax es a nd

Ac c um ula te d D e

fe rre d I nv estm e nt T

ax Cre dit s of P ub lic Ut ili tie

s W ho se Ge ne ra tio n Ass e ts Cea se to be Pu bli c Ut ili ty Pr op e rty , 68 Fe d. Reg . 10190 (I RS Ma r. 4, 20 03 ). B us ine sse s w e re g ive n tax cr e dit s f or makin g c e rt a in cap ita l in ve stm e nts
. Bullock, 6 96 S.W. 2d

a t 31 . Su c h c re dit s w e re vie we d a s b e ne fi ts t o th e uti lity that mu st u lti mate ly be passe d on to ratepa

y ers. See id. at 32. Be cause Congr ess wante d to ensure that public utili ties would have those sums to invest, t he I RS requi re d ea ch public utility to seg reg ate investment tax
cr ed i t s i n t o a s ep ar at e a cc o u n tfo r r egu l at o ry p u rp o s es. S

e eA p p li c a ti o n of Normaliz ation AccountingNone of the parties have raised the issue of a potential normalization viol ation; theref ore, 12 we d o not addre ss it. Cf. CenterPoint , 2 0 0 7 T e x. Ap p . L E X I S 9 9 1 9 , a t * 1 0 5
- 1 8 ( r emanding Commi ssion’s final order to consider r emedy

for nor malization vi olation). 24 Rules , 68 Fe d. Reg . at 10191. In a process called “norma liz ation,” the I RS further require d that the
c re dit amou nts be amor

tize d for re tur

n to r a te pa

y e rs ov e r t

he lif e of the a sse t. See id. at 10191-92.

12 Th e re c or d r e fl e c ts, a t th e tim e it fil e d for str and e d co st re c ov e ry , TNM P he ld s lig htl y
mor e tha n $ 15 mil lio n in

its inv e stm e nt t a x cr e dit

a c c ount. The Co mm is si on c on c lud e d th a t th is amount repr esente d benef its rece ived by

TNMP that had y et to be passe d on to ratepa y er s . Citi es witness, Kollen, testified that TNMP’s strande d costs should b e re duced by the entire amount of TNMP’s investment tax cre dit account. In contra st, Comm ission st aff wi t n es s , Da rry

l Tietjen, testified that TNMP’s strande d costs should only be re duced by

the pre sent value of

TNMP’s investment tax cre dit balance , or $ 6
. 4 9 mi ll io n . T h e Co mm is s io n adopted Tie tjen’s re commendation
an d r e d u c e d t h e b o o k v a l u e o f T N P O n e a c c o r d i n g l y. TN MP a rgue s th a t th e Com mis sio n la c ke d au tho ri ty to make thi s r e du c tio n b e c a us e nothing in the de finition of stranded costs ref ere nces “investment tax cr edits.” SeeTex. Util . Code Ann. § 39.251(7). TNMP f urther argues that the Commiss ion erre d in relying on se ction 36.059 of the PURA to support its re duction beca use that section does not a pply to this st rande d cost true- up proce eding
. See id. § 3 6. 05 9. Ac c or din g ly , TNM P ma int a ins the re is n o le g a l ba sis in t he PUR A to support the Commi ssion’s reduc tion to book value for investment tax credits. We disag ree .

I n d ir e c tin gthe Com mis sio n to fi na lize and de te rm ine each utility ’s str and e d c os t ba lanc e , th e le g isl a tur e pr ov ide d th a t th e uti lity sh a ll onl y re c ov e r i ts “ ne t, v e ri fi a ble , n on mit ig a

ble stranded c osts.” Id. § 39.252(a) . The leg islature fur ther provide d that a utility shall not overre coverThe Commission’s reduction t o TNMP’s stranded c osts is consist ent with its previous 13 decision in Docke t 22349 in which the Commi ssion first estimated TNMP ’s s trande d costs. I n that docket, the Commission also required TNMP to include investment tax cre dits as a r eduction to book va lue and , th e re fo re , to str and e d c os ts. I n light of our deter

mination that the Commi ssion’s r eduction to book value for investment 14 tax credits wa s within the Comm ission’s authority under Chapte r 39 of the PURA, we reje ct TNMP’s complaint that the Commiss ion errone ously relied on se ction 36.059. 25 its stranded costs. Id. § 3 9. 26 2( a ). Citi e s w itn e ss, Ko lle n, te sti fi e d th a t a llo wi ngTN MP to re ta in inv e stm e nt t a x cr e dit s w ou ld a llo w TNM P to ov e rr e c ov e r s tr and e d c os ts. Ba sed on this testimony 13 and the leg islative mandate that utilit ies shall not overr ecove r st rande d costs, we conclude that the Commi ssion acted within its authority under Chapter 39 of the PURA to reduc e the ne t book value
o f T N M P’ s g e n e r a ti o na s s e ts b y th e p r e s e n t v a lu e o f

T N M P’ s inv e stment t a x c r e d it a c c o u n t. We also conc lude that the Commissi on’s dec ision is s upported by s u b s t an tial evidence
. See id. 14 § 3 9. 26 2( a ); Charter Med. , 6 65 S.W. 2d a t 45 2; Central Power & Light , 3 6 S. W. 3 d a t 5 6 1
. We
overr ule TNMP’s third issue.
4. In te re

st I n their third issue, the Cities dispute the Commi ssion’s calculation of in tere st on TNMP’s final strande d cost b al an ce . The Cities argue that the Commission acted ar bitrarily and
c a pr ic iou sly in a

pp lying dif

fe re nt int e re st ra

te s to TN MP’ s fi na l fu e l ba lanc e and fi na l st ra nd e d c os t balanc e. As a

result of this alleg ed discrimination, the Cities argue that the Commission has allowed TNMP to overre cover

stranded c osts in vio l ation of sec tion 39.262 of the PURA. Be cause we conclude that the Commiss ion’s application of differ ent interest rate s to TNMP’s final fue l balance26

and fina l stranded cost balanc e comports with the statute and Commi ssion r ules and wa s supported by su bs tanti a l e vid e nc e , w e re

je c t th e Citi e s’ argume nts
. L ess than two months after the Commiss ion iss ued its final orde r in this case, the supreme c ourt rele ased its opinion in CenterPoint Energy
. The supre me cour t invalidated par

t of PUC Subst antive Rule 25.263—the Com m i s sion’s rule g overningstranded c ost true-up pr oc e e din g s. 14 3 S. W.3 d a t 81 ; see 16 Tex. Admin. C ode § 25.263 (2005) . Spe ci fi ca l ly , the supreme c ourt invalidated rule 25.263(l)(3) , holding t h a t c a r rying c harg es on a utility ’s final stra nded cost balanc e should be calc ulated from January 1, 2002—the date c ustomer choice beg an—instead of fr om the date of

the final true -up orde r, which c ould be two or more year s later, a s provided in the rule. 143 S.W .3d at 84. I n acc ordanc e with the supre me cour t’s decision, the Commission gra nted rehe aringand re manded this case to SOAH for additional proce eding s to determine the interest due on TNMP’s final strande d cost balanc e.

A) In te re

st ratefor stran de d c os ts The Commission’s rule require s the i ntere st rate for stranded costs to be ca lculated b a s e d o n T N M P’ s w e ig h te d av e r a g e c o s t o f c a p it a l ( “ WACC”). See 16 Tex. Admin. C ode § 2 5. 26 3( l) (3 )( A) (i ). Th e re c or d re fl e c ts that th e Com mis sio n a pp lie d a n inte re st r a te of

10 .9 3% to TNMP’s final strande d cost balanc e. This intere st rate wa s within the rang e of evidence submitt ed by the par ties. TNMP’s expert witness te stified that the Commi ssion should apply an intere st rate of 11.59% to TNMP’s final stranded cost balanc e. The Citi es’ expert witness, Scott Norwood, testified that the Commiss ion should apply a rate of 8.31%. The Office of P ublic Utility Counsel proposed an in t er es t ra te of 9.8%. A nd the Commiss ion staff re commended a n interest rate of 10.93%.Se c tio n 2 5. 26 3( h) (4 ) p ro vid e s: 15 Th e fi na l fu e l ba lanc e , a s a dju ste d b y pa ra g ra ph s ( 2) and

(3 ) o f t his su bs e c tio n, sh a ll include ca

rry ing c osts on the positi ve or ne g ative fue l balance equal to: (A) the weig hted-avera g e cost of c apital appr oved in the compa ny ’s unbundled cost of serv i ce (U C OS ) proceeding , if the per iod until t he date of the fina l true-up or der is g reater than one y ear ; or (B ) the rate a

pp ro ve d in § 25 .2 36 of

thi s ti tle (r e latin g to R e c ov e ry of F ue l Cos ts) if the pe ri od

un til the date of

the fi na l tr

ue -u p o rd e r i s o ne y e ar o r l e ss. 16 Tex. Admin. Code § 25.263(h)( 4) (2005). This por tion of the Commi ssion’s rule wa s not at issue in t he su pr e me c ourt ’s CenterPoi nt Energy decision. See ge nerally CenterPoint Energy Inc. v. Public Util. Comm’n , 143 S.W .3d 81 (Tex. 2004) (invalidatingPUC S ubst. Rule 25.263(l)(3))
. 27 Be caus e the Commiss ion’s chosen inter est rate of 10.93% f alls within the rang e of e vidence
sub mi tt e d b y th e p arti e s , w e c o n c lu d e th a t t h e r e is a r e a s o n a b le b a s is in

th e r e c o r d

to s u p p o rt the C ommissi on’s application of an intere st rate of 10.93%. Se e City

of E l P as o , 8 8 3 S. W. 2 d

a t 186. Thus, we c onclude the Commission’s chosen intere st rate is supported by substantial evidence
. B) Interest rate for final fuel balance Section 25.263(h)( 4) of the Commission’s true-up rule g overns the intere st rate to be applied to a u t i l ity ’s final fue l balance
. 16 Tex. Admin. C ode § 25.263(h) (4) ( 2005). Section 15 25.263(h)( 4) g ives two options for the Commiss ion to use when de termining the intere st rate f or a uti lity ’s fi na l f

ue l ba lanc e . T he fi rs t op tio n r e qu ir e s th e Co mmissi on to u se the uti lity ’s WACC when the period between the issuance of the utility ’s final fue l rec onciliation order a nd the date of the fi na l tr

ue -u p or de r is mor e tha

n on e y e ar. Un de r the se c on d o pti on , th e Com mis sio n mu st u seT h is w a s th e s h o rt- te r m inte r e s t r a te a s o f th e d a te T N M P f il e d it s a p p li c a ti o nto f

in a li ze 16 str and e d c os ts. 28 the short-ter

m interest rate appr oved in PUC S ubstantive Rule 25.236 if the per iod betwee n the final fu e l r e c on c ili a tio n o rd e r a nd the fi na l tr

ue -u p o rd e r i s o ne y e ar o r l e ss. Be cause the Commiss ion issued TNMP’s final fuel rec onciliation or der on Fe bruar y 11, 2004, TNMP’s witness estimated that the Commission’s ord er in the stra nded cost true -up proce eding woul d b e i s s u ed within six months and proposed usingthe short-ter m interest rate of 1.17% approve d in PUC Substantive Rule 25.236. Although the parties disput ed the inter pretation 16 of se c tion 25 .2 63 (h)( 4) , th e Com mis sio n a g re e d w ithTN MP a nd a pp lie d th e sh or

t- te rm int e re st rate of 1.17%. Th e Com mis sio n’ s d e te rm inatio n w a s b a se d u po n it s in te rp re tatio n o f r ule 2 5
. 2 6 3 (h )( 4 ). As t h e C o m m i s s i o nex p l ai n edi ni t s o rd er o nre h ea ri n g, [T] he appr opria

tep e r iod for dete rmining which intere st rate a pplies is measured f

rom the date the Commi ssion issues it s order in the fi nal fue l rec onciliation and ca n the re fo re , b e dif

fe re nt t ha n th e a c tua l ti me pe ri od to whic h th e rate a

pp lie s. Othe rw ise , th e re wo uld

have be e n n o r e a so n to inc lud e the wo rd s “ on e y e ar o r l e ss” in the rule since the per iod betwee n the end of the re conciliation per iod and the e arl ie st filing

of the true -up wa s known to be two y ear s when the r ule was written.
We d e fe r t o th e Com mis sio n’ s in te rp re tatio n o f i ts o wn ru le un le ss i t is pla inl y
err oneous or inconsistent with t he languag e of the rule. Se e Pu bli c Ut il. Com m’n v . G ulf Sta te s U til s. Co. , 809 S.W .2d 201, 207 (Tex. 1 9 9 1 ) (“ Our review is limited to determining whether the administrative interpre tation i s p l ai n l y err oneous or inconsistent with the re g ulation.” (interna l qu otatio n o mitte d) ); Gulf Coast Coalition of Citi es v. Public U

til. Comm’n , 16 1 S
. W .3d 706,29

712 (T ex . App.—Austin 2005, no pet.). We conc lude that the Commissi on’s interpre tation of section 25.263(h )( 4 ) co m ports with the plain lang uag e of the rule. Unde r this interpretation, the Commi ssion proper ly applied the short-term interest rate to TNMP’s final fuel balanc e. W e fur ther conclude that the Commiss ion’s decision wa s supported by substantial evidence
. To the extent the Citi es complain that the Commi ssion applied differ ent intere st rates to TNMP’s final stranded c ost balance and fina l fuel bala nce to the disa dvantag e of TN MP’s customers, we reje ct that complaint. The Commi ssion’s a pplication of diffe rent intere st rates wa s
re a so na ble , w a s su

pp or te d by the re c or d, and c omp or ts w iththe Com mis sio n’ s r ule s. We o ve rr

ule the Cities’ third issue.
5. Capacity auction true-up I n TNMP’s first issue, it complains that the C ommissi on err ed in s ummarily denying TN M P ’ s c a

p a c i t y a u c t i o n t r u e - u p c l a i m f o r $ 1 0 6 m i l l i o n . P r i o r t o t h e e v i d e n t i ar y h e a ri ng in t his
case , the Commiss ion iss u ed a S u p p l emental Pre liminary Orde r rulingon the threshold issue of whether TNMP was entitled to a c apac ity auction true-up. I n this order, the Commission concluded that T NM P wa s no t e nti tle d to a c a pa c ity a uc tio n tr ue -u p b e c a us e TN MP d id n ot c on du c t a c a pa c ity
a uc tio n. B e c a

us e we c on c lud e that the Com mis sio n’ s d e c isi on wa s r e a so na

ble and c on sis te nt w ith the re le va nt s tatut e s and

Com mis sio n r

ule s, we re

je c t T NM P’ s c omp la int
. To enc ourag e compe tition i n the n ewly emer g ing r etail marke t, the leg islature require d utilit ies with more than 400 meg awatts of installed ge neration capac ity to auction off 15%Se c tio n 3 9. 15 3( a ) p ro vid e s: 17 Eac h elec tric utility

subject to this section shall sell at auction, at least 60 day s befor e the date se t for customer

choice to beg in, entitlements to at l ea s t 1 5 perc ent of the elec tric ut ility ’s Tex as jurisdictional installed g ener ation capa city
. For the purposes o f t h is s e c ti o n , th e te rm “e le c tr ic u ti li ty ” i n cl u des any aff iliated power

g ener ation company that is unbundled from the e l ec t ri c uti lity in acc ordanc e with Section 39 .0 51 , b ut does not include any entity ow ning less than 400 megawatts of ins talled generation capac ity. Tex. Util . Code Ann. § 39.153(a ) (e mphases adde d).
The recor d ref

lects t hat, prior to the passag e of SB 7, TNMP sought a nd obtained fr om the 18 leg islature an e x emption from the ca pacity auction re quirement. SeeSenate Spec ial Comm. on Elec. Util. Restructuring , 7 6 t h L eg. , R.S. 13 (Mar. 13, 1999) (tr anscr ipt available f rom Senate Staff Service s Offic e). This e x emption w as valuable to TNMP. I n light of this exemption, TNMP di d not have to p art ic ipate in a

c a pa c ity a uc tio n, and

it w a s th e on ly

inc um ben t ut il it y a llo we d to re ta in c o n t r o l o f 1 0 0 % o f i t s c a p a c i t y. 30 of their c apac ity

pri o r to J anuar

y 1, 2002. SeeTex. Util . Code Ann. § 39.153(a ); se e als o 17 CenterPoint , 2007 Tex. App. L EXI S 9919, at *126-*132 (desc ribing capa city auction proc ess and true-up) . Be cause TNMP had l ess t han 400 meg awatts of i nstalled g ener ation capa city , TNMP was exempt from the ca p ac i t y au ct ion require ment in section 39.153. See Tex. Util . Code Ann. § 39.153(a)
. T NM P wa s t he only utilit y to fall within the statutory exemption. To preve nt

18 any ut i l i ty from exerc ising undue marke t power, the leg islature, in sec tion 39.156, also require d
cer tain utilit ies to reduc e their owner ship a nd control of installed g ener ation capa city and file ma

rket mitigation plans with the Commissi on. See id. § 3 9. 15 6. One of th e op tio ns a va ila ble to t ho se utilit ies requir ed to re duce the ir ca pacity under se ction 39.156 was a capa city auction. Id. § 39.156(c) (3). As pa

rt of the f inal proce edingto true-up stra nded c o s ts, section 39.262(d) of theSe c tio n 3 9. 26 2( d) pr ov ide s: 19 Th e a ff ili a te d p ow e r g e ne ratio n co mpa ny sh a ll re c on c ile , an d eithe r c re dit or bil l to the transmission and distribution uti lity , the net sum of: (1) the forme r ele ctric utility ’s final fue l balance deter mined under Sec tion 39.202(c) ; and (2 ) any

dif fe re nc e be tw een the pr ic e of po we r o bta ine d thro ug h th e c a pa c ity auctions u n d er Sections 39.153 and 39.156 and the powe r cost proje ctions that we re e mpl oy e d fo r the same tim e pe ri od in t he ECO M mo de l to e sti mate stranded c osts in the procee ding unde r Section 39.201. Id. § 39.262(d). 31 PURA require d the Commiss ion to true-up the c apac ity auction for ea ch u tilit y

that auctioned capa city under se ction 39.153 or 39.156. Id. § 39.262(d). 19 TNMP ag ree s that it w as ex empt from the c apac ity auction re quirement in sec tion 39.153 and th a t i t d id

n o t c o n d u c t a c a p a c it y a u c ti o np u r s u an t t o e it

h e r s e c ti o n3 9
. 1 5 3 o r

3 9
. 156. Neve rtheless, TNMP ar g ues that the leg islature’s use of the wor d “s h al l ” i n section 39.262(d) is ma n d a to r y an d r e qu ir e s th e Co mm is s io nto c o n d uct a c a p a c it y a u c ti o ntr u e - u p f o r T N M P. We disag ree . The plain languag e of se ction 39.262(d)( 2) re quires the Commission t o rec oncile the differ ence betwee n “th e price of powe r obtained through the capacity auc tions under Sections 39.153 and 39.156 ” and the po we r c os t pr oje c tio ns that we re e mpl oy e d to e sti mate str and e d c os ts in the proce eding under se ction 39.201. SeeTex. Util
. Code Ann. § 39.262(d)( 2) (e mphasis added)
. Th e pla in lan guag e of

thi s st a tut e a lso pr e sume s th a t T NM P pa rt ic ipate d in

the re qu ir e d c a

pa c ityTo the extent TNMP relies on PUC Subs tantive Rule 25.281 to support its arg ument, we 20 are likewise unper suaded by that argument. I t is ax iomatic that an ag ency m ay n ot enac t rules inconsistent w ith its statutory authority
. See, e .g. , Railroad Comm’n v. Lone Star Gas , 844 S.W .2d 67 9, 68 5 ( Te x. 19 92 ); State Bd. of Ins. v. De ffebach , 631 S.W .2d 794, 798 (Tex. App.—Austin 1982, writ ref ’d n.r.e .). The la

ng uag e of the rule is c onsistent with the statute. Having thus concluded that section 39.262(d) of the PURA does not re quire the Commission to conduct a capa city auction true

up , w e lik e wi se c on c lud e the re is n o r e qu ir e me nt t o d o s o und e r t he Com mis sio n’ s r

ule s. TNMP do e s n o t c halleng e the disallowa nces, nor does TNMP cha lleng e the Commission’s 21 authority to disallow certa in costs when fina liz ing TNMP’s stranded c ost balance
. 32 auctions. B eca

use TNMP did not conduct a c apac ity auction pursua

nt to section 39.153 or 39.156, the Com mis sio n c on c lud e d th e re wa s n oth ingto r e c on c ile in a c a pa c ity a uc tio n tr ue -u p f or TN MP. The Commission’s int erpr etation of sec tion 39.262(d) is rea sonable a nd consistent with the plain lang uag e of the statute. Be cause the leg islature expressly exempted TNMP from the
c a pa c ity a uc tio n re qu ir e me nt, we are un pe rs ua de d that the le g isl a tur e int e nd e d th e Com mis sio n to
c on du c t a c a pa c ity a uc tio n tr ue -u p f or TN MP. We overrule TNMP’s first issue.

20
6. “Grossing up” disallow ances I n its second issue, TNMP claims that the Commissi on err ed in “g ro s s i ng up” d i s a l l o w an c e s t o c a

p tu r e t a x b e n e f

i t s r e s u l t i n g f

r o mT N M P ’ s s t r an d e d

c o s tr e c o v e r

y. Be cause we 21
c o n c lu d e th a t th e Co mm is s io n a c te d w it h in it s a u th o r it y u n d e r th e PU RA to “g ross up” dis a llo wa nc e s w he n c a lc ulatin g TN MP’ s st ra nd e d c os ts, we re

je c t T NM P’ s c la im. Section 39.262(c) expressly require s TNMP to file its application to finaliz e strande d costs with the Commi ssion. SeeTex. Util . Code Ann. § 39.262(c ). TNMP d o es not dispute the Commi ssion’s authority

to calculate TNMP’s final stra nded cost ba lance . Ra

the r, TNMP argues that the Com mis sio n la c ks dis c re tio n to make a djust men ts to the va ri ou s c omp on e nts that c omp ri se33

TNMP’s stranded c ost balance
. We disa g ree . The leg islature expressly provided that a

utilit y may
rec over all of its ne t, ve rifiable, nonmitigable stranded costs, but that a utilit y may not overre cover stranded c osts. See id. § 39.252(a) , .262(a)
. Thus, the C ommissi on’s authority to adjust the various components comprisingTNMP’s stranded c ost balance is gr ounded in its authority to ens ure that TNMP does not overr ecove r strande d costs. See id. § 39.262(a)
.

I n th is c a se , a s p art

of its re qu e st t o r e c ov e r s tr and e d c os ts, TN MP so ug ht to r e ta in its a c c ount b a lanc e fo r a c c umu late d d e fe rr e d f e de ra l in c ome ta x (A DF I T) to c ov e r i ts t a x lia bil ity on its stranded cost re cover y . As the Commissi on explained in its fina l or der, the ADF I T ac count balanc e re flec ts the regulatory expectation that TNMP w ould e ventually rec over the book value of TNP One throug h d epre ciation. Duringthe ea rly y ear s of ac counting for c erta in assets, like TNP One, the A DFI T balanc e g rows bec ause the regulatory tax ex pense pa id by rate pay ers e x cee ds the uti lity ’s a c tua l tax expe ns e . T his tr e nd re ve rs e s in late r y e ars wh e n th e uti lity ’s a c tua l tax expe ns e
exce e d s it s r e g u lato r

y tax e xp e n s e , an d

th e A D F I T a c c o u n t b a la n c e w il l u lt im a te ly

r e a c hze r o. Under continuing r egulation, TNMP’s ADF I T acc ount ba lance related to depre ciation would have ultimately

rea ched zer o. B ut TNM P wi ll n owre c ov e r the bo ok va lue of TN P On e a s p ro c e e ds fr om t he sa le of that a sse t and

a s st ra nd e d c os ts. I f t

he e nti re bo ok

va lue is r e c ov e red, the AD F I T a c c ount w ill satisfy TNMP’s tax burden with respec t to its stranded c ost recove ry and will ultimately

rea ch zero. Where, a s here , the Commiss ion made adjustments to both the book value a nd marke t value of TN P One, TNMP w ill not rec over the entire book va lue of TNP One . As a re sult, TNMP wil l not incur a tax liabili ty

on the amounts not r ecove red, and the ADF I T acc ount ba lance will ne ver r eac h zero.34

State d d if fe re ntl y , w ith out “ g ro ssi ngup ” the dis a llo wa nc e s ma de by the Com mis sio n, TN MP w ill
re ta in t he re ma ini ngba lanc e in i ts A DF I T a c c ount a nd wi ll the re fo re ov e rr e c ov e r s tr and e d c os ts. Se c tio n 3 9. 26 2( a ) e xpre ssl y pr e c lud e s T NM P f

rom ove rr e c ov e ri ngstr and e d c os ts. Te x. Ut il. Cod e Ann. § 3 9. 26 2( a ). B ecaus e th e Com mis sio n h a s d isa llo we d r e c ov e ry of c e rt a in
c os ts a sso c iate d w ithTN P On e , T NM P wi ll n ot o we fe de ra l in c ome ta x on th os e c os ts, and TN MP wi ll n ot n e e d th e a sso c iate d A DF I T b a lanc e . We re the Com mis sio n n ot t o “g ros s up ” the se disallowance s, TNMP would overr ecove r st rande d costs. Given the e x press leg islative command that a u t ility

may not be per

mitted to overrec over stra nded costs, see Tex. Util . Code Ann. § 39.262(a) , we conclude that the Commi ssion a cted within its authority to “g ross up” disallowanc es and ther eby

preve nt TNMP from overrec overing stranded c osts. W e over rule TNMP’s third issue.
CO NC LU SION Havingoverr

uled the par

ties’ issues on appe al, we a ffirm the judg ment of the district court a ffirmingthe Commiss ion’s final orde r.

__________________________________________ J an P. Patterson, J ustice Be fore J ustices Patterson, Pember ton and Waldrop Affir med Filed: January

25, 2008