Court Opinion

ID: 2874070
Source: CourtListenerOpinion
Date Created: 2015-09-06 05:44:38.039983+00
Date Added: 2024-06-11T11:35:27.088853
License: Public Domain

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

                                       NO. 03-06-00580-CV

                                     City of Dallas, Appellant

                                                  v.

               Railroad Commission of Texas and Atmos Energy Corporation,
                  as successor by merger to TXU Gas Company, Appellees

     FROM THE DISTRICT COURT OF TRAVIS COUNTY, 345TH JUDICIAL DISTRICT
       NO. D-1-GN-04-002652, HONORABLE GISELA D. TRIANA, JUDGE PRESIDING

                             MEMORANDUM OPINION

               The City of Dallas appeals from a district court judgment affirming a final order of

the Railroad Commission of Texas (Commission) approving rates applicable to all areas in Texas

served by TXU Gas Corporation, the predecessor to appellee Atmos Energy Corporation (TXU Gas).

At all relevant times, TXU Gas or one of its predecessors has been the gas utility that serves much

of north and central Texas, including the Dallas area. In previous proceedings, the utility’s rates had

been set on a municipality-by-municipality or region-by-region basis. In the present proceeding,

however, the commission, for the first time, approved TXU Gas’s request to set rates on a

“statewide” basis, utilizing data from TXU Gas’s entire system in Texas to determine rates that it

imposed on its customers without regard to local or regional boundaries.

               The chief focus of Dallas’s appeal is the commission’s departure from what it terms

the “long standing practice and precedent” of setting separate rates for a region termed the
“Dallas Distribution System,” or “Dallas System.” In prior rate proceedings, the “Dallas Distribution

System” had been described as “an integrated local gas distribution system comprised of

approximately 3,400 miles of pipe . . . [that] encompasses over 370 square miles and serves

approximately 236,000 customers in Dallas, Highland Park, University Park, and Cockrell Hill. . .

comprised of approximately 211,000 residential customers; 26,000 commercial customers; and

200 industrial or transportation customers.” Dallas’s central contention on appeal is that it presented

uncontroverted evidence that TXU Gas’s revenue requirement or cost of service within the

“Dallas Distribution System” is unique and lower compared to other areas served by the utility,

thereby establishing that the statewide rates were unjust and discriminatory to customers in that area.

               In three issues, Dallas urges that the commission’s imposition of statewide rates on

“Dallas Distribution System” customers is not supported by substantial evidence or adequate

findings, that TXU Gas’s published notice of its proposed rate change was deficient regarding its

impact on those customers, and that the commission lacked jurisdiction to set statewide rates because

it had not acquired jurisdiction to set rates within all municipalities in TXU Gas’s service area. We

will overrule these issues and affirm the district court’s judgment.

                                         BACKGROUND

Statutory framework

               In the Gas Utility Regulatory Act (GURA), the legislature has determined that “[g]as

utilities are by definition monopolies in the areas they serve” such that “the normal forces of

competition that regulate prices in a free enterprise society do not operate.” Tex. Util. Code.

Ann. § 101.002 (West 2007).         As a substitute for market competition, the legislature has

implemented “a comprehensive and adequate regulatory system for gas utilities to assure rates,

                                                  2
operations, and services that are just and reasonable to the consumers and the utilities.” Id. Under

GURA, “the railroad commission is vested with all the authority and power of this state to ensure

compliance with the obligations of gas utilities” under the act. Id. § 104.001(a) (West 2007). The

railroad commission has exclusive original jurisdiction over the rates and services of gas utilities that

distribute gas (“distribution” rates or services) in areas outside a municipality, as well as those that

transport, deliver or sell natural gas to a gas utility that distributes gas to the public (“pipeline” rates

or services). Id. § 102.001(a) (West 2007). However, the legislature has delegated to the governing

body of each municipality, in the first instance, exclusive original jurisdiction over distribution rates

and services within its municipal boundaries, subject to the municipality’s right to surrender such

jurisdiction to the commission by ordinance or local option election. See id. §§ 102.001(a)(1)(B),

102.002(b), 103.001, 103.003 (West 2007).

                Under GURA, a gas utility may charge customers only rates set forth on schedules

filed with each regulatory authority having original or appellate jurisdiction over those rates. See

id. §§ 102.151, 104.002, 104.005 (West 2007). A gas utility desiring to increase its rates must file

a statement of such intent with the regulatory authority having original jurisdiction over those rates at

least 35 days before the effective date of the proposed increase. Id. § 104.102(a) & (b) (West 2007).

The statement of intent must include proposed revisions of tariffs and schedules and “a detailed

statement” of each proposed increase, the effect the proposed increase is expected to have on the

utility’s revenues, and each class and number of utility consumers affected. Id. § 104.102(c) (West

2007). The utility must also “publish, in conspicuous form, notice to the public of the proposed

increase once each week for four successive weeks in a newspaper having general circulation in each

county having territory affected by the proposed increase.” Id. § 104.103(a)(1) (West 2007).

                                                     3
                The regulatory authority shall hold a hearing on the proposed rate increase if the

increase would constitute a “major” change, one that would increase the utility’s aggregate revenues

more than the greater of $100,000 or 2 percent. Id. §§ 104.101, 104.105 (West 2007). The

regulatory authority shall “give preference” to the hearing and “decide the questions as quickly as

possible.” Id. § 104.106 (West 2007). Pending the hearing and a decision, the regulatory authority

has authority to suspend the operation of the proposed rate schedule for a specified period. Id.

§ 104.107(a), (b) (West 2007). “If the regulatory authority does not make a final determination

concerning a schedule of rates before expiration of the applicable suspension period, [it] is

considered to have approved the schedule.” Id. § 104.107(c).

                In GURA chapter 104, subchapter B, the legislature addressed certain components

of a regulatory’s authority’s calculation of a gas utility’s rates. It prescribed various calculations to

determine the rate base and expenses, see id. §§ 104.053-.058 (West 2007), and directed that the rate

of return “may not . . . yield[] more than a fair return on the adjusted value of the invested capital

used and useful in providing service to the public.” Id. § 104.052 (West 2007). Further, “[i]n

establishing a gas utility’s rates, the regulatory authority shall establish the utility’s overall revenues

at an amount that will permit the utility a reasonable opportunity to earn a reasonable return on the

utility’s invested capital used and useful in providing service to the public in excess of its reasonable

and necessary operating expenses.” Id. § 104.051 (West 2007).

                Additionally, the regulatory authority must ensure that each rate within its jurisdiction

that a gas utility makes, demands or receives is “just and reasonable.” Id. § 104.003(a) (West 2007).

“A rate may not be unreasonably preferential, prejudicial, or discriminatory but must be sufficient,

equitable, and consistent in application to each class of consumer.” Id. Further, a gas utility may

                                                    4
not (1) “grant an unreasonable preference or advantage concerning rates or services to a person in a

classification”; (2) “subject a person in a classification to an unreasonable prejudice or disadvantage

concerning rates or services”; or (3) “establish or maintain an unreasonable difference concerning

rates of services between localities or between classes of service.” Id. § 104.004 (West 2007).

               “In establishing a gas utility’s rates, the railroad commission may treat as a single

class two or more municipalities that a gas utility serves if the commission considers that treatment

to be appropriate.” Id. § 104.003(a). Furthermore, the commission has provided by rule that

“environs” rates—unincorporated areas near incorporated cities and towns—“may be the same rates

as those in effect in the nearest incorporated area in Texas served by the same utility where gas is

obtained from at least one common pipeline supplier or transmission system.” 16 Tex. Admin. Code

§ 7.220(a) (2008). Conversely, absent commission approval, a gas utility’s rates for an area not in

a municipality may not exceed 115 percent of the average of all rates for similar services for all

municipalities served by the same utility in the same county as that area. Tex. Util. Code Ann.

§ 104.006 (West 2007).

               If, after hearing, the regulatory authority finds the rates are “unreasonable or in

violation of law,” it shall “enter an order establishing the rates the gas utility shall charge or apply

for the service in question.” Id. § 104.110(a) (West 2007). The gas utility must thereafter comply

with those rates until changed in accordance with GURA. Id. § 104.110(b) (West 2007).

               In addition to its original jurisdiction, the railroad commission has exclusive appellate

jurisdiction to review an order or ordinance of a municipality exercising original jurisdiction. Id.

§ 102.001(b). “A party to a rate proceeding before a municipality’s governing body may appeal the

governing body’s decision to the railroad commission.” Id. § 103.051 (West 2007). Such an appeal

                                                   5
is de novo, and based on the test year presented to the municipality, adjusted for known changes and

conditions that are measured with reasonable accuracy. Id. § 103.055(a) (West 2007). The

commission “shall enter a final order establishing the rates [it] determines the municipality should

have set in the ordinance to which the appeal applies.” Id. § 103.055(b) (West 2007).

Proceedings below

               In May 2003, TXU Gas filed with the railroad commission a statement of intent to

change its distribution and pipeline rates over its entire system in Texas and seek approval of new

“statewide rates” applicable to all of its distribution and pipeline customers. It filed similar

statements with each of the approximately 440 municipalities within its service area.         See id.

§ 103.001 (exclusive original jurisdiction of each municipality over gas utility rates, operations and

services within its boundaries). In response to TXU Gas’s filings, fifty-five municipalities purported

to surrender their jurisdiction over TXU Gas’s rates to the commission. See id. § 103.003. Another

group of thirty-one municipalities either took no action at all or suspended TXU Gas’s proposed rate

change and then took no further action. See id. § 104.107 (rate suspension and deemed approval).

The remaining municipalities, including Dallas, denied or dismissed TXU Gas’s rate change

proposal. In each case, regardless of the municipality’s action, TXU Gas appealed it to the railroad

commission. See id. §§ 102.001(b) (commission has “exclusive appellate jurisdiction to review an

order or ordinance of a municipality exercising exclusive original jurisdiction”), 103.051 (“A party

to a rate proceeding before a municipality’s governing body may appeal the governing body’s

decision to the railroad commission”). The commission consolidated all of TXU Gas’s proceedings

into a single docket. Many parties intervened, including Dallas, numerous other cities through the

                                                  6
Allied Coalition of Cities (ACC) or the Association of TXU Municipalities, and various

large gas consumers.

                A hearing spanning eighteen days was held before commission hearing examiners.

Of relevance to this appeal, Dallas opposed TXU Gas’s proposal that the commission set statewide

rates rather than rates specific to the “Dallas Distribution System,” as it had in the past.

Dallas presented the expert testimony of Daniel L. Lawton concerning “Dallas Specific Versus

Statewide Rate Policy Issues.” Lawton opined that TXU Gas’s cost to serve Dallas Distribution

System customers was substantially lower than its statewide or systemwide average due to factors

including “the unique characteristics of a gas distribution system in a large metropolitan area” and

that “Dallas customers have been paying down enormous investment levels in the city associated

with safety replacement and maintenance.” Lawton urged that, consequently, shifting to statewide

rates would force Dallas Distribution System customers to subsidize TXU Gas customers in other

parts of the state, would be “unfair, unjust, and unreasonable,”and would cause short-term “rate

shock.”1 Instead of TXU Gas’s “statewide, one size fits all” approach to rates, Lawton maintained,

       1
           As Lawton summarized his conclusions:

       Historically, Dallas customers have paid rates for the localized system investment
       and costs that have resulted in lower rates relative to the statewide system. By
       blending or averaging system costs into one rate, [TXU Gas] is eliminating the Dallas
       Distribution System benefits of lower costs that Dallas Distribution System
       customers have paid for over the years. The impact or savings associated with the
       Dallas customers’ past payments for plant and cost of service is now being shifted
       to all other customers. As a result, Dallas Distribution System customers (residential,
       commercial, and industrial) receive increases that in some cases are shocking, while
       customers in other parts of TXU Gas’[s] service area receive no increases or rate
       decreases.

                                                 7
the commission should set rates for the “Dallas Distribution System” separately from the rest of

TXU Gas’s system.

               TXU Gas presented the testimony of Steven Houle, who opined that a statewide rate

filing would save rate case expenses and that statewide rates would be more “transparent,” easier to

understand, would help equalize the effects of TXU Gas’s investments across its service area, and

would help ensure similarly-situated customers were treated equally throughout its system. In

rebuttal testimony, Houle also challenged “Mr. Lawton’s . . . erroneous premise that the Dallas

Distribution System is an isolated, independent distribution system that is materially different from

other systems served by TXU Gas.” According to Houle, “[r]ather than being independent and

isolated, the Dallas Distribution System is uniquely inter-related with other systems due to the fact

that it is completely surrounded by other large, densely populated areas” in which customers “often

utilize the same pipeline and distribution network that serves customers in the Dallas Distribution

System.” “Due to this sharing of facilities,” Houle added, “in prior gas cases [TXU Gas] has had

to develop complex allocations to divide the cost of service associated with shared facilities between

the Dallas Distribution System and surrounding cities.” Houle further testified that “I have reviewed

[TXU Gas’s] operating costs in detail, and there is no cost data that I have seen that suggests that it

is cheaper to serve customers in the Dallas Distribution System than to serve customers in adjacent

cities or other parts of the state.”       Houle concluded that the “net effect of [Lawton’s]

recommendation [was] that customers outside of the Dallas Distribution System should subsidize

the rates of customers in the Dallas Distribution System.”

               Terming this “[a] fundamental policy issue the Commission must decide,” the hearing

examiners recommended in their proposal for decision that the commission approve and set

                                                  8
distribution rates on a system-wide basis for TXU Gas.2 As for what these statewide rates would

be, the examiners recommended that the commission adopt some components of TXU Gas’s

proposed rates but not others. The commission adopted the hearing examiner’s recommendations

that are material to this appeal, including the recommendation to approve and set TXU Gas’s rates

on a statewide basis. In its final order, the commission adopted approximately one-hundred detailed

findings of fact regarding the reasonableness of various components of TXU Gas’s rate base,

expenses, and the rate of return. Following these findings were thirty-seven findings regarding cost-

allocation and rate design issues. Among other things, the commission found that specified rates for

six customer rate classes were reasonable: Residential Sales, Commercial Sales, Industrial Sales,

Transportation Service, City-Gate Service, and Pipeline Transportation Service. Based on these

findings, the commission made conclusions of law concerning whether the rates complied with

statutory requirements. These included:

       8.        In accordance with the stated purposes of the Texas Utilities Code, Subtitle
                 A, expressed under Tex. Util. Code Ann. § 101.002 . . . the Commission has
                 assured that the rates, operations, and services established in this docket are
                 just and reasonable to customers and to the utilities.

       2
            The examiners reasoned:

       TXU primarily argues that the advantages of system-wide rates are economic. While
       this proceeding has no doubt been long, complex, and expensive, the Examiners find
       it a difficult prospect to accept that the alternative to system-wide rates—the utility
       having a myriad number of rates, tariffs, and corresponding rate cases—is more
       efficient and less costly. Dallas argues that it is entitled to be treated as a separate
       and independent system for rate making purposes. However, the weight of the
       evidence does not indicate that Dallas is a separate and distinct utility system with
       unique costs that mandate consideration apart from the remainder of TXU’s system.
       The Examiners therefore recommend the Commission approve and set distribution
       rates on a system-wide basis for TXU.

                                                   9
...

23.    The rates proposed by TXU are in accordance with Tex. Util. Code Ann.
       § 104.006 . . . because the rates established for customers of each environs
       area do not exceed 115 percent of the average of all rates for similar services
       for all municipalities served by TXU in the same county.

24.    TXU’s intent to set system-wide rates is consistent with 16 Tex. Admin.
       Code § 7.220 (2002), that provides that rates applicable to customers located
       in the environs may be the same as those rates in the nearest incorporated area
       in Texas served by the same utility.

...

25A.   The revenue, rates, rate design, and service charges . . . set out in this Order
       and accompanying schedules, are just and reasonable, are not unreasonably
       preferential, prejudicial, or discriminatory, and are sufficient, equitable, and
       consistent in application to each class of consumer, as required by Tex. Util.
       Code Ann. § 104.003 . . . .

26.    The overall revenues as established by the findings of fact and attached
       schedules are reasonable; fix an overall level of revenues for TXU that will
       permit the company a reasonable opportunity to earn a reasonable return on
       its invested capital used and useful in providing service to the public over and
       above its reasonable and necessary operating expenses, as required by
       Tex. Util. Code Ann. § 104.051 . . .; and otherwise comply with Chapter 104
       of the Texas Utilities Code.

27.    The revenue, rates, rate design and service charges approved herein will not
       yield to TXU more than a fair return on the adjusted value of the invested
       capital used and useful in rendering service to the public, as required by
       Tex. Util. Code Ann. § 104.052 . . . .

28.    The rates established in this docket comport with the requirements of Tex.
       Util. Code Ann. § 104.053 . . . and are based upon the adjusted value of
       invested capital used and useful, where the adjusted value is a reasonable
       balance between the original cost, less depreciation, and current cost, less
       adjustment for present age and condition.

...

42.    The rate setting methodologies set forth in Tex. Util. Code Ann. § 104.051
       et seq. were used to set the rates in this proceeding.

                                         10
Although the commission’s findings and conclusions referred throughout to statewide data and rates,

the commission did not make specific findings and conclusions comparing the relative benefits of

statewide rates with separate rates unique to the “Dallas Distribution System.”

               Several parties, including Dallas, Atmos, and ACC filed suits for judicial review of

the commission’s order in the district court. The district court rendered a final judgment affirming

the commission’s final order in all respects. Dallas, Atmos, and ACC each appealed to this Court.

Atmos and ACC ultimately dismissed their appeals pursuant to settlement, leaving Dallas as the sole

appellant.

                                            ANALYSIS

               Dallas brings three issues on appeal. In its first issue, it argues that the commission

failed to make adequate findings in support of its decision to impose statewide rates rather than rates

unique to the “Dallas Distribution System” and that the decision is arbitrary, capricious, and not

supported by substantial evidence. In its second issue, Dallas contends that TXU Gas’s published

notice of its proposed statewide rate change was misleading and defective as to its impact on “Dallas

Distribution System” customers. In its third issue, Dallas asserts that the commission never acquired

jurisdiction over TXU Gas’s rates in numerous municipalities within its service area, rendering

invalid the statewide rates and their underlying calculations.

Standard of review

               We review the railroad commission’s decision in a ratemaking proceeding to

determine whether it is supported by substantial evidence. CenterPoint Energy Entex v. Railroad

                                                  11
Comm’n of Tx., 213 S.W.3d 364, 369 (Tex. App.—Austin 2006, no pet.). Under this standard, we

may not substitute our judgment for that of the commission on the weight of the

evidence on questions committed to the commission’s discretion. Tex. Gov’t Code Ann. § 2001.174

(West 2008).     However, we shall reverse and remand the commission’s order if Dallas’s

substantial rights have been prejudiced because the commission’s findings, inferences, conclusions,

or decisions; (1) violate a constitutional or statutory provision; (2) exceed the commission’s statutory

authority; (3) were made through unlawful procedure; (4) were affected by other error of law; (5) are

not reasonably supported by substantial evidence considering the reliable and probative evidence in

the record as a whole; or (6) are arbitrary or capricious or characterized by abuse of discretion or

clearly unwarranted exercise of discretion. Id.

               The commission’s order is presumed valid and Dallas bears the burden of showing

a lack of substantial evidence. CenterPoint Energy Entex, 213 S.W.3d at 369 (citing City of

El Paso v. Public Util. Comm’n, 883 S.W.2d 179, 185 (Tex. 1994) & Sportscoach Corp. of

Am. v. Eastex Camper Sales, Inc., 31 S.W.3d 730, 733 (Tex. App.—Austin 2000, no pet.)). We

review the commission’s legal conclusions for errors of law and its findings of fact for support by

substantial evidence. Id. at 370; see Tex. Gov’t Code Ann. § 2001.174; Heat Energy Advanced

Tech., Inc. v. West Dallas Coal., 962 S.W.2d 288, 294-95 (Tex. App.—Austin 1998, pet. denied).3

        3
          To the extent this analysis entails questions of statutory construction, these are questions
of law that we review de novo. See State v. Shumake, 199 S.W.3d 279, 284 (Tex. 2006). Our
primary objective in statutory construction is to give effect to the legislature’s intent. Id. We seek
that intent “first and foremost” in the statutory text. Lexington Ins. Co. v. Strayhorn, 209 S.W.3d
83, 85 (Tex. 2006). We rely on the plain meaning of the text, unless a different meaning is supplied
by legislative definition or is apparent from context, or unless such a construction leads to absurd
results. City of Rockwall v. Hughes, 246 S.W.3d 621, 625-26 (Tex. 2008); see Tex. Gov’t Code
Ann. § 311.011 (West 2005) (“[w]ords and phrases shall be read in context and construed according
to the rules of grammar and common usage”). However, with regard to a statute that an agency is

                                                  12
To constitute substantial evidence, the evidence in its entirety must be sufficient to allow reasonable

minds to have reached the conclusion that the agency must have reached to justify the disputed

action. Id. (citing Texas State Bd. of Dental Exam’rs v. Sizemore, 759 S.W.2d 114, 116 (Tex.1988)).

The evidence in the record may preponderate against the agency’s decision and still provide a

reasonable basis for the decision and satisfy the substantial evidence standard. Id. (citing Nucor

Steel v. Public Util. Comm’n, 168 S.W.3d 260, 267 (Tex. App.—Austin 2005, no pet.)).

               Whether the commission’s order was supported by substantial evidence is a question

of law. Montgomery Indep. Sch. Dist. v. Davis, 34 S.W.3d 559, 562 (Tex. 2000). The district

court’s judgment is thus not entitled to deference on appeal. Texas Dep’t of Pub. Safety v. Alford,

209 S.W.3d 101, 103 (Tex. 2006) (per curiam). On appeal of that judgment, we consider the

same question presented to the district court: whether the commission’s order was supported by

substantial evidence. See Montgomery, 34 S.W.3d at 562.

Statewide vs. “Dallas Distribution System” rates

               In its first issue, Dallas argues that the commission’s order setting statewide rates for

TXU Gas was not supported by substantial evidence and was an abuse of discretion because the

evidence establishes that the rates are unduly prejudicial, discriminatory, and not just and reasonable

charged with enforcing, we give “serious consideration” to the agency’s construction of it, so long
as that construction is reasonable and consistent with the statutory language, and this is particularly
true when the statute involves complex subject matter within the agency’s area of expertise. See
CenterPoint Energy Houston Elec., LLC v. Gulf Coast Coal. of Cities, 252 S.W.3d 1, 27-28
(Tex. App.—Austin 2008, pet. filed); cf. Rylander v. Fisher Controls Int’l, Inc., 45 S.W.3d 291, 302
(Tex. App.—Austin 2001, no pet.) (courts “do not defer to administrative interpretation in
regard to questions which do not lie within administrative expertise or deal with a nontechnical
question of law.”) (internal citation omitted).

                                                  13
in their effect on “Dallas Distribution System” customers. Dallas emphasizes that it presented

evidence that the “Dallas Distribution System” is an integrated distribution system with different

costs than other areas of TXU Gas’s system. Cf. City of Corpus Christi v. Public Util. Comm’n,

572 S.W.2d 290, 294-95 (Tex. 1978) (municipality, not electric utility, had burden of allocating or

separating municipality’s portion of utility’s systemwide costs). It asserts that TXU Gas presented

no competent evidence to controvert its proof regarding the nature and costs of the

“Dallas Distribution System” or otherwise justify statewide rates. Relatedly, Dallas complains that

the commission failed to make any findings of fact specifically addressing “the issue of state-wide

rates versus rates for the Dallas Distribution System” and that it was required to make such findings

because they concern “underlying findings” supporting its decision to approve statewide rates. See

Texas Health Facilities Comm’n v. Charter Med.-Dallas, Inc., 665 S.W.2d 446, 449-53 (Tex. 1984).

                Because adequate findings of underlying fact are an essential prerequisite to

meaningful substantial-evidence review, see, e.g., State Banking Bd. v. Valley Nat’l Bank,

604 S.W.2d 415, 419 (Tex. Civ. App.—Austin 1980, writ ref’d n.r.e.),4 we will begin by addressing

Dallas’s assertions that such findings are lacking here. As appellees observed during oral argument,

Dallas did not raise this specific complaint in its motion for rehearing, and it is questionable whether

       4
           As this Court observed in Valley Nat’l Bank:

       The purposes in requiring underlying facts are to require a full consideration of the
       evidence and serious appraisal of the facts on the part of the administrative agency;
       to inform the [appellants] of the facts found so that they may intelligently prepare and
       present an appeal to the courts; and to assist the courts in properly exercising their
       functions of reviewing the order.

State Banking Bd. v. Valley Nat’l Bank, 604 S.W.2d 415, 419 (Tex. Civ. App.—Austin 1980,
writ ref’d n.r.e.).

                                                  14
Dallas preserved this argument. See, e.g., Entergy Gulf States, Inc. v. Pub. Util. Comm’n,

173 S.W.3d 199, 210 (Tex. App.—Austin pet. denied); see also Bay City Fed. Sav. & Loan

Ass’n v. Lewis, 474 S.W.2d 459, 461-62 (Tex. 1971) (lack of findings by agency is independently

reversible without regard to whether “lack of substantial evidence was urged”). Even if Dallas’s

complaint is preserved, we conclude that the commission was not required to make specific findings

regarding the relative benefits of statewide rates for TXU Gas compared to separate rates for the

“Dallas Distribution System.”

               The commission was required to make findings of “underlying facts,” or the facts that

supported its ultimate determinations that the statutory requirements for approving TXU Gas’s rates

had been satisfied. See Charter Med.-Dallas, Inc., 665 S.W.2d at 449-53; Valley Nat’l Bank,
604 S.W.2d at 419; see also Tex. Gov’t Code Ann. § 2001.141(b) & (d) (West 2008) (“ultimate

findings” regarding whether statutory prerequisites to agency’s action have been met that are “set

forth in statutory language . . . must be accompanied by a concise and explicit statement of the

underlying facts supporting the findings.”). However, the commission was not “required to comment

on every aspect of the record that may be relevant to its ultimate findings” or make findings

on matters that it did not rely for support of its ultimate determinations. Valley Nat’l Bank,
604 S.W.2d at 419. Thus, to determine the findings the commission was required to make, we look

to the statutory standards that governed the commission’s decision to approve TXU Gas’s rates.

Charter Med.-Dallas, Inc., 665 S.W.2d at 449.

               We have summarized GURA’s standards governing the commission’s ratemaking

decisions above. The legislature prescribed calculations to determine the rate base and expenses,

see Tex. Util. Code Ann. §§ 104.053-.058, directed that the rate of return “may not . . . yield[] more

                                                 15
than a fair return on the adjusted value of the invested capital used and useful in providing service

to the public,” id. § 104.052, and required that the commission “establish the utility’s overall

revenues at an amount that will permit the utility a reasonable opportunity to earn a reasonable return

on the utility’s invested capital used and useful in providing service to the public in excess of its

reasonable and necessary operating expenses.” Id. § 104.051. Rates must also be “just and

reasonable,” “not be unreasonably preferential, prejudicial, or discriminatory,” and “be sufficient,

equitable, and consistent in application to each class of consumer.” Id. § 104.003(a). This type of

statutory language has been held to afford an agency “discretion to determine the method of rate

design,” or how the utility’s revenue requirement is distributed among its various services.

Texas Alarm & Signal Ass’n v. Pub. Util Comm’n, 603 S.W.2d 766, 768 n.2, 772 (Tex. 1980). “Rate

design is a complex problem that involves many factors,” id. at 772, and the statute affords the

commission considerable discretion regarding the precise factors to consider when addressing the

statutory rate considerations and the weight to be given those factors. See Nucor Steel, 168 S.W.3d

at 267-68.    Such questions entail complex technical, economic and policy decisions that

are uniquely appropriate for the commission’s “informed judgment and expertise.” Id. at 268

(internal citation omitted).

               The legislature in GURA did speak to some geographic aspects of rate design. It

specifically prohibited “an unreasonable difference concerning rates of services between localities

or between classes of service,” Tex. Util. Code Ann. § 104.004, and restricted the variations

between rates within municipalities and their environs. Id. § 104.006; see also 16 Tex. Admin.

Code § 7.220(a) (environs rates “may be the same rates as those in effect in the nearest incorporated

area in Texas served by the same utility where gas is obtained from at least one common pipeline

                                                  16
supplier or transmission system.”). There is no dispute that uniform, statewide rates would comply

with these requirements. The legislature also contemplated that the commission could group

customers from more than one municipality into a common rate class “if the commission considers

that treatment to be appropriate.” Id. § 104.003(a). Beyond this, the legislature left the geographic

aspects of rate design to the commission’s informed discretion. See Nucor Steel, 168 S.W.3d at 269

(“When [the statute] is silent as to an aspect of rate design, it demonstrates the legislature’s intent

to leave the decision within the [agency’s] discretion.”).

               The gravamen of Dallas’s argument is that because it presented evidence concerning

certain factors that the commission might have considered in the design of TXU Gas’s rates—that

the “Dallas Distribution System” is an “integrated system” with unique costs for which rates have

historically been set separately—the commission must make explicit findings regarding facts

that supported Dallas’s alternative regional rate design proposal. Although the commission was

required to make findings of underlying facts supporting its approval of TXU Gas’s statewide

rates—and did make extensive findings to that end, as previously discussed—it was not required to

make findings of facts regarding matters that it rejected and did not support its decision. See Valley

Nat’l Bank, 604 S.W.2d at 419. We reject Dallas’s contention that the commission failed to make

adequate findings in support of its ratemaking decision.

               We similarly conclude that the commission’s decision to approve statewide rates is

supported by substantial evidence. Dallas emphasizes its evidence that TXU Gas’s costs of service

are lower within the “Dallas Distribution System” than elsewhere in the utility’s service area,

dismisses TXU Gas’s Houle’s contrary statements as “conclusory” and incompetent, and urges that

                                                  17
substantial evidence does not support the commission’s determination that TXU Gas’s statewide

rates were just, reasonable, and non-discriminatory (at least with respect to “Dallas Distribution

System” customers). Taken to its logical extreme, Dallas’s argument would imply that if a party

presents evidence that a gas utility’s proposed rates would disproportionately impact or exceed the

cost of serving any particular area the party might identify—a region, city, neighborhood, or even

a single customer—the utility must set individually-tailored rates for that area lest it “discriminate”

against that area’s customers. Dallas insists that the “Dallas Distribution System” is distinguishable

from such arbitrary classifications because it is an “integrated system” for which rates have

historically been set separately. However, the commission heard Houle’s testimony that the

“Dallas Distribution System” as it exists today is itself an arbitrary characterization because it is not

“independent and isolated” but “uniquely inter-related with other systems due to the fact that it is

completely surrounded by other large, densely populated areas” in which customers “often utilize

the same pipeline and distribution network that serves customers in the Dallas Distribution System.”

Houle also testified as to several other justifications for statewide rates, including that such rates

would reduce future rate case expenses, would be more “transparent” and easier to understand, and

would help equalize the impact of TXU Gas’s investments and costs across its service area.

Although Dallas criticizes Houle’s testimony for, among other things, reflecting a “background . . .

in electric utilities” rather than gas utilities, it was the commission’s province to determine the

weight to be given his testimony. See Texas State Bd. of Med. Exam’rs v. Scheffey, 949 S.W.2d 431,

437 (Tex. App.—Austin 1997, pet. denied).

                                                   18
                In sum, we conclude that the commission, weighing the myriad factors bearing on the

design of TXU Gas’s rates, had a reasonable basis in the record for approving statewide rates

notwithstanding Dallas’s evidence of the costs of service within the “Dallas Distribution System”

if viewed in isolation. We overrule Dallas’s first issue.

Notice

                In its second issue, Dallas contends that TXU Gas’s published notice of its proposed

rate change to “Dallas Distribution System” customers failed to satisfy GURA’s requirements and

that this deficiency constituted a jurisdictional defect that rendered void the commission’s

subsequent increases to these customers’ rates. Specifically, Dallas complains that the notice cited

estimated statewide average rate increases for residential, commercial, and industrial customer

classes that were lower than the average rate increases TXU Gas had proposed for Dallas customers

in the statement of intent it filed with the city. Dallas urges that “the published notice was defective

because it misleadingly described the increase proposed to customers of the Dallas Distribution

System.” We disagree.

                Section 104.103 of GURA requires that a gas utility requesting a rate change shall:

         (1)    publish, in conspicuous form, notice to the public of the proposed increase
                once each week for four successive weeks in a newspaper having general
                circulation in each county containing territory affected by the proposed
                increase; and

         (2)    provide notice of the proposed increase to any other affected person as
                required by the regulatory authority’s rules.

                                                  19
Tex. Util. Code Ann. § 104.103(a). TXU Gas published its notice once per week in newspapers of

general circulation that included the Dallas Morning News. The notice contained information that

included the following:

•      TXU Gas intended “to implement a new schedule of rates for natural gas service to be charged
       to all of the customers served by the Company in the incorporated municipalities and
       unincorporated areas in the Company’s statewide natural gas system.”

•      “The proposed revisions to the respective rate schedules will impact all classes of service and
       all fees and charges presently being assessed by the Company on its transmission and
       distribution system,” including “approximately 1,344,030 residential, 125,603 commercial,
       and 1,441 industrial sales and transportation customers.”

•      As of the filing date of its statement of intent to change rates, the proposed rates were
       expected to “approximately produce” a 7.24 percent increase in the company’s annual
       revenues from customers in the system. The proposed change would constitute a “‘major’
       change as that term is defined by Section 104.101 of the Texas Utilities Code.”

•      “The proposed change will have differing impacts on individual customers, depending on
       consumption and current applicable rate schedules.”

•      A residential customer receiving a bill for 6 Mcf would incur “an average increase of
       approximately $3.59 per month a 9.4% increase”; a commercial customer receiving a bill for
       30 Mcf would incur “an average increase of approximately $13.91 per month or a 8.7%
       increase”; while “[t]he effect of the proposed changes to rates and services for individual
       customers, which may be significant for individual customers, will vary depending on type
       of service and consumption.”

The notice further indicated that “[a] complete copy of the Statement of Intent” was available for

inspection in TXU Gas’s business offices, provided the offices’ address, and invited “[p]ersons with

specific area questions or who want information about this filing” to contact TXU Gas via a toll-free

telephone number. The notice also provided information regarding the procedures and deadlines for

filing comments or protesting the proposed rate change. A final paragraph was written in Spanish and

provided a contact phone number.

                                                 20
               The commission found that TXU Gas “published public notice of the proposed rate

changes once a week for four or more consecutive weeks in newspapers of general circulation in each

county that contains territory affected by the proposed changes” and that its “publication of notice

meets the statutory and rule requirements of notice and provides sufficient information to rate payers

about the statement of intent.” Based on these fact findings, the commission made the conclusion of

law that “[i]n accordance with Tex. Util. Code Ann. § 104.103” and commission rules, “adequate

notice was properly provided.”

               Dallas assails these findings on the basis that the statement of intent TXU Gas filed

with Dallas requested an approximately 14 percent increase for a 6 Mcf residential customer and a

roughly 12.73 percent increase for a 40 Mcf commercial customer, in contrast to the respective

9.4 percent and 8.7 percent estimated statewide average increases referenced in the published notice.

Dallas accuses TXU Gas of having “withheld material facts from its notice, and affirmatively stat[ing]

incorrect facts in its notice.” However, the notice plainly advised TXU Gas’s customers that the

utility was implementing new rate schedules for natural gas services to be charged to all TXU Gas

customers statewide, that the change would “impact all classes of service and all fees and charges

presently being assessed,” and that the proposed change would constitute a “major” change under

GURA. The notice reflected that residential and commercial customers would each incur an “average

increase” of roughly 9 percent in their charges. Dallas does not assert these estimates were

inaccurate as to the average impact of the proposed changes on TXU Gas’s customers systemwide.

Further, the notice cautioned that “[t]he proposed change will have differing impacts on individual

customers, depending on consumption and current applicable rate schedules,” and referred customers

                                                 21
to the statement of intent and a toll-free telephone number for more information. The commission

found that the notice complied with GURA section 104.303(a)’s requirement of “notice to the

public of the proposed increase.” We conclude that its construction of the statute is reasonable and

entitled to deference, see CenterPoint Energy Houston Elec., LLC v. Gulf Coast Coal. of Cities,

252 S.W.3d 1, 27-28 (Tex. App.—Austin 2008, pet. filed), and that substantial evidence supports the

commission’s finding that TXU Gas had complied with it.5 We overrule Dallas’s second issue.

Jurisdiction to set statewide rates

               Finally, in its third issue, Dallas argues that the commission never acquired jurisdiction

over the rates within eighty-six of the municipalities in TXU Gas’s service area. Dallas’s

arguments are predicated on implications it draws from these cities’ responses to its May 2003

statement of intent.

               After TXU Gas filed its statement of intent with each municipality in its service area,

thirty-one municipalities either took no action or suspended the effective date of TXU Gas’s proposed

change, then took no action. See Tex. Util. Code Ann. § 104.107. The parties agree that these

municipalities were deemed to have approved TXU Gas’s new distribution rates within their

respective boundaries. See id. The other fifty-five cities purported to surrender their exclusive

original jurisdiction over TXU Gas’s distribution rates within their boundaries to the commission.

See id. § 103.003. Dallas argues that because the cities purporting to surrender jurisdiction did not

       5
          TXU Gas asserts that even if the published notice was defective, it would not constitute
a jurisdictional defect. We need not reach this question because we conclude that substantial
evidence supports the commission’s findings that the notice complied with GURA.

                                                  22
act until after TXU Gas had filed its statement of intent, their action was ineffective because GURA

section 103.003(c) provides that “[a] municipality may not elect to surrender its jurisdiction while a

case involving the municipality is pending.” Id. § 103.003(c). Consequently, Dallas continues,

these municipalities actually retained jurisdiction and, by not taking further action to approve or reject

TXU Gas’s request, were deemed to have approved the new distribution rates within their boundaries.

See id. § 104.107.

                Because all eighty-six municipalities were thus deemed to have approved TXU Gas’s

proposed distribution rates within their boundaries, Dallas further reasons, “there was no case or

controversy” as to TXU Gas’s rates within those municipalities and TXU Gas’s subsequent appeals

were therefore ineffective to invoke the commission’s appellate jurisdiction. “As a result,” Dallas

urges, “not only were the state-wide rates ordered not state-wide, but the Commission erred in not

considering the revenues from those areas in setting rates for the rest of the state.” The commission

and TXU Gas respond that GURA section 103.051—“A party to a rate proceeding before a

municipality’s governing body may appeal the governing body’s decision to the railroad

commission”—does not condition a party’s right to appeal on being aggrieved or having lost. Id.

§ 103.051.6 TXU Gas adds that individual municipalities’ deemed approvals of the rates it requested

in its statement of intent would not resolve the controversy underlying its request because the deemed

approvals would yield only piecemeal local rates, not the statewide rates it was seeking. As Dallas

        6
          The appellees also dispute Dallas’s assertions that the fifty-five municipalities who
surrendered their jurisdiction could not validly do so once TXU Gas had filed its statement of intent.
Because we conclude that the commission would have had appellate jurisdiction of TXU Gas’s
appeals from these cities even if these cities’ surrenders of jurisdiction had not been effective, we
need not reach that issue.

                                                   23
suggests, excluding data from these municipalities when setting an otherwise statewide rate would

have invariably yielded inconsistencies between the two sets of rates.7 We agree with appellees that

the commission had jurisdiction over TXU Gas’s appeals from these municipalities. We overrule

Dallas’s third issue.

                                         CONCLUSION

               Having overruled Dallas’s issues, we affirm the judgment of the district court.

                                              __________________________________________

                                              Bob Pemberton, Justice

Before Justices Puryear, Pemberton and Waldrop

Affirmed

Filed: November 6, 2008

       7
         We also observe that the statewide rates ultimately approved by the commission differed
in some respects from the statewide rates TXU Gas proposed in its statements of intent.

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