         TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN



                                        NO. 03-02-00547-CV



 Public Utility Commission of Texas and South Texas Electric Cooperative, Inc., Appellants

                                                   v.

                       City Public Service Board of San Antonio, Appellee




        FROM THE DISTRICT COURT OF TRAVIS COUNTY, 201ST JUDICIAL DISTRICT
               NO. 97-11665, HONORABLE PAUL DAVIS, JUDGE PRESIDING




                                            OPINION


               In this appeal, we must decide whether the Public Utility Commission exceeded its statutory

authority by conducting a proceeding to determine the transmission cost of service (TCOS) for the City

Public Service Board of San Antonio (San Antonio) as a part of its regulatory oversight of the wholesale

energy market under the Public Utility Regulatory Act of 1995 (PURA 95). A utility=s TCOS includes all

reasonable and necessary expenses, plus a reasonable return on investments, associated with owning and

operating its transmission network. The Commission held individual TCOS proceedings for every utility in

the statewide power-transmission grid. Then, the Commission proceeded to use the utilities= TCOS

numbers to set statewide rates for use of transmission lines in wholesale energy transactions. While the
Commission was conducting these proceedings, San Antonio brought a declaratory-judgment action

challenging the Commission=s authority to enact a wholesale rate-setting scheme under PURA 95. San

Antonio eventually prevailed when the supreme court declared the rate-setting rules to be invalid. See

Public Util. Comm=n v. City Pub. Serv. Bd. of San Antonio, 53 S.W.3d 310, 325 (Tex. 2001). Relying

on the supreme-court decision, the district court Areversed and vacated@ the Commission=s order in San

Antonio=s TCOS case. The Commission appeals,1 contending that although it cannot use the TCOS

numbers to set rates, it can use them to carry out its other responsibilities under PURA 95. Because we

think that determining a utility=s TCOS number is tantamount to setting its transmission-service rates, we

affirm the district court=s judgment reversing the Commission=s order.


                                            BACKGROUND

                Texas utilities have voluntarily interconnected their regional transmission networks to form a

single grid called the Electric Reliability Council of Texas (ERCOT). When power is sold in a wholesale

transaction, it is transported over this ERCOT grid. Prior to PURA 95, utilities whose transmission

networks were directly connected within the grid could sell power to one another in Abundled@ transactions

which used a single rate to cover generation, transmission, and distribution services. However, not all



        1
          In addition to the Commission, an intervenor, South Texas Electric Cooperative, Inc., urges us to
reverse the trial court=s judgment. Because its arguments are substantially the same as the Commission=s,
we will treat them together.




                                                     2
wholesale transactions were between utilities with directly connected networks; many such transactions

required power to be transmitted or Awheeled@ over the networks of other utilities. In these cases,

payments to the wheeling utilities were negotiated on a case-by-case basis. PURA 95 eliminates these

distinctions and requires utilities to offer nondiscriminatory access to their transmission facilities and to

charge uniform rates for such access.


PURA 95

                 In 1995, the legislature amended PURA to promote competition in the wholesale electricity

market. See Act of May 28, 1995, 74th Leg., R.S., ch. 765, ' 2.01(a), 1995 Tex. Gen. Laws 3972,

3988-89 (codified at Tex. Util. Code Ann. ' 31.001(c)). The centerpiece of PURA 95=s wholesale-

deregulation scheme is a requirement that electric utilities provide open access to their transmission facilities.

See id. ' 2.08, 1995 Tex. Gen. Laws at 4000 (Tex. Util. Code Ann. ' 35.004, since amended). In this

open-access regime, each utility must provide transmission service at rates and terms comparable to what it

costs the utility to operate its own system. Id. This requires the utilities to separate or Aunbundle@ the costs

associated with their transmission facilities from the costs associated with their generation and distribution

facilities.

                 PURA 95 gives the Commission several responsibilities related to oversight of the

transmission-service market. The Commission is directed to ensure that each utility provide transmission

service in a nondiscriminatory manner, and recover its reasonable costs in providing such transmission

service so that the utility=s other customers are not required to bear those costs. See id. PURA 95 also



                                                        3
provides that A[t]he [C]ommission may require a utility . . . to provide transmission service at wholesale to

another utility . . . and may determine whether the terms and conditions for the transmission service are

reasonable.@ See id. ' 2.07, 1995 Tex. Gen. Laws at 3999 (Tex. Util. Code Ann. ' 35.005, since

amended). Moreover, the Commission is authorized to require parties with wholesale-transmission disputes

to submit to nonbinding alternative dispute resolution. See Tex. Util. Code Ann. ' 35.008 (West 1998). In

order to fulfill these responsibilities, the Commission must Aadopt rules relating to wholesale transmission

service, rates, and terms.@ See id. ' 35.006(a) (emphasis added). Utilities that own transmission facilities

are, in turn, required to Afile a tariff in compliance with [C]ommission rules.@ See id. ' 35.007(a).


The Rules

                The Commission adopted rules governing wholesale-transmission in 1996. See 21 Tex.

Reg. 1397 (1996), adopting 16 Tex. Admin. Code ' 23.67 [hereinafter Rule 23.67], and 21 Tex. Reg.

3343 (1996), adopting 16 Tex. Admin. Code 23.70 [hereinafter Rule 23.70]. These rules required each

ERCOT utility to pay every other ERCOT utility a Afacilities charge@ for transmission service. See Rule

23.67(g). Each ERCOT utility was to pay this facilities charge in its capacity as a transmission customer,

and to receive a portion of the facilities charges paid by other utilities in its capacity as a transmission

provider. This facilities charge had two components, an Aimpact fee@ and an Aaccess fee.@ See Rule

23.67(g)(1). The impact fee made up thirty percent of the facilities charge and was calculated based upon

the distance traveled by the electricity in the transmission customer=s wholesale transactions. See id.; Rule

23.70(o); City Pub. Serv. Bd. v. Public Util. Comm=n, 9 S.W.3d 868, 872-73 (Tex. App.CAustin



                                                     4
2000), aff=d, 53 S.W.3d 310 (Tex. 2001). The access fee, which made up the remaining seventy percent

of the facilities charge, was not distance sensitive. The yearly access fee paid by each utility in its capacity

as a transmission customer was to be based on its percentage of use of the ERCOT grid. More precisely,

the access fee was to reflect the transmission customer=s percentage of the peak-load quantity of electricity

channeled through the ERCOT grid, applied to the TCOS for the entire grid. See City Pub. Serv. Bd., 53

S.W.3d at 314; City Pub. Serv. Bd., 9 S.W.3d at 872; Rule 23.67(g). To calculate access fees, the

Commission was first to determine each ERCOT utility=s TCOS, which consists of its reasonable and

necessary expenses, plus a reasonable return on its investments, related to owning and operating

transmission lines. The Commission was to aggregate those costs to arrive at the TCOS for the entire grid.

The Commission was then to determine the maximum amount of electricity carried on the grid at any one

time during the relevant period, or its Atotal peak load@ and each utility=s percentage of that total. City Pub.

Serv. Bd., 53 S.W.3d at 314; see City Pub. Serv. Bd., 9 S.W.3d at 872; Rule 23.67(g)(1), (5). Each

transmission customer=s access fee was then calculated by multiplying its percentage of the aggregate peak

load for the ERCOT grid by the TCOS for the entire grid. City Pub. Serv. Bd., 53 S.W.3d at 314; see

Rule 23.67(g)(1). Relatedly, the amount that each ERCOT utility received in its capacity as a transmission

provider was to be determined by its individual TCOS as a percentage of the aggregate TCOS for the

entire grid.

                 To set transmission rates pursuant to its rules, the Commission initiated a series of individual

proceedings to determine the TCOS for each ERCOT utility. It also initiated a companion generic

proceeding to resolve common issues and set the transmission rates using the costs determined in the

                                                       5
individual cases. The generic proceeding and the individual proceedings worked together. The Commission

issued a preliminary order separating the general issues to be determined in the generic proceeding from the

utility-specific issues to be determined in the individual proceedings. Once the TCOS numbers were

determined in the individual proceedings, the Commission used those numbers in the generic proceeding to

set transmission-service ratesCi.e., to determine the exact amount that each ERCOT utility was to pay

every other ERCOT utility according to the formula described above.


San Antonio=s Challenge to the Rules

                   While these proceedings were taking place, San Antonio and Houston Lighting and Power

Company each filed declaratory-judgment actions claiming that the Commission had exceeded its statutory

authority in promulgating its wholesale-transmission rules. The causes were consolidated and the trial court

ruled in favor of the Commission. This court then reversed the trial court, agreeing with the utilities that the

Commission had exceeded its authority in promulgating its rules. See City Pub. Serv. Bd., 9 S.W.3d at

877-78. We reasoned that PURA 95 did not grant the Commission authority to establish any transmission-

access rate, regardless of the methodology. See id. at 873. In reaching this conclusion, we explained that

PURA 95 gave the Commission oversight of wholesale transmission service, but not the authority to set

rates initially:


         We believe that the subchapter [dealing with wholesale transmission service], read in
         context, contemplates that negotiations between parties regarding transmission-access
         pricing be voluntary and contractual. Should a party be dissatisfied with the outcome of the
         negotiations, that party may then seek the aid of the [Commission], which can either order



                                                       6
        the parties to submit to alternative dispute resolution, or may settle the dispute by
        establishing a reasonable rate after notice and a contested-case hearing.


See id. at 875. The supreme court affirmed, agreeing that PURA 95 does not grant the Commission

authority to set wholesale transmission rates for municipally owned utilities such as San Antonio, which are

not otherwise subject to the Commission=s traditional ratemaking authority.2 It further elaborated on the

Commission=s oversight role in resolving disputes between the requesting and providing utilities in a way that

ensures that the transmission provider is offering nondiscriminatory access to its network at a reasonable

rate and that the transmission provider=s customers are not unfairly bearing the transmission costs inflicted by

the requesting utility. See City Pub. Serv. Bd., 53 S.W.3d at 320. The Commission does not have the

power to set wholesale transmission rates as an initial matter, but once a dispute arises, it can either refer the

parties to alternative dispute resolution, or it can set a reasonable rate to resolve that dispute. Id. The

supreme court added that the Commission has the independent ability to order utilities to appear before it


        2
           The supreme court did, however, find that the traditional, broad power of the Commission to
Aestablish and regulate@ rates for investor-owned utilities, such as Houston Lighting and Power Company,
encompassed the power to set wholesale transmission rates for those utilities. The court nonetheless
affirmed our invalidation of the rules with respect to investor-owned utilities on the ground that the access
fee violates the provisions of PURA 95 prohibiting subsidies among utilities and requiring that rates for
wholesale transmission service be comparable to each utility=s use of its own system. See Public Util.
Comm=n v. City Pub. Serv. Bd. of San Antonio, 53 S.W.3d 310, 323-24 (Tex. 2001).




                                                        7
even without a dispute to ensure that they are providing non-discriminatory access and to protect their

customers from bearing others= transmission costs.


San Antonio=s TCOS Case

                While the declaratory-judgment action was on appeal, San Antonio sought judicial review

of its TCOS as determined by the Commission after the contested-case proceeding. See Tex. Gov=t

Code Ann. ' 2001.171 (West 2000). San Antonio alleged that the Commission had ignored or

underestimated certain portions of its transmission costs and had therefore set a TCOS number that was too

low. The district court initially affirmed the Commission=s order. But shortly after we declared the

transmission rules invalid in the declaratory-judgment appeal, the district court granted San Antonio=smotion

for new trial, vacated its earlier judgment, and abated the cause pending the final resolution of the

declaratory-judgment action. Once the supreme court ruled that the transmission rules were invalid, the

district court conducted a new hearing and received additional briefing to review San Antonio=s TCOS.

San Antonio argued that the Commission=s order setting its TCOS should be vacated and declared void and

invalid for lack of agency authority. The Commission argued that the court should affirm the agency order.3

The district court vacated the Commission=s order, declaring it to be Avoid and invalid as exceeding the

authority and jurisdiction of the [Commission].@ On appeal, the Commission asserts that although the




        3
          The Commission also argued that district court was not authorized to vacate the order but could
only reverse and remand to the agency. See Tex. Gov=t Code Ann. ' 2001.174 (West 2000).


                                                     8
TCOS proceedings were initially conducted as part of a rate-setting scheme, it has other responsibilities that

empower it to determine the TCOS of individual utilities.


                                              DISCUSSION

                This is a suit for judicial review of a Commission decision made after a contested

case. See Tex. Util. Code Ann. ' 15.001 (West 1998); Tex. Gov=t Code Ann. ' 2001.171 (West

2000). The trial court was therefore authorized to reverse the case if the agency=s findings,

inferences, conclusions, or decisions were in excess of the agency=s statutory authority. See Tex.

Gov=t Code Ann. ' 2001.174(2)(B). This ground for reversal presents a question of law that we

review de novo. See Texas Dep=t of Transp. v. Jones Bros. Dirt & Paving Contractors, 24 S.W.3d

893, 898 (Tex. App.CAustin 2000), rev=d on other grounds, 92 S.W.3d 477 (Tex. 2002). The

Commission has only those powers conferred upon it by the legislature in clear and unmistakable

language. City Pub. Serv. Bd., 53 S.W.3d at 315-16; Public Util. Comm=n v. GTE-Southwest,

Inc., 901 S.W.2d 401, 407 (Tex. 1995). When the legislature expressly confers a power on an

agency, it also impliedly intends that the agency have whatever powers are reasonably necessary

to fulfill its express functions or duties. See GTE-Southwest, Inc., 901 S.W.2d at 407. An agency

may not, however, exercise what is effectively a new power on the theory that such exercise is

expedient for the agency=s purposes. See id.

                The Commission concedes that at the time it conducted San Antonio=s contested-

case proceeding, it intended to use the TCOS number to set rates in the generic rate



                                                      9
proceedingCa use beyond its statutory authority. However, the Commission asserts that the

reviewing court is not bound by the reasons given in an agency order and may affirm if there is

any valid legal basis for the agency action. See Central Power & Light Co. v. Public Util.

Comm=n, 36 S.W.3d 547, 559 (Tex. App.CAustin 2000, pet. denied). The Commission argues that

the oversight responsibilities contemplated by PURA 95 invest it with the authority to initiate a

proceeding to determine San Antonio=s TCOS, even though it may not impose rates. San Antonio

rejoins that determining a utility=s TCOS is tantamount to setting its transmission rates. We

agree that the TCOS case was an integral part of the invalid rate-setting scheme.4

                Under traditional electric-utility regulation, large, vertically integrated utilities

operated as monopolies in the areas they served. These utilities would generate, transmit, and

retail electricity to end-use customers. The Commission was authorized to set rates for each

investor-owned utility at a level that would allow it to recoup its prudently incurred costs and to

earn a reasonable return on its investments. See id. at 553; 16 Tex. Admin. Code '' 25.231,

.235(a) (2002). The TCOS determination applies these same rate-setting principles to the

wholesale transmission market. That is, the final TCOS number represents the utility=s

        4
           In 1999, the legislature amended PURA and authorized the Commission to set wholesale
transmission rates using a method similar to that invalidated by the supreme court. See Tex. Util. Code Ann.
' 35.004(d) (West Supp. 2003). In this opinion, however, we are concerned only with the authority of the
Commission to determine a utility=s TCOS when it issued its final order in 1997.




                                                    10
reasonable and necessary expenses, together with a reasonable return on its prudently invested

capital, involved in operating its transmission facilities. As San Antonio points out, this number is

the first and most essential part of establishing a final rateCit sets the amount to be recovered.

The only thing left to do is apply some methodology that determines how the amount is to be

recovered. Before its rules were invalidated, the Commission used the formula described above

as its rate-setting methodology.

                 Because the Commission admits that it initiated the TCOS proceeding for a purpose that

was undoubtedly beyond the scope of its authorityCto set rates as an initial matterCits final order must be

reversed unless it had some independent basis of authority to initiate such a case. The Commission asks us

to find such authority in its oversight responsibilities. It claims that it cannot determine whether San Antonio

is providing reasonable rates or being forced to subsidize other utilities without first knowing the costs

associated with its provision of transmission service. The Commission also argues that its authority to

oversee San Antonio=s separation of functions encompasses the authority to determine its TCOS.5 We

reject the Commission=s arguments.


        5
           To support this claim, it cites to a rule requiring utilities to make filings with the Commission
separating out their costs and rates, based on the costs associated with their generation, transmission, and
distribution operations. In the declaratory-judgment case, the supreme court referred to this rule as an
example of Commission authority to Aadopt rules relating to wholesale transmission service, rates, and




                                                      11
access@Cwhich the Commission was entitled to do under PURA 95. See City Pub. Serv. Bd., 53 S.W.2d
at 319. The Commission apparently argues that the separation of a utility=s Acosts and rates@ associated
with it transmission operations from the Acosts and rates@ associated with its generation and distribution
operations requires a determination of a utility=s TCOS.


                                                   12
                The supreme court clearly held that the Commission was not authorized to set rates for

municipally-owned utilities outside of a dispute-resolution context. See City Pub. Serv. Bd., 53 S.W.3d at

320. In so holding, it explicitly referenced the Commission=s oversight responsibilities in a context that

contrasted them with rate-setting. See id 320-21. It would elevate form over substance for us to hold that

although the Commission cannot set San Antonio=s rates, it can nonetheless determine, to the penny, the

precise amount of San Antonio=s reasonable and necessary expenses together with a reasonable

return on its prudently invested capitalCi.e., the precise amount it would be allowed to recover if the

Commission were to set rates. To allow the Commission to develop this number apart from its role of

resolving a dispute, and to Ause@ it to check reasonableness or conduct its other oversight functions bears

too close a nexus to actual rate-setting to withstand scrutiny.

                The Commission asks us to draw a hypertechnical distinction between determining San

Antonio=s TCOS and determining how San Antonio=s TCOS is to be recovered. We recognize that, in

carrying out its oversight responsibilities, the Commission must take some measure of the costs associated

with San Antonio=s transmission facilities; however, such authority simply cannot encompass an initial

determination of a municipal utility=s TCOS, which is tantamount to an initial determination of its wholesale




                                                    13
transmission rates.6 We hold that the Commission was without authority to conduct TCOS proceedings for

municipally owned utilities such as San Antonio, and overrule the Commission=s single issue.7

                 Upon finding that the Commission had exceeded its statutory authority in conducting its

TCOS proceeding, the district court Areversed and vacated@ the Commission=s order, which it found to be

Avoid and invalid@ as exceeding the Commission=s authority. This is a suit for judicial review governed by

section 2001.174 of the government code. That section authorizes the trial court to reverse and remand

if the agency=s findings, inferences, conclusions, or decisions exceeded its statutory authority.

See Tex. Gov=t Code Ann. ' 2001.174(2)(B); Texas State Bd. of Pharmacy v. Seely, 764 S.W.2d

806, 815 (Tex. App.CAustin 1988, writ denied) (holding that remand is proper judgment following



        6
           We note that even if a determination of a utility=s TCOS number were conceptually distinct, in
some meaningful way, from setting its rates initially, there surely would be little or no practical distinction in
situations where a utility attempts to charge a rate that would allow it to recover more than its predetermined
TCOS. Such a rate would immediately be Adisputed@ by its transmission customers and the Commission
could then step in to resolve this manufactured dispute by setting a rate.
        7
           The Commission also attempts to argue that this very TCOS proceeding, where San Antonio=s
costs were disputed by several intervening utilities, represents a dispute that it can resolve by setting
reasonable rates. This circular argument has no merit, as such disputes only arose in the context of this
invalid rate-setting procedure.




                                                       14
reversal of agency order). The court was not, in these circumstances, authorized to vacate the

agency=s order. See BFI Waste Sys., Inc. v. Martinez Envtl. Group, 93 S.W.3d 570, 581 (Tex.

App.CAustin 2002, pet. filed).


                                           CONCLUSION

                The Commission was without authority to determine San Antonio=s TCOS apart from a

dispute which would entitle it to set rates. Because the appropriate remedy in this case was reversal and

remand to the Commission, we modify the judgment of the trial court to reverse the agency order and

remand the case to the agency. As modified, we affirm the trial-court judgment.




                                                Bea Ann Smith, Justice

Before Chief Justice Law, Justices B. A. Smith and Yeakel

Modified and, as Modified, Affirmed

Filed: April 24, 2003




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