Opinion issued June 25, 2015.




                                       In The

                                Court of Appeals
                                      For The

                           First District of Texas
                              ————————————
                               NO. 01-14-00102-CV
                             ———————————
     NAVARRO COUNTY WHOLESALE RATEPAYERS; M.E.N. WATER
    SUPPLY CORPORATION; ANGUS WATER SUPPLY CORPORATION;
     CHATFIELD WATER SUPPLY CORPORATION; CORBET WATER
     SUPPLY CORPORATION; CITY OF BLOOMING GROVE; CITY OF
    FROST; CITY OF KERENS; AND COMMUNITY WATER COMPANY,
                            Appellants
                                         V.
   ZACHARY COVAR, EXECUTIVE DIRECTOR OF THE TEXAS
  COMMISSION ON ENVIRONMENTAL QUALITY; THE TEXAS
      COMMISSION ON ENVIRONMENTAL QUALITY, ITS
COMMISSIONERS, BRYAN SHAW, CARLOS RUBENSTEIN AND TOBY
         BAKER, AND CITY OF CORSICANA, Appellees


                    On Appeal from the 419th District Court
                           Travis County, Texas1


1
       Pursuant to its docket equalization authority, the Supreme Court of Texas
       transferred the appeal to this Court. See Misc. Docket No. 14-001 (Tex. Jan. 7,
                    Trial Court Case No. D-1-GN-12-000226


                          MEMORANDUM OPINION

      This is an administrative law case in which the plaintiffs, wholesale

purchasers of water from the City of Corsicana, challenge the trial court’s

judgment affirming an order by the Texas Commission on Environmental Quality

that dismissed their rate appeal. At issue was whether the plaintiffs, pursuant to 30

TEX. ADMIN. CODE § 291.133, carried their burden to show that the protested rate

“adversely affected the public interest.” We affirm.

                                 BACKGROUND

The Parties and the Contracts

      The City of Corsicana is the regional water provider in Navarro County and

provides service to over 11,000 retail customers and 21 wholesale customers.

Plaintiffs are eight of Corsicana’s wholesale customers [collectively, “the

Ratepayers”]. Of Corsicana’s 11,000 retail customers, 9,000 are residential retail

customers. The average water use of a residential retail user is less than 6,000

gallons per month. In contrast, each of the wholesale ratepayers purchases over

1,000,000 gallons of water per month, which it then resells to its own retail

customers.


      2014); see also TEX. GOV’T CODE ANN. § 73.001 (West 2013) (authorizing
      transfer of cases).
                                         2
      Corsicana sells water to the Ratepayers pursuant to individual contracts.

Since the 1960s, the contracts have given Corsicana the right to raise its rates. In

2001, Corsicana created a “standard contract,” which was intended to be used

whenever a wholesale customer amended its contract. Seven of the Ratepayers—

M.E.N. Water Supply Corporation, Angus Water Supply Corporation, Chatfield

Water Supply Corporation, Corbet Water Supply Corporation, City of Frost, and

Community Water Company—entered into the standard contract. Two of the

Ratepayers—City of Blooming Grove and City of Kerens—did not. The standard

contract provides the following regarding rate changes:

      Section 4.02. The rates stated in the contract are the prevailing rates
      which “may be changed or modified from time to time by Seller in
      accordance with Section 4.03 of this Contract during the time it
      remains in effect.

      Section 4.03. Rate Revision. Purchaser acknowledges and agrees that
      Seller’s city council has the right to revise by ordinance, from time to
      time and as needed, the rates charged hereunder to cover all
      reasonable, actual, and expected costs incurred by Seller to provide
      the potable water supply service to Seller’s customers. Except as
      provided in subsection b below, if, during the term of this contract,
      Seller revises its minimum inside city retail water rate, then such
      revised rate shall likewise apply to water usage by Purchaser under
      this Contract.

      Early versions of the contracts in the 1960s and 1970s charged all customers

on a declining block rate, i.e., a rate in which the price per 1,000 gallons decreases

as usage increases. Later, Corsicana used a flat volumetric rate for all customers.

From 2006 to 2008, Corsicana raised its volumetric rate from $2.14 per 1,000
                                          3
gallons to $3.00 per 1,000 gallons. Nevertheless, by 2008, Corsicana’s “Utility

Fund,” which is comprised of revenues and expenses from its water and

wastewater utilities had a $1 million shortfall. Because Corsicana does not operate

on credit, it must have a cash reserve available to cover potential shortfalls and

emergencies.

The 2009 Rate Increase

      One of the ways that Corsicana sought to increase its Utility Fund was to

raise its water rates.   Under the rate adopted, Corsicana charges each of its

customers—both wholesale and retail—a monthly base rate that is determined by

the size of the customer’s meter. The base rates range from $17.60 for a 5/8- or

3/4-inch meter to $1,695.52 for a 10-inch meter. Regardless of the meter size, the

base rate includes the first 1,000 gallons used per month. For water use in excess

of 1,000 gallons per month, Corsicana charges tiered volumetric rates, in inclining

blocks. The volumetric rate is $3.00 per 1,000 gallons for 1-10,000 gallons; $3.15

per 1,000 gallons for 10,001-25,000 gallons; and $3.25 per 1,000 gallons for over

25,000 gallons.

The Ratepayers’ Appeals

      Arguing that the 2009 rate increase disproportionately affected wholesale

ratepayers when compared to residential retail ratepayers, the Ratepayers appealed

Corsicana’s rate change by filing a Petition with the Texas Commission on


                                         4
Environmental Quality [“the Commission”]. The Commission referred the case to

the State Office of Administrative Hearings [“SOAH”], where an Administrative

Law Judge [“ALJ”] conducted a hearing to determine whether the rate change

“affected a public interest.” See 30 TEX. ADMIN. CODE §§ 291.131-.133. After the

hearing, the ALJ issued a Proposal for Decision [“PFD”] and a proposed order

finding that the Ratepayers failed to show that the 2009 rate increase adversely

affected the public interest. After considering the ALJ’s PFD, the Commission

agreed that the Ratepayers had failed to show that the rate change adversely

affected the public interest, holding that “[t]he public-interest inquiry set out in 30

TAC § 291.133(a)(1)-(4) does not include a comparison of the protested rate’s

impacts on wholesale and retail customers.” The Ratepayers then appealed to the

Travis County District Court, which affirmed the Commission’s order dismissing

the rate appeal. This appeal followed.

    PROPRIETY OF COMMISSION’S “PUBLIC INTEREST” RULING

      In four issues on appeal, the Ratepayers contend that:

      1. Rate discrimination must be considered in a public interest
         hearing;

      2. If the Commission correctly interpreted the public interest rules to
         preclude consideration of rate discrimination, the rules are invalid;

      3. Corsicana’s wastewater subsidy is not a “cost of service” issue;
         and



                                          5
      4. Corsicana’s Utility Fund deficit is not a “changed condition” that
         may be considered under 30 TAC § 291.133(a)(3)(B) or a factor
         that supports Corsicana’s 2009 Rate Increase.




Standard of Review

      The substantial-evidence standard of the Texas Administrative Procedure

Act (“APA”) governs our review of the Commission’s final order. See TEX. GOV’T

CODE ANN. § 2001.174 (West 2008). The APA authorizes reversal or remand of an

agency’s decision that prejudices the appellant’s substantial rights because the

administrative findings, inferences, conclusions, or decisions (1) violate a

constitutional or statutory provision, (2) exceed the agency’s statutory authority,

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

or (5) are arbitrary or capricious or characterized by abuse of discretion or clearly

unwarranted exercise of discretion. Id. § 2001.174(2)(A)-(D), (F). Otherwise, we

may affirm the administrative decision if we are satisfied that “substantial

evidence” exists to support it. Id. § 2001.174(1), (2)(E).

      We review the agency’s legal conclusions for errors of law and its factual

findings for support by substantial evidence. Heat Energy Advanced Tech., Inc. v.

W. Dallas Coal. for Envtl. Justice, 962 S.W.2d 288, 294–95 (Tex. App.—Austin

1998, pet. denied). Substantial evidence “does not mean a large or considerable


                                          6
amount of evidence, but rather such relevant evidence as a reasonable mind might

accept as adequate to support a conclusion of fact.” Lauderdale v. Tex. Dep’t of

Agric., 923 S.W.2d 834, 836 (Tex. App.—Austin 1996, no writ) (quoting Pierce v.

Underwood, 487 U.S. 552, 564–65, 108 S. Ct. 2541 (1988)) (internal quotation

marks omitted). We consider the reliable and probative evidence in the record as a

whole when testing an agency’s findings, inferences, conclusions, and decisions to

determine whether they are reasonably supported by substantial evidence. Graff

Chevrolet Co. v. Texas Motor Vehicle Bd., 60 S.W.3d 154, 159 (Tex. App.—

Austin 2001, pet. denied); see TEX. GOV’T CODE ANN. § 2001.174(2)(E). We

presume that the Commission’s order is supported by substantial evidence, and the

Ratepayers bear the burden of proving otherwise. See Tex. Health Facilities

Comm’n v. Charter Med.–Dallas, Inc., 665 S.W.2d 446, 453 (Tex. 1984). The

burden is a heavy one—even a showing that the evidence preponderates against the

agency’s decision will not be enough to overcome it, if there is some reasonable

basis in the record for the action taken by the agency. Id. at 452. Our ultimate

concern is the reasonableness of the agency’s order, not its correctness. Firemen’s

& Policemen’s Civil Serv. Comm’n v. Brinkmeyer, 662 S.W.2d 953, 956 (Tex.

1984).

      To the extent that appellants’ issues address the construction of the

Commission’s rules, we review these questions de novo. Rodriguez v. Serv. Lloyds


                                        7
Ins. Co., 997 S.W.2d 248, 254 (Tex. 1999). In general, “[w]e construe

administrative rules, which have the same force as statutes, in the same manner as

statutes.” Id.; see also State v. Shumake, 199 S.W.3d 279, 284 (Tex. 2006)

(addressing statutory construction). “Unless the rule is ambiguous, we follow the

rule’s clear language.” Rodriguez, 997 S.W.2d at 254 (citation omitted). “If there is

vagueness, ambiguity, or room for policy determinations in a statute or regulation,

. . . we normally defer to an agency’s interpretation unless it is plainly erroneous or

inconsistent with the language of the statute, regulation, or rule.” TGS–NOPEC

Geophysical Co. v. Combs, 340 S.W.3d 432, 438 (Tex. 2011).

      Whether the agency’s order satisfies the substantial-evidence standard is a

question of law. Id. Thus, the district court’s judgment that there was substantial

evidence supporting the Commission’s final order is not entitled to deference on

appeal. See Tex. Dep’t of Pub. Safety v. Alford, 209 S.W.3d 101, 103 (Tex. 2006)

(per curiam). On appeal from the district court’s judgment, the focus of the

appellate court’s review, as in the district court, is on the agency’s decision. See

Montgomery Indep. Sch. Dist. v. Davis, 34 S.W.3d 559, 562 (Tex. 2000); Tave v.

Alanis, 109 S.W.3d 890, 893 (Tex. App.—Dallas 2003, no pet.).

Applicable Principles of Law

      The Commission’s jurisdiction in this case arose from Sections 11.036 and

11.041 of the Texas Water Code, which provide:


                                          8
      (a) A person . . . having in possession and control any storm water,
          floodwater, or rainwater that is conserved or stored as authorized
          by this chapter may contract to supply the water to any person . . .
          having the right to acquire use of the water.

      (b) The price and terms of the contract shall be just and reasonable
          and without discrimination . . . .

TEX. WATER CODE ANN. § 11.036(a)-(b). (Vernon 2008) (emphasis added).

      (a) Any person entitled to receive or use water . . . from any conserved or
          stored supply may present to the commission a written petition showing:
          (1) that he is entitled to receive or use the water;
          (2) that he is willing and able to pay a just a reasonable price for the
              water;
          (3) that the party owning or controlling the water supply has water not
              contracted to others and available for the petitioner’s use; and
          (4) that the party owning or controlling the water supply fails or refused
              to supply the available water to the petitioner, or that the price or
              rental demanded for the available water is not reasonable and just
              or is discriminatory.

TEX. WATER CODE ANN. § 11.041(a) (Vernon Supp. 2014) (emphasis added).

      In Texas Water Comm’n v. City of Fort Worth, 875 S.W.2d 332, 335 (Tex.

App.—Austin 1994, writ denied), the court recognized that the Texas Constitution

limits the State’s ability to pass laws that impair contractual obligations to

instances wherein the public safety and welfare must be protected. The court then

held that before the Commission could modify a rate set by contract, the

Commission must first make a finding that the challenged rates “adversely affect

the public interest by being unreasonably preferential, prejudicial, or

discriminatory.” Id. at 336.



                                            9
      In the wake of the City of Fort Worth case, the Commission adopted the

wholesale-service rules found in Subchapter I of Chapter 291 of the Texas

Administrative Code, which are applicable to this case because it involves a

petition to review rates charged for the sale of water for resale. See 30 TEX. ADMIN.

CODE §§ 291.128-291.138. The wholesale service rules set up a two-step process

for reviewing challenged rates set by contract: (1) there must be a determination

that a public interest is adversely affected, and only if such a public interest is

found; 2) will the Commission review the rate. Id.

      For a petition to review a rate that is charged pursuant to a written contract,

the executive director of the Commission will forward the petition to SOAH to

conduct a hearing on public interest, and SOAH will conduct an evidentiary

hearing to determine whether the protested rate adversely affects the public

interest. 30 TEX. ADMIN. CODE §§ 291.131(b), 291.132(a). The ALJ then prepares

a proposal for decision and order with proposed findings of fact and conclusions of

law concerning whether the protested rate adversely affects the public interest and

submits this recommendation to the commission.           30 TEX. ADMIN. CODE §

291.132(c). The Commission determines whether the challenged rate adversely

affects the public interest by applying section 291.133 of the Administrative Code,

which provides as follows:

      (a) the commission shall determine the protested rate adversely
      affects the public interest if after the evidentiary hearing on public
                                         10
interest the commission concludes at least one of the public interest
criteria have been violated:

  (1) the protested rate impairs the seller’s ability to continue to
  provide service, based on the seller’s financial integrity and
  operational capability;

  (2) the protested rate impairs the purchaser’s ability to continue to
  provide service to its retail customers, based on the purchaser’s
  financial integrity and operational capability;

  (3) the protested rate evidences the seller’s abuse of monopoly
  power in its provision of water or sewer service to the purchaser.
  In making this inquiry, the commission shall weigh all relevant
  factors. The factors may include:

      (A) the disparate bargaining power of the parties, including the
         purchaser’s     alternative    means,    alternative    costs,
         environmental impact, regulatory issues, and problems of
         obtaining alternative water or sewer service;

      (B) the seller’s failure to reasonably demonstrate the changed
          conditions that are the basis for a change in rates;

      (C) the seller changed the computation of the revenue
          requirement or rate from one methodology to another;

      (D)where the seller demands the protested rate pursuant to a
         contract, other valuable consideration received by a party
         incident to the contract;

      (E) incentives necessary to encourage regional projects or water
          conservation measures;

      (F) the seller’s obligation to meet federal and state wastewater
          discharge and drinking water standards;

      (G) the rates charged in Texas by other sellers of water or sewer
         service for resale;


                                  11
             (H) the seller’s rates for water or sewer service charged to its
                retail customers, compared to the retail rates the purchaser
                charges its retail customers as a result of the wholesale rate
                the seller demands from the purchaser;

         (4) the protested rate is unreasonably preferential, prejudicial, or
            discriminatory, compared to the wholesale rates the seller charges
            other wholesale customers.

      (b) The commission shall not determine whether the protested rate
          adversely affects the public interest based on an analysis of the
          seller’s cost of service.

30 TEX. ADMIN. CODE § 291.133.

      The public interest does not require that a wholesale rate be equal to the

seller’s cost of providing that service, thus a cost-of-service analysis is

inappropriate unless and until the Commission determines that the challenged rate

affects a public interest. See 30 TEX. ADMIN. CODE § 291.133(b). The petitioner

has the burden of proof in a public-interest hearing. Id. at § 291.136.

      In their petition, the Ratepayers relied only upon § 291.133(a)(3), arguing

that Corsicana’s rate evidences its abuse of monopoly power.

Disparate Treatment between Retail Customers and Wholesale Customers

      In two related issues on appeal, the Ratepayers contend that the Commission

erred in deciding that rate discrimination cannot be considered in the public

interest analysis under § 291.133, and that, if § 291.133 does in fact preclude

consideration of rate discrimination, the rule is contrary to statutory authority.



                                         12
Critical to the Ratepayers argument is their own definition of rate discrimination as

“the disparate treatment of retail and wholesale customers.”

      In his proposal for decision, the ALJ concluded that “the public-interest

inquiry is limited to the factors set out in 30 TAC § 291.133(a)(1)-(4). It does not

include a comparison of protested rate’s impacts on wholesale and retail

customers.” The Commission’s final order did not limit the public interest inquiry

to the factors set out in § 291.133(a), but did agree that “[t]he public-interest

inquiry set out in 30 TAC § 291.133(a)(1)-(4) does not include a comparison of the

protested rate’s impacts on wholesale and retail customers.”

      We agree that the factors listed in § 291.133(a)(3) are non-exclusive, and

other factors may be considered if appropriate. Section 291.133(a)(3) provides that

when determining whether the seller has abused its monopoly power, “the

commission shall weigh all relevant factors[,] which “may include” the eight

factors specifically set forth in the rule.       See 30 TEX. ADMIN. CODE §

291.133(a)(3)(A-H). The use of the word “may” “creates discretionary authority

or grants permission or a power.” See TEX. GOV’T CODE ANN. § 311.016 (Vernon

2013). Nothing in the rule limits the Commission to considering only the factors

listed, and indeed, the Commission is not required to consider all of the factors

listed, only those that are relevant. However, the fact that the Commission may




                                         13
consider factors other than those listed does not answer the question of whether it

should have done so in this case.

      The issue before this Court is not—as the Ratepayers argue—whether the

trial court refused to consider rate discrimination as a factor. It clearly did not

refuse to consider rate discrimination because the very purpose behind a public

interest hearing is to determine whether the challenged contractual rate “adversely

affect[s] the public interest by being unreasonably preferential, prejudicial, or

discriminatory.” City of Fort Worth, 875 S.W.2d at 336. The issue, properly

framed, is whether the Commission must consider the disparate impact of a rate

change on wholesale and retail customers as a factor when determining whether

there has been an abuse of monopoly power by the seller under § 291.133(a)(3).

      The Ratepayers base their rate discrimination argument on language found

in the preamble to the Commission’s adoption of the Wholesale Water or Sewer

Service Rules, specifically focusing on 30 TEX. ADMIN. CODE § 291.133(a)(3)(A-

H), the abuse of monopoly power provision that is the basis for the Ratepayers’

petition. The portion of the preamble relied on by Ratepayers provides as follows:

      One commenter argued that the public interest criteria in § 291.133(a)
      (4) should concern unreasonable discrimination between customers,
      but should only focus on wholesale customers. The commission
      agrees that a comparison of the protested rate with rates the seller
      charges other wholesale customers is relevant to the public interest
      inquiry, and the statutory language gives sufficient guidance
      concerning the scope of the inquiry. The public interest inquiry
      under paragraph § 291.133(a)(3) should sufficiently cover whether
                                        14
      any disparity in treatment between retail and wholesale customers
      adversely affects the public interest. Accordingly, the adopted rules
      includes a revised paragraph § 291.133(a)(4) which uses the statutory
      language found in the Water Code, § 13.047(j), that the rate shall not
      be unreasonably preferential, prejudicial, or discriminatory and
      specifies that under the subsection the inquiry shall be limited to a
      comparison of seller’s rates charged to wholesale customers. A
      commenter argued that § 291.133(a)(4) imposed an unlawful standard
      to determine the public interest because the subsection inquired
      concerning the mere appearance of discrimination, as opposed to the
      existence of discrimination. This issue has been resolved by the
      adopted changes which inquire whether the protested rate is
      unreasonable preferential, prejudicial, or discriminatory.

19 Tex. Reg. 6229 (1994) (emphasis added).            The Ratepayers argue that the

highlighted sentence in the preamble above is proof that § 291.133(a)(3)—the

abuse-of-monopoly power section—is intended to consider disparate treatment of

wholesale and retail customers as a factor in an abuse-of-monopoly power analysis

even though that factor is not one of those listed.

      Corsicana responds that, taken in context, the preamble does not support an

expansion of the factors listed in §291.133(a)(3) to include a consideration of the

disparate impact of a rate change on retail and wholesale customers. We agree

with Corsicana.

      The portion of the preamble relied upon by the Ratepayers was in response

to comments submitted regarding the original proposed version of § 291.133(a)(4),

which provided that the public interest would be violated if:




                                          15
      The protested rate appears to discriminate between the purchaser and
      others who purchase water or sewer service from the seller, and the
      seller does not provide reasonable support for such discrimination.

19 Tex. Reg. 3899 et seq. (1994). As originally proposed, section 291.133(a)(4)

would have permitted the analysis the Ratepayers urge here, i.e., a comparison of

the impact of a protested rate on wholesale and retail customers and whether such

disparate treatment was discriminatory. However, the commenter suggested that

this analysis should be confined to comparing the treatment of wholesale

customers, and the Commission agreed, stating in the preamble that “a comparison

of the protested rate with rates the seller charges other wholesale customers is

relevant to the public interest inquiry.” Therefore, in response to the comment to

the originally proposed § 291.133(a)(4), the Commission adopted the current

version, which provides that the public interest criteria has been violated if:

      [t]he protested rate is unreasonably preferential, prejudicial, or
      discriminatory, compared to the wholesale rates the seller charges
      other wholesale customers.

30 TEX. ADMIN. CODE § 291.133(a)(4). If we were to interpret § 291.133(a)(3) to

include a comparison of the impact of a rate on wholesale and retail customers, it

would effectively negate the change that the Commission made to § 291.133(a)(4),

which was intended to narrow the comparison to consider the effect as between

wholesale customers only.




                                          16
      Our conclusion that § 291.133(a)(3) does not include a comparison of the

impact of the rate on wholesale versus retail customers is supported by looking at

the terms of § 291.133(a)(3) itself. One of the factors that is listed requires a

comparison of “the seller’s rates for water or sewer service charged to its retail

customers, compared to the retail rates the purchaser charges its retail customers as

a result of the wholesale rates the seller demands from the purchase.” 30 TEX.

ADMIN. CODE § 291.133(a)(3)(H). In other words, the Commission determines

whether the rate unfairly discriminates against wholesalers by comparing the rate

Corsicana charges its own retail customer with the rate that the Ratepayer charge

their retail customers as a result of the wholesale rate it pays Corsicana. This

analysis compares “apples to apples” by looking at whether Corsicana favors its

own retail customers at the expense of the Ratepayers’ retail customers, thereby

recognizing that the Ratepayers’ costs of acquiring the water will eventually be

passed along to its own retail customers.       In other words, if the Ratepayers’

customers pay the same or less than Corsicana’s own retail customers, that factors

weighs against a finding that the contracted for rate is discriminatory.

      At the public interest hearing, there was evidence that, assuming an average

6,000 gallon use per month, an average retail customer pays the Ratepayers $3.45

or less per 1,000 gallons of water due to the wholesale rate that Corsicana charges

the Ratepayers, while Corsicana’s own average retail customer pays Corsicana an


                                          17
average of $5.43 per 1,000 gallons.2 As such, the Ratepayers’ retail customers

actually pay less for water than Corsicana’s own retail customers.

      Also, we note that the public interest rule requires the Commission to

determine whether the protested rate adversely affects the public interest.

Corsicana’s rates are the same for both retail and wholesale customers.             The

difference in the impact of the rate is attributable to water usage, not the

customer’s status as a wholesale or retail customer. Indeed, there was evidence

that 31 of Corsicana’s 50 highest volume water customers were retail customers

who paid the same higher rates as the wholesale customers. Thus, the Ratepayers

claim that the disputed rate treats wholesale and retail customers differently is not

supported by the record.

      The Ratepayers also point to a comment by Corsicana’s mayor as evidence

of Corsicana’s intent to discriminate against wholesale buyers. When questioned

about why Corsicana adopted an inclining block volumetric rate, there was

evidence that the Mayor responded that it was because the wholesale customers

“don’t vote.”    However, the mayor’s individual mental process, subjective

knowledge, or motive is irrelevant to a legislative act of Corsicana’s city counsel.

See City of Corpus Christi v. Bayfront Assocs., Ltd., 814 S.W.2d 98, 105 (Tex.

2
      This difference is largely attributable to the fact that the Ratepayers are able to
      apportion their base rate among their retail customers. Thus, the base rate by the
      Ratepayers’ retail customer is less than the base rate paid by Corsicana’s own
      retail customers even though their volumetric rate may be higher.
                                          18
App.—Corpus Christi 1991, writ denied) (stating that “an individual city council

member’s mental process, subjective knowledge, or motive is irrelevant to a

legislative act of the city, such as the passage of an ordinance”); Mayhew v. Town

of Sunnyvale, 774 S.W.2d 284, 298 (Tex. App.— Dallas 1989, writ denied)

(“These principles are consistent with the basic doctrine that the subjective

knowledge, motive, or mental process of an individual legislator is irrelevant to a

determination of the validity of a legislative act because the legislative act

expresses the collective will of the legislative body.”).

      In related issue two, the Ratepayers argue that “[i]f the Commission

correctly interpreted the public interest rules to preclude consideration of rate

discrimination, the rules are invalid.” However, the Commission did not conclude

that rate discrimination was irrelevant; instead it decided that comparing the

disparate impact of a rate on wholesale versus retail customers was not a proper

consideration for determining rate discrimination.

      We agree with the Commission that “[t]he public-interest inquiry set out in

30 TAC § 291.133(a)(1)-(4) does not include a comparison of the protested rate’s

impacts on wholesale and retail customers.” The rule, as written, adequately

addresses the issue of rate discrimination by comparing (1) the treatment of

wholesale customers to other wholesale customers [in § 291.133(a)(4)] and (2) the

treatment of the seller’s own retail customers to the wholesale buyer’s retail


                                          19
customers [in § 291.133(a)(3)(H)]. The Commission did not err by deciding that a

comparison of the impact of the challenged rate on wholesale as opposed to retail

customers was inappropriate.

      Accordingly, we overrule issues one and two.

“Cost of Service” Issues

      When the Commission sets utility rates, the rates are based on the utility’s

cost of rendering service; two components of cost of service are allowable

expenses and return on invested capital. 30 TEX. ADMIN. CODE § 291.31(a). “Only

those expenses that are reasonable and necessary to provide service to the

ratepayer may be included in the allowable expenses.” 30 TEX. ADMIN. CODE §

291.31(b).   “The commission shall not determine whether the protested rate

adversely affects the public interest based on an analysis of the seller’s cost of

service.” 30 TEX. ADMIN. CODE § 291.133(b).           A cost-of-service analysis is

inappropriate unless and until the Commission determines that the challenged rate

affects a public interest. Id. Therefore, cost-of-service evidence is irrelevant to

determining whether a protested rate adversely affects the public interest.

      The “Wastewater Subsidy” Evidence

      The Ratepayers claim that Corsicana adopted the protested water rates to

shift a shortfall in its wastewater service revenue to its out-of-city wholesale water

customers.   They claim that a shortfall in Corsicana’s Utility Fund, which is


                                         20
comprised of revenues and expenses from both its water and wastewater utilities,

was due to its rates for wastewater utility service being too low to cover the

expenses of wastewater service. The gist of the Ratepayers’ claim is that the rates

they pay are actually subsidizing Corsicana’s wastewater service and are not

necessary and reasonable to provide water service to them.

      In issue three, the Ratepayers contend the Commission erred in deciding that

their “wastewater subsidy” argument and evidence proffered in support thereof

was a cost-of-service issue and could not be considered as part of its public interest

analysis. We disagree. In order for the Commission to determine whether there

was in fact a subsidy, it would necessarily have to examine the costs and revenues

of both the water and wastewater services, because both are combined in the

Utility Fund. Section 291.133(b) clearly prohibits such an inquiry. Thus, we

conclude that the Commission properly refused to consider the Ratepayers’

“wastewater subsidy” evidence and argument in conducting its public interest

analysis.

      We overrule issue three.

      The “Changed Conditions” Issue

      One of the factors that the Commission may consider in determining

whether there has been abuse of monopoly power affecting the public interest is

“the seller’s failure to reasonably demonstrate that changed conditions are the basis


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for a change in rates[.]”    30 TEX. ADMIN. CODE § 291.133(a)(3)(B). At the

hearing, Corsicana presented evidence of “changed conditions,” i.e., the fact that

its Utility Fund had a $1 million shortfall and that Corsicana needs a cash reserve

available to deal with emergencies. In issue four, the Ratepayers contend that the

Commission erred by considering the Utility Fund deficit as a changed condition

while excluding consideration of its “wastewater deficit” as prohibited cost-of-

service evidence. We disagree.

       The “wastewater subsidy” argument would have required the Commission to

delve into the cause of the Utility Fund deficit, which would necessarily have

required consideration of the costs of service of both water and wastewater

services. However, in considering the Utility Fund as a “changed circumstance,”

the fact of the deficit, not its cause, is important. Indeed, in its proposal for

decision, the ALJ noted that there were several possible causes for the Utility Fund

deficit:

       It is certainly possible that the deficit in the Utility Fund was cause
       wholly or partially by water-service rates that were too low to cover
       the cost of providing that service. The deficit could also have been
       caused in whole or in party by sewer service rates that were too low or
       by unreasonably high water or sewer expenses, or both. Drilling
       down further, it might be that the deficit in the Utility Fund was due to
       rates for certain types of customers being lower than the cost of
       serving them while other customers paid rates that were sufficient to
       cover the cost of their service. However, those are all cost-of-service
       issues that are outside the scope of the current proceeding to
       determine whether the protested rates adversely affect the public
       interest.
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      Regardless of its cause or causes, the uncontradicted evidence shows
      that the shortfall in the Utility Fund existed at the time Corsicana
      raised its water rates. Since the evidence also shows that an operating
      reserve is necessary to pay for emergencies and shortfalls in the cost
      of providing water service and that the Utility Fund served as
      Corsicana’s operating reserve for that purpose, the ALJ concludes that
      the deficit in the Utility Fund, regardless of its cause or causes, was a
      changed condition that gave Corsicana a reasonable basis for
      increasing its water rates.

The Commission agreed with the ALJ, stating that “[t]he $1 million deficit in

Corsicana’s Utility Fund, regardless of its cause or causes, was a changed

condition that gave Corsicana a reasonable basis for increasing its water rates.”

Because considering the depleted Utility Fund as a changed circumstance did not

require an inquiry into the cause of its deficit, whereas the “wastewater subsidy”

argument did, the ALJ and the Commission did not run afoul of the prohibition

against “cost-of-service” evidence in considering it, and in concluding that

Corsicana had shown changed circumstances justifying its challenged rate.

      We overrule issue four.

                                     CONCLUSION

      We affirm the trial court’s judgment.



                                              Sherry Radack
                                              Chief Justice


Panel consists of Chief Justice Radack and Justices Brown and Lloyd.
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