         TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN


                                      NO. 03-02-00001-CV




      Reliant Energy, Incorporated and American Electric Power Company, Appellants

                                                v.

                         Public Utility Commission of Texas, Appellee




            DIRECT APPEAL FROM THE PUBLIC UTILITY COMMISSION OF TEXAS



                                          OPINION


               In this direct appeal, we must determine whether the Public Utility Commission

erred in promulgating a rule governing stranded-cost recovery for formerly regulated electric

utilities. See Tex. Util. Code Ann. ' 39.001(e), (f) (West Supp. 2003). Stranded costs represent

prudently incurred expenditures made by the utilities during regulationCpreviously recoverable

over time through regulated ratesCthat have become unrecoverable in a deregulated market.

Utilities are permitted to recover their stranded costs as part of the transition to competition in

Texas. Reliant Energy, Incorporated and American Electric Power Company (AAEP@) argue that
the Public Utility Commission1 exceeded its authority by promulgating portions of substantive rule

25.263, which governs the proceeding where the Commission is to determine whether a utility

actually has stranded costs and to reconcile a utility=s actual stranded costs with amounts already

recovered based on previous estimates. We hold that the Commission exceeded its authority in

promulgating some of the challenged portions of its rule and reverse and remand those portions to

the Commission for further proceedings in accordance with this opinion. See Tex. Util. Code Ann.

' 39.001(f). We affirm the remaining portions of the rule as enacted. See id.


                                           BACKGROUND




        1
          In addition to the Commission, several intervenors argue in support of the rule. They include the
Office of Public Utility Counsel (OPUC), the Steering Committee for Cities Served by TXU Electric and
Central Power and Light Company (SCC), Texas Industrial Energy Consumers (TIEC), the State of Texas,
and the Alliance for Retail Markets (ARM). TXU Electric Company was also a party to this appeal but it
has since settled with the Commission and filed a motion to dismiss. We have granted TXU=s motion and
dismissed its claims.




                                                    2
                In 1975, the legislature enacted the Public Utility Regulatory Act (PURA) creating

the Public Utility Commission and establishing a comprehensive regulatory regime for electric

utilities. At that time, it was thought that electric utilities were natural monopolies, immune from

the normal forces of competition. Under the regulatory regime created by PURA, each utility was

allowed to operate as a monopoly in the area it served but was prohibited from charging monopoly

prices. The Commission was authorized to set rates for each utility at a level that would allow it

to recoup its prudently incurred costs and to earn a reasonable return on its investments.2 See 16

Tex. Admin. Code '' 25.231, .235(a) (2002); see also Central Power & Light Co. v. Public Util.

Comm=n, 36 S.W.3d. 547, 553 (Tex. App.CAustin 2000, pet. denied) (describing utility ratemaking

procedure under regulation).

                When the legislature enacted PURA most electric utilities were large vertically

integrated companies that produced, transported, and retailed electricity. In truth, only one


       2
           The utilities could recoup, among other things, the following expenses if reasonably incurred:

            $ operation and maintenance costs incurred in furnishing normal service and in
              maintaining plants

            $ assessed taxes

            $ fuel and purchased power costs
            $ ordinary advertising costs

            $ post-retirement benefit-plan costs

            $ costs of certain assets through depreciation

See 16 Tex. Admin. Code '' 25.231, .235(a) (2002).

                                                     3
component of a vertically integrated electric utility immunizes it from the normal forces of

competitionCits transmission and distribution infrastructure. Recognizing this, the legislature amended

PURA in 1999 and partially deregulated the industry. Among its Apolicies and purposes,@ the legislature

found that:


        [T]he production and sale of electricity is not a monopoly warranting regulation of rates,
        operations, and services and that the public interest in competitive electric markets requires
        that, except for transmission and distribution services and for the recovery of stranded
        costs, electric services and their prices should be determined by customer choices and the
        normal forces of competition.


Tex. Util. Code Ann. ' 39.001(a) (West Supp. 2003).

                 Chapter thirty-nine of PURA governs the restructuring of the electric-utility industry. As of

January 1, 2000, each privately owned electric utility was required to Aunbundle@ or separate into the

following entities: a power generation company, a retail electric provider, and a transmission and distribution

utility. See id. ' 39.051(b) (West Supp. 2003). The former vertically integrated utilities can now operate

as holding companies that own affiliated unbundled entities. See id. ' 39.051(c) (West Supp. 2003).

Under deregulation, the power generation and retail markets are to be governed by Acustomer choices and

the normal forces of competition,@ while the Commission is to continue to regulate transmission and

distribution utilities. See id. ' 39.001(a). The Commission is also charged with facilitating stranded-cost

recovery for the formerly regulated utilities. See id.

                 Chapter thirty-nine defines stranded costs as Athe positive excess of the net book value of

generation assets over the market value of those assets. . . .@ See id. ' 39.251(7) (West Supp. 2003). The


                                                         4
basic concept of stranded costs is straightforward. Under regulation, a utility could recover over time its

prudently incurred costs of acquiring power-generation assets through rates approved by the

Commission and paid by captive customers. See Central Power & Light Co., 36 S.W.3d at 552-

53. The Commission facilitated this cost recovery by incorporating depreciation expenses into

approved rates. See id. at 53. But in a deregulated environment, it was thought that competition

might drive rates to levels so low that a formerly regulated utility would be unable to recoup its

investments. Stranded costs represent that portion of the net book value of a utility=s generation

assets not yet recovered through depreciation that has become unrecoverable in a deregulated

environment. See City of Corpus Christi v. Public Util. Comm=n, 51 S.W.3d 231, 237-38 (Tex.

2001); Tex. Util. Code Ann. ' 39.251(7).

                Chapter thirty-nine sets out a three-stage program for the recovery of stranded

costs. In the first stage, from September 1999 to December 2001, the Commission froze retail

electric rates. See Tex. Util. Code Ann. '' 39.052(a), .254-.256 (West Supp. 2003). During this

stage, utilities identified as having probable stranded costs 3 were required to Amitigate@ them

through various measures intended to reduce the book value of their generation assets. See id.

They could shift depreciation from transmission and distribution assets to generation assets, id. '

39.256; they could keep earnings in excess of the allowed rate of return, id. ' 39.254. These

utilities were also allowed to Asecuritize @ a portion of their estimated stranded costs by selling


        3
          These utilities were identified in an April 1998 Commission Report to the Texas Senate
Interim Committee on Electric Utility Restructuring. In making these estimates, the Commission
utilized an AExcess Cost Over Market@ computer model (ECOM model).

                                                    5
transition bonds and using the proceeds to reduce the book value of their generation assets. See

id. '' 39.301-.313 (West Supp. 2003). The costs of issuing and servicing transition bonds are

borne by all retail customers in a utility=s service area through a nonbypassable Atransition

charge.@ See id. '' 39.302(7), .303(b), (c); City of Corpus Christi, 51 S.W.3d at 239. Because the

Commission estimated in 1998 that the appellant utilities would have significant stranded costs in

a deregulated environment, each utility        used the available mitigation procedures and

securitization to reduce the book value of their generation assets during this stage of PURA=s

stranded-cost recovery program. 4

               The second stage began on January 1, 2002, the first day of competition. See Tex.

Util. Code Ann. '' 39.001(b)(1), .201 (West Supp. 2003). During this stage, the Commission was


       4
           See generally Tex. Pub. Util. Comm=n, Application of Reliant Energy, Incorporated for
Financing Order to Securitize Regulatory Assets and Other Qualified Costs, Docket No. 21655
(2000); Tex. Pub Util. Comm=n, Application of Central Power and Light Company for Financing
Order to Securitize Regulatory Assets and Other Qualified Costs, Docket No. 21528 (2000); Tex.
Pub. Util. Comm=n, Application of Reliant Energy for Approval of Unbundled Cost of Service Rate
Pursuant to PURA ' 39.201 and Public Utility Commission Substantive Rule ' 25.344, Docket No.
22355 (2001); Tex. Pub. Util. Comm=n, Application of Central Power and Light Company for
Approval of Unbundled Cost of Service Rate Pursuant to PURA ' 39.201 and Public Utility
Commission Substantive Rule ' 25.344, Docket No. 22352 (2001).




                                                6
authorized to set a nonbypassable Acompetition transition charge@ to allow utilities to recover any

stranded costs remaining after the mitigation procedures and securitization utilized in stage one.

See generally id. ' 39.201. Any competition transition charge was to be included in the tariffs of a

utility=s affiliated unbundled transmission and distribution utility. See id. ' 39.201(b)(3). In

determining whether to set such a charge, the Commission was required to revise its previous

stranded-cost estimates using Aupdated company-specific inputs.@ See id. ' 39.201(h).

               In preparation for the rate hearings for the transmission and distribution utilities to

be held in 2001, the stranded cost estimates were updated. The Commission=s updated estimates

unexpectedly reflected that the utilities would have no stranded costs.5 A substantial increase in

natural gas prices in 2000 had driven the market value of the utilities= generation assets well

above their book value. These new estimates therefore indicated that some utilities had been

overcompensated by their earlier mitigation procedures and securitization.

               In light of these revised estimates, the Commission issued orders requiring the

utilities to discontinue all mitigation efforts, to reassign the depreciation transferred from


       5
          See generally Tex. Pub. Util. Comm=n, Application of Reliant Energy for Approval of
Unbundled Cost of Service Rate Pursuant to PURA ' 39.201 and Public Utility Commission
Substantive Rule ' 25.344, Docket No. 22355, p. 139; Tex. Pub. Util. Comm=n, Application of Central
Power and Light Company for Approval of Unbundled Cost of Service Rate Pursuant to PURA '
39.201 and Public Utility Commission Substantive Rule ' 25.344, Docket No. 22352, p. 120.




                                                 7
transmission and distribution assets back to those assets, and to return monthly Aexcess

mitigation credits@ to retail providers and their ratepayers. The Commission did not, however,

require the utilities to refund the amounts they had received from selling transition bonds, and by

statute it could not alter the transition charge that had been imposed on ratepayers to service the

bonds. See id. ' 39.303(d) (Transition charge authorized in financing order is Airrevocable and not

subject to reduction, impairment, or adjustment by further action of the commission . . . .@).

Utilities that had sold transition bonds to recover stranded costs no longer anticipated would seem

to have received a windfall at the ratepayers = expense.

                The third and final stage of stranded-cost recovery is yet to occur. This stage

requires the Commission to conduct a Atrue-up proceeding@ sometime after January 10, 2004, to

determine whether a utility actually has remaining stranded costs. See id. '' 39.201(l), .262(c)

(West Supp. 2003). The challenged rule governs the conduct of this true -up proceeding. See 16

Tex. Admin. Code ' 25.263 (2002). The goal of the true -up proceeding in this third stage is to

determine the utility=s actual stranded costs and to reconcile or true up this determination with its

previous estimates. See Tex. Util. Code Ann. '' 39.201(l), .262(c). This final determination is to

be based on a new calculation of the value of a utility=s generation assets made under actual

competitive conditions. See id. The Commission is required to subtract the market value of a utility=s

generation assets from the book value of those assets.6 See id. '' 39.251(7), .252(a), .262(c), (h), (i)


        6
           The ECOM model remains applicable in 2004 only to the extent that a utility has nuclear assets
that are not susceptible to market valuation under the methods described in PURA section 39.263(h). See
Tex. Util. Code Ann. ' 39.262(i) (West Supp. 2003).

                                                   8
(West Supp. 2003). If the calculation yields a positive number, i.e., if the book value of the assets exceeds

their market value, then the utility has stranded costs it is entitled to recover. If the calculation yields a

negative number, i.e., if the market value of the assets exceeds their book value, the utility has no stranded

costsCand chapter thirty-nine does not provide for any return to ratepayers of so called Anegative stranded

costs.@ If this true-up proceeding reveals that the utilities over-recovered estimated stranded costs through

their earlier mitigation efforts, the Commission can make appropriate adjustments by, among other things,

reducing the unbundled transmission and distribution utility=s rates. See id. ' 39.201(l). The Commission

cannot, however, reduce the transition charge imposed on ratepayers to service transition bonds. See id. '

39.303(d).

                In addition to finalizing stranded costs, chapter thirty-nine also requires that the

Commission make several other Atrue-up@ calculations in the 2004 proceeding that could affect

customer rates. See id. ' 39.262(d)-(g) (West Supp. 2003). These calculations reconcile previous

estimates with known values in various areas and result in either credits or bills to the

transmission and distribution utility from its affiliated power generation company or retail electric

provider. See generally id. Based on these credits or bills, the transmission and distribution

utility is to make adjustments to its nonbypassable delivery rates. See id. ' 39.262(g).

                One of these several other true -up calculations involves the determination of a

utility=s final fuel balance. See id. '' 39.202(c), .262(d)(1) (West Supp. 2003). In the 2004

proceeding, the Commission must true up the actual cost of fuel incurred by the utility against the prior

estimate used to set the Afuel factor@ component of regulated rates during the final period of traditional


                                                      9
regulation. See id. A positive fuel balance represents money owed to the utility for under-recovered fuel

costs.7 See id. The challenged portion of rule 25.263 would reduce this positive fuel balance owed to the

utility by any negative stranded-cost calculationCregardless of whether the negative calculation was caused

by market forces or by previous over-recovery through securitization. See 16 Tex. Admin. Code '

25.263(l).

                 The utilities argue that there is no such thing as negative stranded costs. They also complain

that the fuel balance is not a stranded cost and therefore cannot be Anetted@ against a negative stranded-cost

calculation. In other words, according to the utilities, the true-up proceeding was never intended to

reconcile a negative stranded-cost calculation against a positive fuel-balance calculation to reduce the

amount due to the utility for under-recovered fuel costs. The Commission insists that it has a mandate to

prevent a utility from receiving an over-recovery of stranded costs and that offsetting sums due for a positive

fuel balance is a permissible means of reversing an over-recovery of stranded costs achieved through

securitization. We begin our analysis by examining how the rule works.


                                                 THE RULE




        7
            A positive final fuel balance is to be recovered through the mechanism described above: each
affiliated power generation company will bill the regulated transmission and distribution utility, which will, in
turn, increase its nonbypassable delivery rates. See id. '' 39.202(c), .262(d)(1), (g).




                                                      10
                 Rule 25.263 requires the relevant portion of the true -up proceeding to be

conducted in four steps. First, the Commission subtracts the newly calculated market value 8 of

the utility=s generation assets from the net book value of those assets. According to the statute,

if this number is positive, the utility has recoverable stranded costs; if it is negative, the utility has

no stranded costs.9 See Tex. Util. Code. Ann. '' 39.251(3), (7), .252(a) (West Supp. 2003). A

negative number may be due to over-recovery of stranded costs that reduced the book value of

assets during the first stage, but it may also result from unrelated market conditions that

increased the market value of the assets.

                 Second, the Commission calculates the utility=s final fuel balance, which is the

differenceCpositive or negativeCbetween the estimated cost of fuel that was used to set the

utility=s rates for the final period of regulation and the actual cost of fuel for that period. Under

the prior regulatory regime, this amount would have been includedCas a credit or chargeCin the

rates set at the utility=s next ratemaking proceeding. Under the challenged section of rule 25.263,

this final fuel balance is netted against the actual stranded costs determined in step one. Thus, a



        8
            Chapter thirty-nine sets out several methods for calculating the market value of a utility=s
generation assets. One part of rule 25.263 that the utilities challenge is the section that implements the
Apartial stock valuation@ method. Compare Tex. Util. Code Ann. ' 39.262(h)(3), with 16 Tex. Admin.
Code ' 25.263 (f)(1)(c) (2002).
        9
           There will sometimes be a third step. If a utility has nuclear assets that are not susceptible to the
normal market valuation methods, the Commission conducts an updated ECOM estimate to determine
whether investments in these assets are stranded and nets this calculation with stranded-cost determination
for the rest of the assets. See Tex. Util. Code Ann. ' 39.262(i) (West Supp. 2003); 16 Tex. Admin. Code
' 25.263(f)(2) (2002).


                                                      11
negative stranded cost calculation could reduce or eliminate a positive fuel balance owed to the

utility.

                 Third, the Commission calculates a Acapacity-auction true-up@ amount, which is the

difference between the price the utility, or its unbundled power generation affiliate, was estimated

to obtain for its power on the wholesale market in the second stage and the price the utility

actually received during the first two years of competition. See 16 Tex. Admin. Code '' 25.263(i),

(l) (2002). The actual market price is reflected in Acapacity auctions @ in which the utility sold its

entitlements to generation capacity to reduce its market share as a part of the transition to

competition. See Tex. Util. Code Ann. '' 39.153, .156 (West Supp. 2003). The capacity-auction

true-up amount must then be netted against the amount reached in step two by netting the

stranded costs determined in step one with the fuel balance.

                 Fourth, and finally, the Commission will conduct a prudence review of regulatory

assets 10 not previously approved in a prior Commission rate order but being recovered through

securitization in the form of a transition charge or through a competition transition charge

imposed during the second stage of stranded-cost recovery. See 16 Tex. Admin. Code ' 25.263(l)

(2002). If the Commission determines that these assets were not prudently incurred, it will


           10
            Regulatory assets are a subset of generation-related costs incurred by a utility. See City of
Corpus Christi v. Public Util. Comm=n, 51 S.W.3d 231, 238 (Tex. 2001). They arise when the
regulatory regime requires that a utility=s right to recover an expenditure be deferred over several years. See
id. The right to recover this income stream in future years is carried on the utility=s books as a regulatory
asset. See id. Regulatory assets therefore have no market value absent a regulatory regime that assures
their recovery. See id.


                                                     12
subtract them from the true-up balance as determined in steps one through three. If the resulting

final true-up balance is positive, the utility will be entitled to recover that amount through a

competition transition charge assessed to its transmission and distribution customers. See id. '

25.263(l)(2)(A). If negative, the Commission will (1) reverse any existing competition transition

charge, then (2) reverse any remaining mitigation proceeds, then (3) impose on utilities that have

sold transition bonds a negative competition transition charge based on the lesser of the absolute

value of the re maining negative true -up balance or the amount the utility has securitized. See id.

' 25.263(l)(2)(C).




                                                13
                                           DISCUSSION

               This is a direct challenge to the validity of a chapter thirty-nine competition rule.

See Tex. Util. Code Ann. ' 39.001(e). The utilities allege that certain portions of the rule exceed

the Commission=s statutory authority.11 See id.; see generally City Pub. Serv. Bd. v. Public Util.

Comm=n, No. 3-00-007-CV, slip op. at 8, 2002 Tex. App. LEXIS 2059, at *12 (Tex. App.

AustinCMar. 21, 2002, no pet.). An administrative agency has only those powers conferred upon

it by clear and unmistakable language. Public Util. Comm=n v. City Pub. Serv. Bd., 53 S.W.3d

310, 315-16 (Tex. 2001). 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. Public Util. Comm=n v. GTE-Southwest, Inc., 901 S.W.2d 401, 407

(Tex. 1995). 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. Id. at 407. We must therefore

determine whether the Commission had either the express or implied authority to promulgate the

challenged aspects of its rule that will govern the 2004 true -up proceedings.


       11
           We reject the Commission=s contention that the utilities= complaints are not properly
brought as validity challenges because there may exist some hypothetical set of facts where the
type of harm that the utilities predict might not actually occur. The utilities properly challenge the
rule=s validity by arguing that several of its mandatory provisions were promulgated without




                                                 14
Netting

               PURA provides that A[a]n electric utility is allowed to recover all of its net,

verifiable, nonmitigable stranded costs incurred in purchasing power and providing electric

generation service.@ Tex. Util. Code Ann. ' 39.252(a). The utilities challenge the Commission=s

authority to net a utility=s final stranded-cost calculation with other true-up items such as a

utility=s final-fuel balance. The Commission defends its rule arguing that (1) these other true -up

items are themselves potential stranded costs and, (2) even if they are not, netting is a

permissible means of preventing over-recovery of stranded costs by those utilities that received a

windfall through securitization.

               PURA defines stranded costs as follows:


       AStranded costs@ means the positive excess of the net book value of generation
       assets over the market value of those assets, taking into account all of the electric
       utility=s generation assets, any above market purchased power costs, and any
       deferred debit related to a utility=s discontinuance of the application of Statement
       of Financial Accounting Standards No. 71 [i.e., unrecovered regulatory assets].


Tex. Util. Code Ann. ' 39.251(7). PURA further defines generation assets as follows:




statutory authority. City Pub. Serv. Bd. v. Public Util. Comm=n, No. 3-00-007-CV, slip op. at 8,
2002 Tex. App. LEXIS 2059, at *12 (Tex. App. AustinCMar. 21, 2002, no pet.). (AIn order to be
invalid, the 1999 Rule must, on its face, contravene the legislative grant of power.@)




                                                15
       AGeneration assets@ means all assets associated with the production of electricity,
       including generation plants, electrical interconnections of the generation plant to
       the transmission system, fuel contracts, fuel transportation contracts, water
       contracts, lands, surface or subsurface water rights, emissions -related allowances,
       and gas pipeline interconnections.


Id. ' 39.251(3).

               As described above, at the true -up proceeding, the Commission is required to

calculate a utility=s actual stranded costs by subtracting the market value of its generation assets

from their book value. If this number is negative, i.e., if the market value of those assets exceed

their book value, it is undisputed that the utilities are not required to refund this negative amount

to the ratepayers. Under chapter thirty-nine, there is simply no concept of negative stranded

costs and no consequence of a negative calculation.

               Chapter thirty-nine defines stranded costs as Athe positive excess of net book

value of generation assets over the market value of the assets.@ See id. ' 39.252(7) (emphasis

added). Because we presume that each word in a statute has meaning, the word Apositive@ must

be given effect. See Southwestern Life Ins. Co. v. Montemayor, 24 S.W.3d 581, 584 (Tex.

App.CAustin 2000, pet. denied). Stranded costs therefore exist only when the book value of a

utility=s generation assets exceeds their market value. If book value is equal to or less than

market value, then there are no stranded costs. The term Anegative stranded costs@ appears

nowhere in chapter thirty-nine, and there are no statutory provisions providing for recovery by

ratepayers of the excess market value over cost.




                                                 16
               The fact that chapter thirty-nine does not recognize the concept of negative

stranded costs motivates the Commission=s argument that all the true -up items represent

stranded costs and that the netting required under its rule will determine actual stranded costs.

The utilities protest that the other true -up items do not comprise stranded costs as they are

defined in chapter thirty-nine and cannot be offset by a negative stranded-cost calculation. They

focus particularly on showing that the final-fuel balance has nothing to do with stranded costs.

The Commission responds by arguing that because coal, gas, nuclear, and other types of fuel are

Aindisputably assets associated with the production of electricity,@ they constitute generation

assets that could become stranded. We reject the Commission=s attempt to define these items as

stranded costs.

               Under the prior regulatory regime, the approved rates for a utility always included

a Afixed fuel factor,@ which was based on a projection of future fuel costs. 16 Tex. Admin. Code

' 25.237 (2002). The Commission periodically adjusted this fuel factor, and at least every three

years the fuel revenues the utility received under the factor were Areconciled@ with the fuel costs

the utility actually incurred. See Tex. Util. Code ' 36.203 (West 1998); 16 Tex. Admin. Code '

25.236 (2002); see also Nucor Steel v. Pub. Util. Comm=n, 26 S.W.3d 742, 744-45 (Tex.

App.CAustin 2001, pet. denied). Chapter thirty-nine, section 36.202(c) simply postpones the fuel

reconciliation for the final period of regulation until the 2004 true -up proceeding, at which time

any under-recovered fuel balances will be surcharged.




                                                17
               The statutory structure of chapter thirty-nine also indicates that the legislature did

not consider a final fuel balance to be a stranded cost. Stranded costs and the final fuel balance

are determined and recovered under separate sections of chapter thirty-nine.

               Stranded costs are determined and recovered under sections 39.201(l) and

39.262(c). Section 39.201(l) provides: A[t]wo years after customer choice is introduced, the

stranded cost estimate under this section [i.e., the stage-two stranded-cost estimate] shall be

reviewed and, if necessary, adjusted to reflect a final, actual valuation in the true-up proceeding

under Section 39.262.@ Tex. Util. Code Ann. ' 39.201(l). Section 39.262(c) provides:


       After January 10, 2004 . . . each transmission and distribution utility, its affiliated
       retail electric provider, and its affiliated power generation company shall jointly
       file to finalize stranded costs under Subsections (h) and (i) and reconcile those
       costs with the estimated stranded costs used to develop the competition transition
       charge in the proceeding held under Section 39.201.


Id. ' 39.262(c). Subsections (h) and (i) set out methods for quantifying the market value of a

utility=s generation assets and calculating its stranded costs. Significantly, the final fuel balance

does not figure into this calculation.

               Under-recovered fuel costs are determined and recovered under section 39.202(c)

and 39.262(d)(1). Section 39.202(c) provides: A[a]fter the date of customer choice, each affiliated

power generation company shall file a final fuel reconciliation for the period ending the day before

the date customer choice is introduced . . . [which will be] included in the true -up proceeding.@ Id.

' 39.202(c). Section 39.262(d)(1) provides Athe affiliated power generation company shall


                                                 18
reconcile, and either credit or bill to the transmission and distribution utility, the net sum of . . .

the former electric utility=s final fuel balance . . . and [the capacity-auction true-up amount].@ Id. '

39.262(c).

                Stranded costs and the final fuel balance are distinct concepts treated separately in

the statute. If the legislature wanted to define an under-recovered fuel balance as a stranded cost

it could have done so explicitly, or it could have easily included the impact of the final fuel

reconciliation in the market valuation of a utility=s generation assets under section 39.262(c), (h),

and (i). The fact that the legislature treated the fuel balance separately shows that it did not

intend it to be a component of a stranded-cost calculation.

                The same is true of the other true -up items. The capacity-auction true-up amount

is the difference between the price the utility, or its unbundled power generation affiliate, was

estimated to obtain for its power on the wholesale market in the second stage of stranded-cost

recovery and the price the utility actually received during the first two years of competition.

Although there is a closer nexus between this true -up item and the final determination of stranded

costs, the legislature chose not to include this item in its definition of stranded costs or to

incorporate it into the methods it prescribes for calculating stranded costs. Moreover, the

legislature specifically mandated that this item be netted with the final fuel balance. Id. '

39.262(d).

                Chapter thirty-nine seems to contemplate two parallel true -up tracksCone for

stranded costs and one for the several other true -up items. Separate portions of chapter thirty-


                                                  19
nine govern the effects that the calculations under each track are to have on rates. Compare id.

' 39.262(c), with id. ' 39.262(g). Although the calculation under each track can be applied to

adjust the transmission and distribution utility=s nonbypassable rates, the utilities are authorized

to securitize any remaining stranded costs but not positive balances associated with the other

true-up items.    Id ' 39.262(c). In some circumstances, performing two parallel true -up

calculations, as the statute provides, and performing a single true -up calculation that nets

stranded costs against all the true -up items, as the rule requires, would result in identical

adjustments to rates. However, netting the stranded-cost calculation with the other true -up items

can cause an impermissible offset of amounts due a utility whenever the market value of its

generation assets exceed their book value, i.e., when it has no stranded costs. See generally id.

'' 39.252(a) (a utility is allowed to recover all its net verifiable stranded costs), .262(c)-(i)

(contemplating two parallel true-up tracks).

               We thus reject the Commission=s argument that the other true -up items represent

stranded costs. We agree with the utilities that the statute does not contemplate a negative

stranded-cost calculation and does not contemplate any consequence to ratepayers if the

stranded-cost calculation produces a negative number. The rule that would net a negative

stranded-cost calculation against a positive balance produced from the other true-up items is not

authorized by the statute. Indeed, it directly contradicts the legislature =s intent that a positive

stranded-cost calculation has significance while a negative calculation simply means that a utility

is not entitled to recovery of stranded costs. By collapsing two parallel true -up tracks into a


                                                20
combined calculation, the rule impermissibly allows a negative stranded-cost calculation to offset

positive balances due from other true -up items. The statute does not require a utility to refund a

negative calculation of stranded costs to ratepayers and the Commission may not require such a

refund by calling these other true -up items stranded costs.


Reversing Securitization Over-Recoveries

               We now turn to the Commission=s claim that even so, netting the calculations is a

permissible means of preventing over-recovery of stranded costs by those utilities that received a

windfall through securitization. When the legislature provided for mitigation and securitization of

estimated stranded costs, it did so with the proviso that the Commission must ensure that no

utility over-recover its stranded costs. See id. ' 39.262(a). The utilities that were estimated in

the first stage to have stranded costs received substantial sums of money or its equivalent

through mitigation and securitization proceeds. When the revised stranded-cost estimate showed

that these utilities were likely to have no stranded costs, the Commission required the utilities to

disgorge their mitigation proceeds through excess mitigation credits. As previously noted,

however, the Commission could not reverse the transition charge imposed on ratepayers to

finance the bonds that the utilities had sold. See id. '' 39.201(l)(1), .303(d).

               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. Public Util. Comm=n, 53 S.W.3d at 316. Chapter thirty-nine requires the

Commission to see that utilities do not over-recover their stranded costs. The Commission argues

                                                21
that netting the various true -up items is a permissible way to prevent over-recoveryCeffectively

forcing the utilities that sold transition bonds based on earlier invalid stranded-cost estimates to

disgorge amounts to which they are not entitled.

               While we agree with the Commission that it has the implied power to attempt to

reverse over-recovery of stranded costs through netting, we find its rule to be overbroad. An

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

expedient for the agency=s purposes.         GTE-Southwest, Inc., 901 S.W.2d at 407.           The

Commission=s rule does not limit the amount by which a negative stranded-cost calculation can

offset other positive true -up balances to a utility=s previous over-recovery. See 16 Tex. Admin.

Code. ' 25.263(l). We hold that the Commission has the discretion to net a negative stranded-

cost calculation against the other true -up items only to the extent that the utility over-recovered

stranded costs through securitization.

               For example, a utility that entered the first stage of stranded-cost recovery with

generation assets having a book value of 3x and an estimated market value of 1x would have

been required to mitigate or securitize estimated stranded costs of 2x. Assume that this utility

sold transition bonds and removed 2x from its books, reducing its book value to 1x. If the market

value of this utility=s generation assets has risen to 3x at the time of the true -up proceeding, the

updated stranded-cost calculation will yield a negative 2x indicating that it has no actual stranded

costs. But to the extent the book value was reduced by the proceeds of securitization, the utility

appears to have over-recovered 2x when it received its bond proceeds. This is true because the


                                                 22
original book value of 3x would not have exceeded the increased market value of 3x, even had

the utility never received bond proceeds of 2x. The full 2x would represent an over-recovery of

stranded costs that the utility did not have. This amount, but no more, may be netted against

other sums to prevent over-recovery.

               The Commission must conduct parallel true-up calculations for strandedcosts and

the other true-up items. Only in those limited circumstances where a negative calculation of

stranded costs results from the reduction of book value by securitization may the Commission

devise a rule to offset any windfall received through securitization against the positive balance

due the utility for the other true -up items. If a utility=s stranded-cost calculation would have been

negative even if it had never sold transition bonds, then the full amount of its bond proceeds

represents an over-recovery which can be netted against the other true -up items. On the other

hand, if a utility would have had a positive stranded-cost calculation but for the fact that it sold the

bonds, i.e., if it would be entitled to recover stranded costs had it never reduced its book value

through securitization, the Commission is limited to netting the amount by which the bond

proceeds exceeded the actual stranded costs it would have recovered. 12


       12
          The exact changes that the Commission makes to its rule to bring it into compliance
with these principals are, of course, matters of discretion. The Commission could simply add a
safety-valve provision which, for any utility, limits the amount by which a negative stranded-cost




                                                  23
calculation can offset other positive true -up balances to permissible amounts. Determining these
permissible amounts at the true -up proceeding would not be difficult because it merely requires
hypothetical adjustments to book value based on known information.


                                               24
                 Reliant argues that it should not be required to disgorge any over-recovery it may have

received through securitization. Its basic complaint seems to be that the Commission=s rule does not

account for the fact that securitization substantially reduces the book value of a utility=s generation assets.

We believe that our formulationCrequiring the Commission to consider what a utility=s stranded-cost

calculation would have been absent securitizationCaddresses this concern. 13




        13
              Reliant claims that failure to take this reduction of book value into account causes the
Commission to inaccurately catagorize the bond proceeds as an over-recovery. Reliant also argues that by
netting the amounts that a utility received when it sold securitization bonds against other amounts it is due,
the Commission accomplishes indirectly what it is directly prohibited from doing by statute. This argument is
misconceived. Chapter thirty-nine makes securitization financing orders irrevocable and prohibits the
Commission from adjusting the transition charges in order to assure payment to bondholders and allow the
bonds to be issued on more favorable terms. See Tex. Util. Code. Ann. '' 39.301, .304, .306, .307
(West Supp. 2003). Transition charges flow to the bondholders to retire the transition bonds by paying all
the principal and interest. See id.; City of Corpus Christi, 51 S.W.3d at 239. Nothing in chapter thirty-
nine guarantees that a utility can keep bond proceeds to which it is not entitled.




                                                     25
               In no circumstances may a negative stranded-cost calculation attributable to

market conditions be netted against a positive fuel balance or other such true -up calculation. We

sustain the challenge to the rule because it does not limit the netting of negative stranded-cost

calculations to prevent over-recovery attributable to securitization. The Commission has the

statutory authority to prevent over-recovery of stranded costs through securitization. It has no

statutory authority to net negative stranded costs attributable to market forces.14




       14
           In view of our disposition of this issue, we need not address the utilities= equal-
protection arguments. See Tex. R. App. P. 47.1 (opinions must be as brief as practicable).
Similarly, we do not specifically reference the arguments of the several intervenors on this issue
because they do not differ materially from those of the Commission. See id. Throughout our
opinion, we discuss the arguments of the intervenors only when they differ materially from those
of the Commission.




                                               26
Partial Stock Valuation Method

               One of the Commission=s most important responsibilities during the true -up

proceeding is to calculate the market value of a utility=s generation assets. See generally Tex.

Util. Code Ann. ' 39.262(h). Chapter thirty-nine sets out several different methods that the

Commission may use to make this calculation. See id. The utilities claim that the Commission

exceeded its authority in promulgating portions of its rule that implement Athe partial stock

valuation method.@ See generally id. ' 39.262(h)(3); 16 Tex. Admin. Code ' 25.263(f)(1)(C)

(2002).

               The Commission is authorized to use the partial stock valuation method to

establish the value of generation assets when a utility has transferred some or all of those assets

to affiliated or nonaffiliated corporations and between nineteen and fifty-one percent of the

common stock of each such corporation is spun off and sold to public investors through a national

stock exchange and traded for one year or more. See Tex. Util. Code Ann. ' 39.262(h)(3). The

Commission is authorized to calculate the value of the assets held by the transferee corporation,

presumably an unbundled power generation company, by adding the market value of its common

stock to the book value of its preferred stock and its debt. See id.; see generally 16 Tex. Admin.

Code ' 25.263(f)(1)(C)(viii).


A. Control Premium

               The average daily closing price over thirty consecutive trading days, chosen by the

Commission, with some constraints, is generally presumed to establish the market value of the

                                                27
common stock. See Tex. Util. Code Ann. ' 39.262(h)(3). The Commission, however, is also

authorized to convene a panel of financial experts to determine whether a control premium exists

for the retained common stock. Id. A control premium is the additional value that a block of

shares obtains by virtue of the fact that it carries with it the power to control the corporation. See

Black=s Law Dictionary 1200 (7th ed. 1999). AThe control premium is often computed by

comparing the aggregate value of the controlling block of shares with the cost that would be

incurred if the shares could be acquired at the going market price per share.@ Id.

               The utilities challenge the way that the control premium is calculated under the

Commission=s rule.

               Section 39.262(h)(3) of PURA specifically provides:


       The [C]ommission may accept the market valuation to conclusively establish the
       value of the common stock equity in each transferee corporation or convene a
       valuation panel of three independent financial experts to determine whether the
       percentage of common stock sold is fairly representative of the total common
       stock equity or whether a control premium exists for the retained interest. . . . If
       the panel determines that a control premium exists for the retained interest, the
       panel shall determine the amount of the control premium, and the [C]ommission
       shall adopt the determination but may not increase the market value by a control
       premium greater than 10 percent.


Tex. Util. Code Ann. ' 39.262(h)(3) (emphasis added). The Commission=s rule, however,
provides:


       If the panel determines that a control premium exists for the retained interest, the
       panel shall determine the amount of the control premium, and the [C]ommission
       shall adopt the determination, but may not use the control premium to increase the
       value of the assets by more than 10%.

                                                 28
16 Tex. Admin. Code ' 25.263(f)(1)(C)(v) (emphasis added). The utilities argue that the statute

only allows the Commission to apply the control premium to increase the value of the retained

common stock equity by up to ten percent. They claim that the rule is invalid because it instead

allows the Commission to apply the control premium to increase by up to ten percent the value of

all the corporation=s assets.15 The Commission responds that while the statute prohibits it from

Aincreas[ing] the market value by a control premium greater than 10 percent,@ see Tex. Util. Code

Ann. ' 39.262(h)(3), the statute does not specify A[ten] percent@ of what and that we should defer to its

interpretation.

                  We may not add words to a statute unless necessary to give effect to legislative intent.

Southwestern Life Ins., 24 S.W.3d at 583. The Commission essentially asks us to add the words Aof all

the corporation=s assets@ to the end of the statutory phrase Aby a control premium no greater than 10

percent.@ But the meaning of the phrase is unmistakable without such an addition. Because a control

premium represents value added to a retained block of shares, a Acontrol premium of ten percent@ would

naturally increase the value of the retained block of shares by ten percent. Similarly the phrase Aby a control

premium no greater than 10 percent@ is limited to increasing the value of the retained block of shares by no




        15
          As explained above, under the partial stock valuation method a corporation=s common
stock represents only a portion of the total value of its assets. See Tex. Util. Code Ann.
' 39.262(h)(3); 16 Tex. Admin. Code ' 25.263(f)(1)(C). Of course, the retained portion of that
stock represents an even smaller portion of the total value of its assets. See id.


                                                      29
more than ten percent. We agree with the utilities that the Commission exceeded its authority by enacting

the portion of its rule that would apply the control-premium cap to all of the corporation=s assets.


B. AOther Admitted Evidence@

                Reliant also complains that the rule impermissibly allows the Commission to second-guess

the findings of the valuation panel. Chapter thirty-nine, section 39.262(h)(3) requires a valuation panel

consisting of three financial experts chosen from the top ten nationally recognized investment

banks with demonstrated experience in the electric industry of the United States. Tex. Util. Code

Ann. ' 39.262(h)(3). It then provides, A[i]f the panel determines that a control premium exists for

the retained interest, the panel shall determine the amount of the control premium, and the

commission shall adopt the determination [subject to the ten-percent cap].@ Id. (emphasis

added). The statute further provides that Athe determination of the commission based on the

finding of the panel conclusively establishes the value of the common stock in each transferee

corporation.@ Id. Rule 25.263, however, states that the Commission is to determine the value of

the common stock of the transferee corporation Abased on the findings of the Commission and

other admitted evidence.@ See 16 Tex. Admin. Code 25.263(f)(1)(C)(vii) (2002) (emphasis added).

                The Commission argues that the language Aother admitted evidence@ was intended

only to allow for consideration of evidence relating to issues other than the panel=s substantive

finding, such as the Commission=s obligation to reduce any control premium by ten percent, or to

ensure that the panel was properly constituted in accordance with the statute. See Tex. Util. Code




                                                    30
Ann. ' 39.262(h)(3). It claims that if the rule is applied in a way that fails to respect the panel=s

determination, the proper place to challenge it is at the true -up proceeding.

                By requiring that the Commission Ashall adopt@ the panel=s control-premium

determination, the legislature signaled its intent that the valuation of the panel be conclusive.

The extra-statutory language of the rule, as written, allows the Commission to consider whatever

evidence it chooses to increase the value of the common stock. The Commission cannot simply

confer this authority on itself without legislative approval. See Ford Motor Co. v. Motor Vehicle

Bd. 21 S.W.3d 744, 764 (Tex. App.CAustin 2000, pet. denied) (an agency Amay not, on a theory

of necessary implication from a specific power, function, or duty expressly delegated, erect and

exercise a new or additional power or a power that contradicts the statute@).

                The Commission is also wrong to contend that Reliant=s complaint is not properly

brought as a validity challenge. It cannot promulgate a rule granting to itself a power in

contradiction of its legislative mandate, and then claim that because it intends to interpret the rule

narrowly that the issue is somehow one of application and not validity. We sustain the challenge

to this portion of the rule.16


        16
            Intervenors TIEC, SCC, and OPUC argue that the challenged portion of the rule is
valid because the Commission can choose not to convene a valuation panel at all, in which case it
must consider Aother admitted evidence@ in order to determine market value. They argue that, in
light of this discretion, the statutory requirement that the Commission=s determination be Abased
on the finding of the panel@ means only that the panel=s determination is to provide a basis, but
not necessarily the sole basis, for the Commission=s interpretation. We disagree. The challenged
portion of the rule only applies if the Commission chooses to convene a valuation panel.
Moreover, the statute is clear that when a panel is convened, its determination is to be
conclusive. See Tex. Util. Code. Ann. ' 39.262(h)(3). On the intervenors = interpretation, the

                                                 31
Interest

                A utility found to have stranded costs at the true -up proceeding must either

securitize those costs or recover them over time through nonbypassable rates. See Tex. Util.

Code Ann. ' 39.262(c); 16 Tex. Admin. Code ' 25.263(l)(2)(A) (2002). For a utility that does not

securitize its stranded costs, full recovery may take a number of years. Rule 25.263 provides that

if a utility is found to have stranded costs at the true -up proceeding, then its unbundled

transmission and distribution affiliate Ashall be allowed to recover . . . carrying costs [i.e., interest]

on the true-up balance.@ See 16 Tex. Admin. Code ' 25.263(l)(3) (2002). Because of the time

value of money, this interest represents a portion of the Anet, verifiable, nonmitigable stranded

costs@ that the utility is entitled to recover under chapter thirty-nine. See generally Tex. Util.

Code Ann. ' 39.252(a). The rule further provides that interest shall be calculated from the date

that the final true-up order is issued until stranded costs are fully recovered. See 16 Tex. Admin.

Code ' 25.263(l)(3).




requirement that the Commission=s determination be Abased on the findings of the panel@ would
be superfluous given the fact that it follows a requirement that the Commission Ashall adopt@ the
panel=s determination. See Texas Workers= Compensation Ins. Fund v. Del Industrial, Inc., 35
S.W.3d. 591, 593 (Tex. 2000) (AA cardinal rule of statutory construction is that each sentence,
clause and word is to be given effect if reasonable and possible.@).




                                                   32
               The utilities argue that the rule=s provision for interest is deficient. The y claim that

interest should be calculated to accrue from January 1, 2002, the first day of competition, because

this is when costs became Astranded.@ The Commission rejoins that stranded costs do not

magically arise on the first day of competition, but, for purposes of stranded-cost recovery under

chapter thirty-nine, come into existence only after the true -up proceeding. We agree with the

Commission.

               The true-up proceeding determines whether a utility has any actual stranded costs.

See Tex. Util. Code Ann. ' 39.201(l), .262(c). At that time, the Commission is to determine a

utility=s stranded costs by comparing the market value of the utility=s generation assets with their

book value. The utilities attach some significance to the fact that the stranded-cost calculation is

to use the book value of December 31, 2001Cthe last day of regulation. See Tex. Util. Code Ann.

' 39.251(7). They contend that this indicates that the true -up proceeding actually determines the

amount of stranded costs that existed on the first day of competition. This contention is false.

While the book value to be used by the Commission at the true -up proceeding is to be determined

as of December 31, 2001, its calculations are to be based on the market value as determined in

the proceeding. See id. ' 39.262(h). This market value may fluctuate widely between the first

day of competition and the date of the true -up proceeding. Moreover, a formerly regulated utility

enters the first day of competition with its preexisting customer base intact, i.e., the utility=s

affiliated retail electric provider inherits the retail customers in the former utility=s service area.




                                                  33
In the first few years of competitionCbefore the 2004 true -up proceedingCa utility can take steps

to increase the market value of its generation assets by simply participating in the market.17

                That the legislature chose the last day of regulation as the day for measuring book

value is inconsequential. After competition is introduced, a utility no longer accrues Abook

value,@ because such a concept is meaningless outside of the former regulatory system. We

reject the utilities= argument that their actual stranded costs all accrued on the first day of

competition.




        17
          For example a utility may upgrade a plant or successfully renegotiate an above-cost fuel contract.
 Cf. Tex. Util. Code Ann. ' 39.251(7) (requiring that Aabove market purchased power costs@ be
considered in any stranded-cost calculation).




                                                    34
                Reliant makes an additional argument that interest on at least a portion of its

recoverable stranded costs should accrue from the first day of competition. It claims that A[t]o

the extent Reliant . . . has stranded costs in 2004, the Commission=s 2001 stranded-cost estimates

[which resulted in reversal of Reliant=s earlier mitigation efforts] will have been incorrect@ and

Reliant will have been deprived of the opportunity to recover its stranded costs through early

mitigation. See generally Tex. Util. Code Ann. '' 39.201(d)-(l), .254, .256. It therefore contends

that interest on any stranded costs attributable to reversed mitigation should accrue from the time

that it is required to issue excess mitigation credits. This argument lacks merit. The duty to

utilize the statute=s mitigation procedures was predicated on stranded-cost estimates, see id., and

a utility=s right to fully recover its stranded costs does not encompass a right to early mitigation. 18

See id. 39.252(a).

                AEP also argues that providing for interest to accrue only from the date of the final

order is arbitrary and capricious because orders affecting different utilities will likely be issued on

different dates. This argument also lacks merit. Normal Aregulatory lag@ is considered to be an

element of risk borne by a utility. See State v. Public Util. Comm=n, 883 S.W.2d. 190, 196 (Tex.

1994). The utilities therefore are not entitled to revenues lost due to the time it takes to conduct

the true-up proceeding.




        18
          We also reject Reliant=s claim that interest on the capacity auction true-up amount should accrue
from the first day of competition. We have held that the capacity auction true-up amount is not a
component of stranded costs.


                                                    35
                 We overrule the utilities= issues challenging section 25.236(l)(3) of the

Commission=s competition rule and hold that the Commission=s provision for interest is adequate

to provide the utilities with full recovery of their stranded costs.


Failure to Reduce Potential Stranded Costs

                 Because recoverable stranded costs are determined according to the market value of

generation assets as measured in the 2004 true-up proceeding, any move that increases the market value of

these assets before the true-up proceeding will potentially reduce a utility=s stranded-cost recovery. For

utilities with significant unrecovered book value there will be no competitive-market incentive to maintain or

increase the market value of their assets until after the true-up proceeding.

                 Chapter thirty-nine addresses this lack of market incentive by creating a statutory incentive.

It provides that utilities are only allowed to recover stranded costs that are Anonmitigable,@ see Tex. Util.

Code Ann. ' 39.252(a), and requires Aan electric utility . . . [to] pursue commercially reasonable means to

reduce its potential stranded costs, including good faith attempts to renegotiate above-cost fuel and

purchased power contracts or the exercise of normal business practices to protect the value of its assets.@

See id. ' 39.252(d). To enforce this requirement the legislature mandated that Athe [C]ommission shall

consider the utility=s efforts under this subsection when determining the amount of the utility=s stranded costs;

provided, however, that nothing in this section authorizes the [C]ommission to substitute its judgment for a

market valuation of generation assets determined under Sections 39.262(h) and (i).@ Id.

                 Rule 25.263(e)(4) implements this section. It provides that the Commission will determine

at the true-up proceeding whether the utility, through its unbundled successor affiliates, has pursued

                                                      36
commercially reasonable means to reduce its stranded costs. It further provides that if the [C]ommission

finds that a utility=s successor affiliates Ahave failed, individually or in combination, to fully comply with their

obligations under PURA ' 39.252(d), the [C]ommission may reduce the net book value of the . . .

[affiliated power generation company=s] generation assets or take other measures it deems appropriate in

the true-up proceeding filed under this section.@ See 16 Tex. Admin. Code ' 25.263(e)(4) (2002).

                 AEP and Reliant each challenge this portion of the rule, but on different grounds. AEP

claims that a utility=s duty to reduce its potential stranded costs ended once it unbundled into successor

affiliates, while Reliant argues that the Commission lacks the authority to reduce the book value of

generation assets. We reject both arguments.

                 AEP claims that unbundled power generation companies and retail electric providers are not

required to reduce their potential stranded costs. It argues that these successor affiliates have no such duty

because section 39.252(d) imposes the duty on A[a]n electric utility@ and PURA=s general definition of

electric utility specifically excludes power generation companies and retail electric providers. See Tex. Util.

Code Ann. ' 31.002(6). This argument cannot survive close scrutiny because it requires us to construe

portions of the statute in isolation and would lead to absurd results. See Southwestern Life Ins., 24

S.W.3d at 583-85.

                 Section 39.252(a) grants the right to recover stranded costs to Aan electric utility.@ Tex. Util.

Code Ann. ' 39.252(a). Section 39.252(d) imposes the duty to pursue commercially reasonable means to

reduce potential stranded costs on Aan electric utility,@ and requires the commission to consider Athe utility=s@

efforts when determining the amount of stranded costs, i.e., when conducting the true-up proceeding. Id. '


                                                        37
39.252(d). These subsections all affect the stranded-cost calculation to take place at the true-up

proceeding. Yet at the true-up proceeding, Aan electric utility@ is to collect its stranded costs through its

successor affiliates. See id. ' 39.262(c) (A. . . each transmission and distribution utility, its affiliated retail

electric provider, and its affiliated power generation company shall jointly file to finalize stranded costs . . .

.@). The Aelectric utility=s@ stranded costs are calculated according to the market value of the generation

assets owned by its successor power generation company. See id. ' 39.262(h), (i). It is apparent from

these sections that when the legislature was discussing stranded-cost recovery it sometimes used the term

Aelectric utility@ to refer to an integrated utility=s successor affiliates.

                  Moreover, AEP=s reading would lead to absurd results. As discussed above, section

39.252(d) imposes on an electric utility the statutory duty to try to reduce stranded costs as a substitute for

market incentive. As discussed above, until the true-up proceeding, no utility with significant book value will

have any market incentive to increase or maintain the value of its generation assets because any move to do

so will correspondingly reduce its stranded-cost recovery. The unbundling of a utility into successor

affiliates does not affect this lack of incentive. We decline to attribute to the legislature the intent to make

such an arbitrary distinction.

                  Reliant attacks the rule on another basis. The rule allows the Commission to reduce the

book value of a utility=s generation assets if its successor affiliates have not pursued commercially reasonable

means to reduce potential stranded costs. See 16 Tex. Admin. Code ' 25.263(e)(4) (2002). According to

Reliant, the legislature=s Aobvious purpose@ in prohibiting the Commission from substituting its judgment for

the market valuation of generation assets is to ensure that the true-up calculation yields an accurate


                                                         38
stranded-cost number. Reliant argues that by allowing the Commission to adjust book value, the rule

circumvents the statutory goal of calculating an accurate stranded-cost amount. We disagree.

                 We note initially that the relevant statutory goal is not calculating an accurate stranded-cost

amount, but calculating an accurate Averifiable, non-mitigable stranded cost[]@ amount. Tex. Util. Code

Ann. ' 39.252(a) (emphasis added). Compliance with the duty to pursue commercially reasonable means

to mitigate its potential stranded costs is part of what makes stranded costs non-mitigable. See id. '

39.252(a), (d). Reliant=s interpretation is likely to yield inaccurate determinations of non-mitigable stranded

costs.

                 Nothing in the statute explicitly prohibits the Commission from reducing a utility=s book

value if it finds that it or its successor affiliates have failed to comply with their obligation to attempt to

reduce stranded costs. In fact, the statute implies that just such an adjustment should take place. As noted,

section 39.252, subsection (d) requires the Commission to consider a utility=s attempts to comply with this

obligation when determining a utility=s stranded costs at the true-up proceeding. See id. ' 39.252(d).

Because this same subsection further provides that the Commission is prohibited from adjusting the market

value of the generation assets as determined under section 39.262(h) and (i), see id, it impliedly

contemplates some sort of adjustment to book valueCthe only other component of stranded costs. We

overrule the utilities= challenge to section 25.263(e)(4) of the Commission=s rule.


                                              CONCLUSION

                 The Commission erred in promulgating that portion of its rule which unqualifiedly allows a

negative stranded-cost calculation to offset other amounts a utility may become entitled to at the true-up

                                                      39
proceeding. The statutory duty to see that a utility does not over-recover its stranded costs justifies netting

a negative stranded-cost number against the other true-up amounts only to the extent that it reverses an

actual over-recovery due to securitization. The Commission also erred in promulgating those portions of its

rule which, in setting out the partial stock valuation method, (1) allow it to apply the ten-percent control-

premium cap to the value of all corporate assets, and (2) allow it to second-guess the valuation of the panel

by considering other admitted evidence. We reverse these portions of the rule and remand them to the

Commission for further proceedings consistent with this opinion. We find the other challenged portions of

the rule to be valid and uphold them as enacted.


                                            ON REHEARING

                 The utilities filed motions for rehearing asking that we clarify certain portions of our opinion

and substantively change other portions. We grant the motions for purposes of clarification only and

substitute modified pages. We overrule the motions insofar as they request that we change our holding.

Our opinion and holding remain substantively unchanged.




                                                   Bea Ann Smith, Justice

Before Justices Kidd, B. A. Smith and Yeakel

Affirmed in Part; Reversed and Remanded in Part

Filed: February 6, 2003

                                                      40
41
