Opinion ID: 895266
Heading Depth: 2
Heading Rank: 1

Heading: Interest on the CTC True-Up Balance

Text: The PUC allowed CenterPoint to recover interest on the CTC balance under its Rule 25.263( l )( 3), which at the time provided: The TDU [transportation and distribution utility] shall be allowed to recover, or shall be liable for, carrying costs on the true-up balance. Carrying costs shall be calculated using the utility’s cost of capital established in the utility’s UCOS [unbundled cost-of-service] proceeding, and shall be calculated for the period of time from the date of the true-up order until fully recovered. The consumer groups argue that interest on the true-up balance is not allowed because we invalidated Rule 25.263( l )( 3) in its entirety in CenterPoint Energy . The PUC and CenterPoint argue that we only invalidated the timing portion of the Rule — the date that interest begins to accrue. We agree with the PUC and CenterPoint . Any fair reading of our CenterPoint Energy decision makes clear we were focused on the date, not the rate. We stated in CenterPoint Energy that “Rule 25.263( l )( 3) is invalid,” 4 3 and we reasonably read that statement in context. 4 4 We explained: No one disputes that the Legislature intended electric utilities to recover carrying costs on stranded costs to compensate for the financing costs incurred during the stranded cost recovery period. Nor does anyone dispute that prior to deregulation, carrying costs on investments in generation plants were included in rates. The only issue before us is the date from which carrying costs may be recovered once deregulation commenced: January 1, 2002, which was the first day of deregulation, or two or more years later, at the end of final true-up proceedings. 4 5 We did not hold utilities cannot recover interest on their stranded costs or other costs. Indeed, we held that the rule was too parsimonious because it did not provide for the recovery of interest for the period between January 1, 2002, the date consumer choice commenced, and the date of the final true-up order. The basis of our holding was that failure to allow the recovery of interest during this period would fail to compensate the utilities fully for their stranded costs that existed on December 31, 2001, the last day of the freeze period. 4 6 “A two- or three-year gap in recovery of carrying costs would not permit generation companies full recovery of their stranded costs as the Legislature intended.” 4 7 We further noted that in allowing securitization to reduce stranded costs, the Act specifically states that the purpose of securitization is to enable utilities to use this financing technique “to recover regulatory assets and stranded costs, because this type of debt will lower the carrying costs of the assets.” 4 8 We invalidated Rule 25.263( l )( 3) only insofar as it picked the wrong start date for the accrual of carrying costs: We conclude that the Commission’s construction of chapter 39 was incorrect regarding the date as of which stranded costs are to be determined. . . . Because the Commission’s rule is based on an incorrect construction of the Act in this regard , it is infirm. 4 9 We did not hold broadly that the PUC could not allow utilities to recover interest on the CTC balance. The consumer groups argue that even if the Court only invalidated the timing element of Rule 25.263( l )( 3) — the date interest begins to accrue — that portion of the Rule is not severable, and the whole Rule is therefore invalid. The consumer groups provide no persuasive reason why the PUC cannot follow the Court’s directive regarding the accrual date but otherwise enforce its Rule by allowing the recovery of interest. The Rule is part of Chapter 25 of Title 16 of the Texas Administrative Code, covering substantive rules of the PUC applicable to electric service providers. Rule 25.3(a) of the same Chapter states that “[ i ]f any provision of this chapter is held invalid, such invalidity shall not affect other provisions or applications of this chapter which can be given effect without the invalid provision or application, and to this end, the provisions of this chapter are declared to be severable.” The PUC thus followed its own severability rule and enforced Rule 25.263( l )( 3), but with an accrual date consistent with CenterPoint Energy . We see no error in this approach, which complied with our decision while also enforcing the remainder of the PUC’s rule allowing the recovery of interest. By analogy to statutory construction, severability is a question of legislative intent. 5 0 Here , the body enacting the regulation in issue has expressly stated by general rule that it intends invalid provisions to be severable. Absent an expression of intent regarding severability, the valid remaining portions of a statute remain enforceable if the invalidity of one portion “does not affect other provisions or applications of the [rule] that can be given effect without the invalid provision or application.” 5 1 Here, the PUC was able to otherwise enforce its rule by modifying only the date that interest begins to accrue. It specifically concluded in the Order that PURA’s function is not impaired by CenterPoint Energy ’s invalidation of a portion of Rule 25.263( l )( 3) and that the remainder of the Rule should be given effect. 5 2 We agree with the PUC that there is no ground to invalidate the entire rule because of the one defect we found in CenterPoint Energy . In fact, invalidating the whole rule and barring any recovery of interest whatsoever would contradict our view in CenterPoint Energy “that the Legislature intended electric utilities to recover carrying costs on stranded costs to compensate for the financial costs incurred during the stranded cost recovery period,” consistent with the prior ratemaking principle that “carrying costs on investments in generation plants were included in rates.” 5 3 GCCC separately argues that regardless of the validity of Rule 25.263( l )(3), the 11.075 percent interest rate chosen by the PUC was arbitrary and capricious, and not supported by substantial evidence, because there was no evidence in the record that it reflected CenterPoint’s current weighted-average cost of capital (WACC). 5 4 For several reasons, we are unpersuaded . First, given our conclusion that Rule 25.263( l )( 3) remains valid with the corrected start date mandated by CenterPoint Energy , we agree with the court of appeals that, as a general proposition, an agency cannot be said to “err or act arbitrarily or capriciously by complying with the mandate of its own rule,” 5 5 assuming that the rule is based on a valid delegation of legislative authority and is a reasonable exercise of that authority. Indeed, we have stated that if an agency “does not follow the clear, unambiguous language of its own regulation, we reverse its action as arbitrary and capricious.” 5 6 Second, GCCC does not persuade us that the PUC can as a practical matter constantly re-determine a utility’s cost of capital or is required by law to do so. The PUC selected the 11.075 percent rate in the true-up proceeding where a final order issued in December 2004 and in the financing order proceeding where a final order issued in March 2005. This rate was based on the weighted-average cost of capital established in the utility’s 2001 unbundled cost-of-service (UCOS) proceeding, adjusted for federal income taxes, 5 7 and GCCC offers no proof or argument that the earlier proceedings in which CenterPoint’s cost of capital was determined were flawed. Further, as all parties agree, the PUC in 2006 prospectively reset the interest rate on the CTC to reflect changed economic conditions. The rate was lowered to 8.06 percent. 5 8 Finally, the PUC points to expert testimony in the administrative record offered by CenterPoint that the 11.075 percent interest rate was appropriate given the risk associated with the recovery of CTCs, the fact that the rate was a pre-tax rate that had to be grossed up to ensure the recovery of income taxes on the CTC, the use of the same rate in other proceedings, and other factors. The consumer groups do not challenge the credentials of the expert, whose testimony was offered by CenterPoint to rebut the argument that the previously determined rate had become outdated and that one of several other rates proposed by intervenors and PUC staff should be used. While there was some conflicting testimony on the appropriate interest rate, under the applicable substantial evidence standard of review , 5 9 we ask only whether some reasonable basis exists in the record for the agency’s action. 6 0 That standard was met here. 6 1 In sum, the PUC did not act in an arbitrary or capricious manner in (1) following its own rule, (2) relying on a previously determined cost of capital in proceedings whose fairness is not challenged here, (3) ultimately choosing an interest rate for which a reasonable basis exists in the record, and (4) substantially lowering the interest rate when circumstances warranted.