Cities of Alvin, Dickinson, Fort Stockton, Friendswood, La Marque, League City, Lewisville, and Texas City Office of Public Utility Counsel And State of Texas v. Public Utility Commission of Texas First Choice Power, Inc. And Alliance for Retail Markets

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03-03-00386-CV

Cities of Alvin, Dickinson, Fort Stockton, Friendswood, La Marque, League City,
Lewisville, and Texas City; Office of Public Utility Counsel;
and State of Texas, Appellants

v.

Public Utility Commission of Texas; First Choice Power, Inc.; and Alliance
for Retail Markets, Appellees

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 200TH JUDICIAL DISTRICT
NO. GN203764, HONORABLE JOHN K. DIETZ, JUDGE PRESIDING

OPINION

This appeal concerns the Public Utility Commission’s order increasing the fuel-factor

component of the price-to-beat for First Choice Power, Inc. When appellants1 sought judicial review

of that order, the district court dismissed the case in part, concluding that many of appellants’

challenges were untimely challenges to the validity of the rule governing fuel-factor adjustments.

In the alternative, the court affirmed the order. We will affirm the district court’s judgment.

1
Appellants are the Cities of Alvin, Dickinson, Fort Stockton, Friendswood, La Marque,
League City, Lewisville, and Texas City (“the cities”); the Office of Public Utility Counsel (“OPC”);
and the State of Texas.
 BACKGROUND

Texas is in transition from a regulated market for electricity toward a competitive

market for the production and sale of electricity. See State v. Public Util. Comm’n, 131 S.W.3d 314,

318-20 (Tex. App.—Austin 2004, pet. filed) (“2003 Rulemaking Case”); see also Tex. Util. Code

Ann. ch. 39 (West Supp. 2004); see generally id. §§ 11.001-64.158 (West 1998 & Supp. 2004)

(“PURA”). As part of the transition, integrated utilities were required to “unbundle” into companies

that respectively generate, transmit and distribute, and provide electricity; the unbundled companies

may be wholly separate or remain affiliated. PURA § 39.051(b).

During the transition period, the Public Utility Commission (“the Commission”) sets

a price-to-beat for affiliated retail electric providers (“AREPs”) that provide electricity to residential

and small commercial customers. See PURA § 39.202(a). The price-to-beat is the base rate of the

utility affiliated with the AREP (6% less than the utility’s rate charged on January 1, 1999) as

modified by the fuel factor, which adjusts the price-to-beat to account for changes in fuel prices. Id.

Previously, the fuel factor was set so that the utility could recover its estimated fuel

cost; the resulting fees charged for fuel were later reconciled with the utility’s actual fuel expenses.

See PURA § 36.203; see also Nucor Steel v. Public Util. Comm’n, 26 S.W.3d 742, 745 (Tex.

App.—Austin 2000, pet. denied). Companies could not automatically pass through their fuel costs

(PURA § 36.201), and were required to show efficient generation, effective cost controls, and

negotiation of the lowest reasonable fuel cost for its non-affiliated contracts. Nucor, 26 S.W.3d at

745 (citing 17 Tex. Reg. 7067 (1992), amended 18 Tex. Reg. 836 (1993)). For purchases from

affiliated providers, the utility also had to show that the fuel expenses were reasonable and necessary

2
and that the affiliate did not charge the utility any more than it did other utilities in a similar class.

Nucor, 26 S.W.3d at 745.

During the transition period, the showing necessary to obtain an adjustment of the fuel

factor is streamlined. An AREP may request that the Commission adjust the fuel factor up to twice

per year by demonstrating that “the existing fuel factor does not adequately reflect significant

changes in the market price of natural gas and purchased energy used to serve retail customers.”

PURA § 39.202(l). The Commission’s rule implementing subsection (l) provides in relevant part

as follows:

An affiliated retail electric provider may request that the commission adjust the fuel
factor(s) established under subsection (f)(3) of this section not more than twice in a
calendar year if the affiliated retail electric provider demonstrates that the existing
fuel factor(s) do not adequately reflect significant changes in the market price of
natural gas and purchased energy used to serve retail customers. . . . The
methodology for calculating the adjustment to the fuel factor(s) shall be the
following:

(A) For each business day of the ten-day period ending no more than ten business
days before the filing of a fuel factor adjustment application, an average of the
closing forward 12-month NYMEX Henry Hub natural gas prices, as reported
in the Wall Street Journal, is calculated.

(B) The average forward price for each business day calculated in subparagraph (A)
of this paragraph will then be averaged to determine a ten-day rolling price.

(C) The percentage difference between the averaged ten-day rolling price calculated
under subparagraphs (A) and (B) of this paragraph and the averaged ten-day
rolling price used to calculate the current fuel factor(s) is calculated. If the
current fuel factor was calculated through an adjustment under subparagraph (E)
of this paragraph, then the averaged ten-day rolling price calculated concurrent
with that adjustment shall be used. If the percentage difference is 4.0% or more,
the current fuel factor(s) may be adjusted.

3
 (D) To adjust the current fuel factor(s), the percentage difference is added to one and
then multiplied by the current factor(s). The results are the adjusted fuel
factor(s) that will be implemented according to the procedural schedule in clause
(i) and (ii) of this subparagraph:

(i) if no hearing is requested within 15 days after the petition has been filed,
a final order shall be issued within 20 days after the petition is filed;

(ii) if a hearing is requested within 15 days after the petition is filed, a final
order shall be issued within 45 days after the petition is filed.

26 Tex. Reg. 2680, 2707 (2001) (“Rule 25.41(g)(1)”).2 When adopting rule 25.41, the Commission

recognized “the undeniable fact that REPs [retail electric providers], affiliated or not, will not incur

costs after 2002 based on a historic fuel mix; rather, all REPs will be purchasing power in the

market.” 26 Tex. Reg. at 2692.

This Court upheld rule 25.41 against a challenge that the Commission failed to

establish a sufficient headroom—the difference between the price-to-beat and the sum of non-

bypassable charges approved by the Commission. See Reliant Energy, Inc. v. Public Util. Comm’n,

62 S.W.3d 833, 838 (Tex. App.—Austin 2001, no pet.). Although no party in the original

rulemaking process directly appealed the use of the NYMEX index3 to assess and correct

2
The rule was amended in part by 28 Tex. Reg. 3249 (2003). The successive versions of
the rule were codified at 16 Tex. Admin Code § 25.41. For convenience, we will refer to the version
adopted in 2001 as “rule 25.41” and the amended version adopted in 2003 as “amended rule 25.41.”
3
The “NYMEX index” in this case is the New York Mercantile Exchange index of the
closing forward 12-month natural gas prices at the Henry Hub. It is published in the Wall Street
Journal. The Commission will compute an average of the prices each day (see rule 25.41(g)(1)(A)),
then average those averages (see rule 25.41(g)(1)(B)). See State v. Public Util. Comm’n, 131 S.W.3d
314, 319 n.3 (Tex. App.—Austin 2004, pet. filed) (“2003 Rulemaking Case”).

4
inadequacies in the fuel factor, this Court later upheld amended rule 25.41 against challenges to the

use of the NYMEX index, among other issues. See 2003 Rulemaking Case, 131 S.W.3d. at 322-25.

On May 9, 2002, First Choice applied to the Commission to increase its fuel factor

under rule 25.41. The Commission found that First Choice’s fuel factor was originally set based on

a natural gas price of $3.111/MMBtu4, and the relevant average natural gas price on the NYMEX

index for ten business days from April 24, 2002 through May 7, 2002 was $3.817/MMBtu—an

increase of 22.69%. The Commission found that it had previously concluded that the NYMEX gas

index was representative of the price of natural gas and purchased energy, and that a 4% change in

that price would satisfy minimally the requirement in utility code section 39.202 for “significant”

change. The Commission determined that, because rule 25.41 was defined as the exclusive means

of showing changes in the price of natural gas for this purpose, evidence of First Choice’s actual

costs and revenues was irrelevant; the only change First Choice had to show was the change in the

NYMEX index. The Commission also concluded that the rate ceiling for the price-to-beat contained

in PURA section 39.202(p) is not applicable to fuel factor adjustments under PURA section

39.202(l). Based on this demonstrated “significant” increase of greater than 4% in the price of

natural gas and purchased energy used to serve retail customers, the Commission raised First

Choice’s fuel factor by 22.69%; the Commission found that First Choice’s fuel factor would rise

from 2.18¢/kWh5 to 2.67¢/kWh, causing a typical residential customer using 1000 kWh per month

to pay an additional $4.93 per month.

4
MMbtu stands for one million British thermal units, a unit of measurement of gas.
5
kWh stands for kilowatt hour, a measure of energy.

5
 The Commission also concluded that a statutory provision requiring electric utilities

to reimburse the cities’ reasonable expenses for participating in a ratemaking proceeding does not

apply in this case because First Choice is an AREP, not an electric utility. See PURA §§ 33.023

(requiring electric utilities to pay expenses), 31.002(6)(H) (excluding retail electric providers from

definition of electric utility).

Appellants sought judicial review of the Commission’s order. The district court

found that most of appellants’ challenges were actually directed to the validity of rule 25.41 and

should have been brought in the original rulemaking challenge. Consequently, the court determined

that the validity challenges brought in this ratemaking proceeding were untimely and that it had no

jurisdiction over them; the court alternatively denied the challenges.6 The court also denied the

6
The challenges over which the district court concluded it lacked jurisdiction included
challenges by all appellants. It included the following:

OPC’s assertions that the Commission (1) exceeded its authority by increasing the fuel
factor without requiring First Choice to demonstrate the statutorily mandated factors—i.e., that the
existing fuel factor does not adequately reflect significant changes in the market price of natural gas
and purchased energy used to serve retail customers, (2) acted arbitrarily and abused its discretion
by basing its decision on criteria irrelevant under PURA section 39.202(l) and rule 25.41(g)(1) and
by failing to consider criteria relevant under these provisions, (3) acted arbitrarily and abused its
discretion by raising the fuel factor without substantial evidence that the fuel factor did not
adequately reflect significant changes in the market prices of natural gas and purchased energy used
to serve retail customers as required by these provisions, (4) acted arbitrarily and abused its
discretion by raising the fuel factor without making findings of fact on the market prices of natural
gas and purchased energy used to serve retail customers, the significance of changes in the market
prices, and the inadequacy of the fuel factor to reflect those changes, and (5) improperly excluded
evidence of First Choice’s costs and revenue, rendering its decision unsupported by substantial
evidence and violative of PURA section 39.202(l) and rule 25.41(g)(1).

The State’s assertions that the Commission eliminated the statutory requirement that First
Choice demonstrate that the existing fuel factor does not adequately reflect significant changes in
the market price and violated constitutional and statutory due-process requirements by imposing a

6
challenges timely and appropriately brought in this ratemaking proceeding, including contentions

that the fuel-factor adjustment increased the price-to-beat to an impermissible level and that First

Choice was required to reimburse the cities’ expenses incurred in this proceeding.

DISCUSSION

The State, OPC, and the cities raise several issues on appeal. Because many of these

issues overlap, we will discuss them as if they were raised collectively. Appellants assert that the

district court erred by concluding that it lacked jurisdiction to consider their challenges, excluding

evidence of First Choice’s actual costs and windfall profits, rendering a judgment not supported by

substantial evidence or necessary findings of fact, setting the price-to-beat too high, finding no

violation of due process in the 45-day time limit, and failing to require First Choice to reimburse the

cities’ costs.

JURISDICTION

The district court concluded that it lacked jurisdiction over most of appellants’

challenges to the Commission’s order because they were untimely challenges to the validity of rule

25.41 that were filed in the wrong court. A validity challenge “tests a rule on procedural and

45-day time limit for processing fuel-factor adjustments.

The cities’ assertions that the Commission failed to consider evidence of the price First
Choice actually paid for natural gas and power used to serve retail customers and improperly
authorized a windfall for First Choice, violating PURA section 39.202(l) and rule 25.41(g)(1) by
failing to require First Choice to demonstrate that the existing fuel factor does not adequately reflect
significant changes in the market price of natural gas and purchased energy used to serve retail
customers.

7
constitutional grounds.” 2003 Rulemaking Case, 131 S.W.3d at 321 (citing Eldercare Props., Inc.

v. Texas Dep’t of Human Servs., 63 S.W.3d 551, 558 (Tex. App.—Austin 2001, pet. denied)). The

scope of a validity challenge also includes whether the agency had statutory authority to promulgate

the rule. Railroad Comm’n v. ARCO Oil and Gas Co., 876 S.W.2d 473, 477 (Tex. App.—Austin

1994, writ denied). PURA requires as follows: “A person who challenges the validity of a

competition rule must file a notice of appeal with the court of appeals and serve the notice on the

commission not later than the 15th day after the date on which the rule as adopted is published in

the Texas Register.” PURA § 39.001(f). Because appellants failed to file these challenges in this

Court within 15 days after the adopted rule was published, the district court determined that it did

not have jurisdiction over the validity challenges; the court alternatively decided the merits of

appellants’ challenges and denied them.

Appellants contend that the district court had jurisdiction because they challenge the

application of the rule, not its validity. An applicability challenge does not question the general

validity of a rule, but seeks a judicial declaration regarding the application of the rule in a particular

fact situation. Eldercare, 63 S.W.3d at 558. Appellants describe the district court’s decision as the

application of a new and radical form of res judicata, and they caution that a company unaware that

a rule affecting it was being adopted would find itself subject to the rule without recourse.

Appellants assert that courts have jurisdiction to review Commission decisions, and that validity

challenges generally may be pursued through declaratory-judgment actions. See PURA § 15.001;

Tex. Gov’t Code Ann. §§ 2001.038, .174 (West 2000) (part of the Administrative Procedures Act

[“APA”]). Appellants argue that, because the rule uses the language of the statute, the basis for their

8
challenges was not apparent until the Commission misapplied it. They also contend that they

challenge, not the language of the rule, but the Commission’s failure to follow the rule by conflating

the rule’s provisions, excluding relevant evidence, and raising the fuel factor based on an inadequate

record. They further contend that, between the adoption of the rule and its application,

circumstances demonstrated that the Commission’s theories supporting the rule were not borne

out—e.g., the NYMEX index proved not to accurately represent the market price of natural gas and

purchased energy. They also warn that limiting challenges to the transition rules sets a precedent that

will haunt future litigants in administrative proceedings and increase this Court’s case load.

Appellants urge that we have discussed the scope of challenges permissible in district

court in a case that, while distinguishable, should guide us to consider all of their challenges in this

ratemaking proceeding. See City Pub. Serv. Bd. of San Antonio v. Public Util. Comm’n, 96 S.W.3d

355 (Tex. App.—Austin 2002, no pet.). In that case, we held that a challenge asserting that the

Commission considered evidence outside the scope of the rule (from a previous proceeding declared

void) was a challenge to the application of the rule, not to the validity of the rule’s failure to mention

the use of that evidence. Id. at 360. Here, we have the converse; appellants challenge the validity

of the rule through challenges to the application of the rule. While appellants state some issues

asserting that the rule was applied in unexpected ways, some challenges at their core address the

validity of terms of the rule. We conclude that the latter should have been brought by direct appeal.

The district court’s decision that it lacks jurisdiction over validity challenges is based,

not on res judicata, but on statutory limits on the time and place for validity challenges. Unlike the

general statutes permitting declaratory judgments regarding the validity of rules and substantial-

9
evidence reviews, challenges to the validity of a competition rule must be brought by direct appeal

to this Court not more than 15 days after the date on which the rule as adopted is published in the

Texas Register. Compare Tex. Gov’t Code Ann. §§ 2001.038, .174, and PURA § 15.001, with

PURA § 39.001(f). Appellants’ argument that section 39.001(e) requires that appeals be conducted

under the APA does not prevail because the APA applies “unless otherwise provided”; the time and

venue limitation of section 39.001(f) provides otherwise. See PURA § 39.001. This specific statute

controls over the more general permission of validity challenges through declaratory-judgment

actions. See Columbia Hosp. Corp. v. Moore, 92 S.W.3d 470, 473 (Tex. 2002); Lufkin v. City of

Galveston, 63 Tex. 437, 439 (1885). Section 39.001(f) is unchallenged, mandatory, and exclusive.

Under the plain language of section 39.001(f), the district court had no jurisdiction over validity

challenges, which must have been brought by direct appeal to this Court within 15 days after the

adopted rule was published. See id. The statute does not provide that persons challenging the

validity of a rule may wait until the rule is applied to them before challenging the validity of its terms

under another provision. See id. While some persons may be bound before they are aware of the

formulation of competition rules and the need to challenge them, we need not consider that issue

because there is no indication in the record that we face that situation here.

Dismissal of validity challenges in this case should not create a torrent of validity

challenges because of the specific limitation of the rule to competition rules. See § 39.001(f). The

legislature determines the scope of our jurisdiction and that of district courts. Tex. Const. art. V,

§§ 6, 8; see also Tex. Gov’t Code Ann. §§ 22.220, 24.007 (West 2004). PURA requires that

challenges to the validity of competition rules be brought directly and quickly in this Court. See

10
PURA § 39.001(f). Although we may read the scope of challenges to validity narrowly, we cannot

ignore statutory mandates in hopes of avoiding an onslaught of preemptive validity challenges.

Some of the challenges in this case are applicability challenges, some are validity

challenges, and others straddle the line between the types. Rather than parsing the classifications

at the outset, we will address the merits of challenges to the application of the rule, and dismiss those

addressed to rulemaking that are not properly before us.

SUBSTANTIVE CHALLENGES

For the permissible challenges to the application of the statute and rule, we review

the Commission’s actions under the substantial-evidence standard, which provides as follows:

If the law authorizes review of a decision in a contested case under the substantial
evidence rule or if the law does not define the scope of judicial review, a court may
not substitute its judgment for the judgment of the state agency on the weight of the
evidence on questions committed to agency discretion but:

(1) may affirm the agency decision in whole or in part; and

(2) shall reverse or remand the case for further proceedings if substantial rights of
the appellant have been prejudiced because the administrative findings,
inferences, conclusions, or decisions are:

(A) in violation of a constitutional or statutory provision;

(B) in excess of the agency’s statutory authority;

(C) made through unlawful procedure;

(D) affected by other error of law;

(E) not reasonably supported by substantial evidence considering the reliable
and probative evidence in the record as a whole; or

11
 (F) arbitrary or capricious or characterized by abuse of discretion or clearly
unwarranted exercise of discretion.

Tex. Gov’t Code Ann. § 2001.174.

When construing a statute, we must try to interpret the statute in a way that gives

effect to the plain meaning of the statute’s words and effectuates the legislature’s intent. Tex. Gov’t

Code Ann. §§ 312.003, .005 (West 1998); State v. Gonzalez, 82 S.W.3d 322, 327 (Tex. 2002).

Statutory construction is a question of law that we review de novo. Id. We are not bound by an

agency’s interpretation of a statute that it administers or enforces. Rylander v. Fisher Controls Int’l,

Inc., 45 S.W.3d 291, 299 (Tex. App.—Austin 2001, no pet.). The supreme court summarized the

process as follows:

We look first to the “plain and common meaning of the statute’s words.” Fitzgerald
v. Advanced Spine Fixation Sys., Inc., 996 S.W.2d 864, 865 (Tex. 1999) (quoting
Liberty Mut. Ins. Co. v. Garrison Contractors, Inc., 966 S.W.2d 482, 484 (Tex.
1998)). If a statute’s meaning is unambiguous, we generally interpret the statute
according to its plain meaning. Fitzgerald, 996 S.W.2d at 865. Moreover, we
determine legislative intent from the entire act and not just from isolated portions.
Jones v. Fowler, 969 S.W.2d 429, 432 (Tex. 1998). Thus, we “read the statute as a
whole and interpret it to give effect to every part.” Jones, 969 S.W.2d at 432.

Gonzales, 82 S.W.3d at 327. Regardless of whether the statute is ambiguous, we may consider,

among other matters, the object sought to be attained, the circumstances under which the statute was

enacted, the legislative history, the common law or former statutory provisions, including laws on

the same or similar subjects, the consequences of a particular construction, the administrative

construction of the statute, and the title (caption), preamble, and emergency provision. Tex. Gov’t

Code Ann. § 311.023 (West 1998).

12
 Generally, we construe agency rules in the same manner as statutes, striving to give

effect to the agency’s intent and following the plain language of the rule unless it is ambiguous.

Rodriguez v. Service Lloyds Ins. Co., 997 S.W.2d 248, 254 (Tex. 1999). But if there is vagueness,

ambiguity, or room for policy determinations in the regulation, we will defer to the agency’s

interpretation unless it is plainly erroneous or inconsistent with the language of the rule. H.G.

Sledge, Inc. v. Prospective Inv. & Trading Co., 36 S.W.3d 597, 604 (Tex. App.—Austin 2000, pet.

denied). The agency’s interpretation of its rule represents the view of the regulatory body that

drafted and administers the rule and essentially becomes a part of the rule itself. Id. Although the

agency’s interpretation of a statute is entitled to respect and weight, it does not bind us. Fisher

Controls, 45 S.W.3d at 299.

Proof of entitlement to increase fuel factor

Appellants raise several challenges to the nature and sufficiency of the evidence

considered by the Commission when increasing First Choice’s fuel factor. They contend that the

Commission violated its statutory authority by increasing the fuel factor (1) while not requiring First

Choice to present necessary evidence, (2) allowing First Choice to present irrelevant evidence, and

(3) barring appellants from presenting relevant evidence. Appellants contend that the evidence

considered does not satisfy the statute or the rule.

Appellants argue that the Commission exceeded its authority and rendered portions

of PURA section 39.202(l) and rule 25.41 meaningless by adjusting First Choice’s fuel factor based

only on a showing of a minimum 4% change in the NYMEX index. They correctly note that the

statute does not refer to the NYMEX index and argue that the rule only uses the NYMEX index as

13
the mechanism by which the adjustment is calculated once the need for an adjustment is otherwise

proved. They assert that there must be, in addition to proof of a 4% change in the NYMEX index,

proof of the market price of gas and energy used to serve retail customers, proof of significant

change in that price, and proof that the existing fuel factor does not adequately reflect that significant

change. They complain that the record lacks evidence linking the NYMEX index, the price that First

Choice paid for such gas and energy, and the market price of gas and energy actually used to serve

retail customers. They contend that the Commission contravened PURA § 39.202(l) when it failed

to determine whether the market prices of natural gas and purchased energy embedded in First

Choice’s purchased power contracts had significantly increased. Because the index is the only

evidence First Choice offered to support an adjustment of its fuel factor, appellants contend that First

Choice supplied no evidence to support the fuel-factor increase; accordingly, they assert that the

Commission exceeded its authority by adjusting the fuel factor based solely on the increase in the

NYMEX index.

1. Use of the NYMEX index

Resolution of many of appellants’ issues turns on the extent of the use of the NYMEX

index permitted by statute and rule. Neither the statute nor the rule specifies how a provider must,

or must not, demonstrate change to the relevant market price or the fuel factor’s inadequacy to reflect

that change. See PURA § 39.202(l); rule 25.41(g)(1). The express language of rule 25.41 authorizes

the NYMEX index as the means to calculate the remedy for inadequacies in the fuel factor and sets

4% as the minimum level of change in the NYMEX index to permit adjusting the fuel factor. See

rule 25.41(g)(1)(A)-(D). But both the rule and the Commission’s discussion of it indicate that the

14
NYMEX index will be used to assess the adequacy of the fuel factor to reflect significant changes

in the market price of gas and purchased energy used to serve retail customers.

Appellants argue that the demonstration of the inadequacy of the fuel factor is a

bifurcated process requiring separate determinations of the adequacy of the fuel factor and the

adjustment of the fuel factor. They rely on the fact that the first sentence of the rule restates the

statute’s outline of the assessment process and only the subsections detailing the adjustment

mechanism mention the NYMEX index. See rule 25.41(g)(1). Although it is possible to extrapolate

from this structure the idea that the assessment and the adjustment are separate analyses, that

extrapolation is not required and that idea is not consistent with the Commission’s discussion

contemporaneous with the adoption of the rule or with the rule’s implementation. Appellants’

bifurcation of the analysis would permit a finding of a significant change that fails to meet the 4%

threshold, while a unitary process defines a 4% change as “significant” and adjusts the fuel factor

upon a showing of that change. The less strained reading is that the comparison of the current

NYMEX index with the index supporting the existing fuel factor, coupled with the 4% threshold,

is the analysis for the significance of the change in the market price and of the adequacy of the fuel

factor to reflect that change.

Whether the NYMEX index reflects the market price of natural gas and purchased

energy used to serve retail customers concerns the validity of the rule. The Commission explained

in the 2001 rulemaking proceeding that the NYMEX index is evidence of the market price of natural

gas and purchased energy—regardless of the generation source of that electricity—used to serve

retail customers. See 26 Tex. Reg. at 2692-94. The Commission noted “the undeniable fact that

15
REPs, affiliated or not, will not incur costs after 2002 based on a historic fuel mix; rather, all REPs

will be purchasing power in the market.” Id. at 2692. Purchases by REPs are, by definition, made

to supply electric energy “to retail customers.” See PURA § 31.002(17) (retail electric providers

supply electric energy to retail customers). The Commission also stated, “Beyond 2002, the market

price of generation will likely be set by gas-fired generation, and as such, it is appropriate to apply

the changes in the market price of natural gas and purchased energy to the entire fuel factor in order

to maintain the level of headroom in the price-to-beat.” Id. at 2693. The Commission emphasized

its intent to rely on market indices by providing for the use of an electricity commodity index after

a sufficiently liquid one developed. Id. at 2693. Although commenters expressed concerns about

the adequacy and reliability of the NYMEX index to represent the relevant market price (see, e.g.,

26 Tex. Reg. at 2682, 84, 91), the Commission rejected those concerns by adopting the NYMEX

index as the sole measure of the market price. Thus, the Commission concluded that the NYMEX

index represents the market price of natural gas and purchased energy used to serve retail customers.

The Commission also determined in the 2001 rulemaking proceeding that a change

in the NYMEX index represents the requisite significant change in the market price. The

Commission described the 4% change in the NYMEX index as the “materiality threshold” for

changes in the index to show the statutorily required “significant changes” in market prices and

therefore support adjustment of the fuel factor.7 See 26 Tex. Reg. at 2694. The Commission thus

7
The Commission wrote:

Based on the comments received, the commission concludes that a 4.0%
materiality threshold is reasonable. The commission disagrees with those
commenters suggesting that there be no materiality threshold. PURA §39.202(l)

16
linked the measurement of the adequacy of the fuel factor to reflect significant changes in market

price and the mechanism to correct inadequacies, and concluded that the NYMEX index was

sufficient for both tasks. The Commission has implemented the rule consistent with its discussion.

Although the amended rule is not before us, the Commission confirmed its adoption

of the NYMEX index for these purposes in the 2003 rulemaking proceeding amending rule 25.41.

2003 Rulemaking Case, 131 S.W.3d at 319. Because the Commission did not waver in its devotion

to the NYMEX index, the arguments pertaining to the use of market price in that proceeding are

instructive and persuasive regarding the Commission’s interpretation of the enabling statute and the

extent of the use of the NYMEX index under rule 25.41. See id. at 322-23. The 2003 amendments

mainly concerned the threshold amount of change in the NYMEX index and the length of the period

measured to evaluate the market price. Id. at 319; see also 28 Tex. Reg. 3249 (2003). The

Commission concluded that the statute’s reference to “market price” required use of a market index,

and also concluded that the NYMEX index was sufficiently correlated to the market price of both

specifies that PTB fuel factors may be adjusted for ‘significant changes in the
market price of natural gas and purchased energy . . . .’ (emphasis added). Use
of the term ‘significant’ indicates that some sort of threshold be demonstrated in
order to justify an adjustment under § 39.202(l). . . .

The commission concludes that a 4.0% materiality threshold is reasonable
because such a threshold is analagous [sic] to the existing materiality threshold
in the current fuel rule. While the commission recognizes that the current 4.0%
threshold is based on the current solid fuel and gas mix of the integrated utility,
in a competitive market, the market clearing price of purchased power will be set
by the marginal unit in the market, which will most likely be a combined-cycle
gas turbine.

26 Tex. Reg. at 2694-95.

17
natural gas and of purchased energy used to serve retail customers. See 2003 Rulemaking Case, 131

S.W.3d at 323 (citing 28 Tex. Reg.at 3261-63); see also PURA § 39.202(l). The Commission

rejected use of AREPs’ actual costs, stating that “[b]asing price-to-beat fuel factor adjustments solely

on the actual costs of the affiliated REP and not the market price of natural gas and purchased energy

(as required by statute) will ignore the market prices that non-affiliated REPS must incur to compete

against the affiliated REP.” 2003 Rulemaking Case, 131 S.W.3d at 323 (quoting 28 Tex. Reg. at

3261).

Appellants further complain that the Commission misapplied its own rule by making

the adjustment automatic upon the finding of an index increase of more than 4%. The rule provides

that, upon a showing that the index has changed by 4% or more, the Commission “may” adjust the

fuel factor. Although the rule does not mandate a change on that showing, neither does it require

an additional showing. If the index shows that the market price has changed and the fuel factor has

not changed, it is logical under the Commission’s reasoning to conclude that the fuel factor does not

reflect the changed market price. Further, there is no finding or conclusion that the change is

automatic, only that the Commission has determined that a 4% change in the NYMEX index

satisfies the statutory requirement of a significant change. We decline to read the preamble of the

rule and the statute to require showings additional to the 4% change in the NYMEX index average

found sufficient by the Commission to satisfy both the statute and the rule.

The suitability of the NYMEX index to measure the relevant market price was

decided in the rulemaking proceeding, and we cannot review it in this ratemaking proceeding. The

Commission’s determination in the rulemaking proceeding to use the NYMEX index as the sole

18
means to correct inadequacies in the fuel factor, combined with its linkage between the

determination of adequacy and the correction of inadequacies, supports the Commission’s use in this

proceeding of the NYMEX index as the sole measure of the adequacy of the fuel factor.8 The

absence of any reference to the NYMEX index in the statute does not prohibit the Commission from

using it for these purposes, and that use does not render the statute or the rule meaningless in whole

or in part. Although the Commission could have chosen other methods either to assess the adequacy

of the fuel factor or to adjust it—i.e., looking to the AREP’s actual costs, as appellants urge—we

find no support for the argument that exclusive use of the NYMEX index to assess the adequacy of

the fuel factor violates either the statute or the rule in a way subject to attack in this ratemaking

proceeding. The Commission explained in the rulemaking proceeding why use of the AREP’s actual

costs was not only inappropriate but also contrary to the intent of the transitional statutes. The

Commission’s choice of the NYMEX index was unchallenged by direct appeal and reinforced in the

2003 amendment process. Therefore, this suit for judicial review of the ratemaking decision did not

invoke the district court’s jurisdiction to review the adoption of the NYMEX index-dependent

method. The challenges to the application of the rule and statute in this regard likewise lack merit.

2. Admissibility and sufficiency of evidence about adequacy of fuel factor

Appellants complain about the type and sufficiency of the evidence admitted at the

ratemaking hearing. Appellants decry the exclusion of their evidence regarding the prices actually

8
We reached a similar conclusion based on additional testimony regarding the 2003
amendments to rule 25.41, which retained use of the NYMEX index but adjusted the materiality
threshold and the measuring period. See generally, 2003 Rulemaking Case, 131 S.W.3d at 322-23.

19
paid by First Choice for natural gas or purchased energy used to serve retail customers. They assert

that First Choice’s evidence of NYMEX index rates is no evidence of the adequacy of the fuel factor

to reflect significant changes in the market price of natural gas and purchased energy used to serve

retail customers, and thus that First Choice failed to produce necessary evidence. They contend that

evidence of the NYMEX index alone cannot satisfy various elements of the statute and rule. They

contend that there was no evidence that First Choice would suffer losses if the Commission did not

increase its fuel factor. They also contend that the increase of First Choice’s fuel factor based on

such limited evidence contravenes legislative intent for the price-to-beat.

Appellants argue that, by not requiring the AREPs to provide evidence of the actual

prices paid for gas and energy “used to serve retail customers,” the Commission has written words

out of the statute. But the statute does not require “actual” prices paid, nor does it require the prices

paid by an individual AREP; instead, it mandates that the “market” price is the standard to be used.

The Commission decided within its authority that the relevant market price was the price that a new

REP would have to pay to serve retail customers as reflected by the NYMEX index, not the price

paid by First Choice or other AREPs.9 As discussed above, the Commission determined in the

rulemaking proceedings that the natural gas price drives the market price of purchased energy.10 See

9
In our opinion on amended rule 25.41, we discussed the Commission’s theory that the use
of current market prices, regardless of the price actually paid by affiliated retail electric providers
under possibly lower long-term contracts, would further its goal of enabling and encouraging
competitive electric providers to enter the market. 2003 Rulemaking Case, 131 S.W.3d at 322-25.
10
Appellants correctly point out that the district court inaccurately states in Conclusion of
Law #7 that PURA section 39.202(l) looks “only to the market price of natural gas and purchased
energy as determined by the NYMEX Henry Hub index.” (Emphasis added.) The statute does not
refer to the NYMEX index. However, because the conclusion of law is also accurately based on rule
25.41, the stray language in that conclusion regarding the statute did not harm appellants.

20
26 Tex. Reg. at 2694-95. Because that is the market in which REPs, companies that serve retail

customers, purchase energy or gas, the NYMEX index is evidence of the price of gas and energy

used to serve retail customers. Comparison of the current index to the index used to set the existing

fuel factor is evidence of whether that market price has changed. Comparison of the rate of change

to the 4% materiality threshold determines whether any change is statutorily significant. Under the

rule as adopted in 2001, the NYMEX index is not irrelevant, is not just some evidence, but is

conclusive evidence of the elements of the statute and the rule.

Accordingly, the Commission did not err by excluding evidence of prices actually

paid for gas and energy, nor did it err by “ignoring” unrebutted evidence that the fuel-factor

adjustment would lead to a windfall profit for First Choice. The Commission follows the rules of

evidence applicable in civil cases. 16 Tex. Admin. Code § 22.221 (2004). “Irrelevant, immaterial,

or unduly repetitious evidence shall be excluded.” Id. Evidence is relevant if it has any tendency

to make the existence of any fact that is of consequence to the determination of the action more

probable or less probable than it would be without the evidence. Tex. R. Evid. 401. Evidence

regarding First Choice’s purchase price and any windfall profits resulting from the fuel-factor

adjustment does not bear on whether the NYMEX index has changed the requisite amount. The

Commission did not err by excluding or refusing to consider such evidence.

Appellants’ arguments that the Commission’s actions contravene legislative history

are not persuasive. Appellants contend that the legislature made the fuel factor adjustable in order

to keep the price-to-beat from falling significantly below market so that competitors could enter the

market, to provide a safe harbor for customers to receive service from their familiar suppliers at

21
regulated rates 6% lower than rates in effect before the transition began, and to protect providers

from uncompensated losses.11 The intent to develop a competitive market supports the

Commission’s action. The 6% price break was guaranteed only at the beginning of the period; the

statute sets no upward limit on the price-to-beat due to fuel-factor adjustments. See PURA

§ 39.202(a), (l). The Commission determined that maintaining the price-to-beat at below-market

levels would hinder the legislature’s goal to have competitors enter the market. 26 Tex. Reg. at

2680, 92. While the Commission may have been concerned that setting too high a minimum change

in the NYMEX index could inflict losses on AREPs, neither the statute nor the rule confines the fuel-

factor’s adjustability to loss prevention. Even if a price rise is not necessary to prevent losses, the

Commission is within its discretion to determine that achievement of the legislature’s express policy

goal to foster competition (see PURA § 39.001(a)) outweighs other concerns. If, as appellants urge,

11
Appellants cite both case law and legislative history. See Reliant Energy, Inc. v. Public
Util. Comm’n, 62 S.W.3d 833, 838 (Tex. App.—Austin 2001, no pet.); see also Public Utility
Regulatory Act: Hearings on S.B. 7 Before the Senate Spec. Comm. on Elec. Util. Restructuring,
76th Leg., R.S. at 18 (March 1, 1999). Appellants’ arguments echo comments in the rulemaking
proceeding before the Commission:

OPC explained that the legislative policy for the price to beat is to provide a
safe haven for residential and small commercial customers from any adverse
impacts of competition that might arise during the transition period. The use of
a fuel factor mechanism for adjustments, OPC explained, indicates that PTB
customers would not face any consequences greater than under a regulated cost
of service rate. OPC reasoned that the Legislature was aware that this provision
placed risks on the affiliated REP, which no longer owned generation. OPC
contended that the affiliated REP is required to absorb that risk unless it
becomes so onerous that an adjustment to the PTB needs to be requested on
financial integrity grounds.

26 Tex. Reg. at 2692.

22
the Commission misinterpreted legislative intent in promulgating the rule in 2001 and applying it

in this case in 2002, the legislature had ample opportunity during its regular session in 2003 and four

subsequent special sessions to clarify its intent. Although the legislature’s silence is far from

dispositive,12 its silence on this issue is significant.

The Commission decided in the rulemaking proceeding that it would adjust an

AREP’s fuel-factor based on evidence of sufficient change in the NYMEX index over a specified

period. The Commission indicated in the rulemaking proceeding, and confirmed in this adjustment

proceeding, that the NYMEX index data alone would support the adjustment. There is no dispute

that First Choice provided the NYMEX-derived data supporting a fuel-factor adjustment. The

Commission did not err by excluding or failing to consider other evidence—even evidence of

windfall profits that the Commission found “troubling.” The Commission made findings and

conclusions regarding what evidence was necessary under the rule and the statute to justify an

increase in the fuel factor, and concluded that First Choice had supplied the necessary evidence. We

conclude that sufficient evidence supports those findings and conclusions.

3. Allowability of size of increase of price-to-beat

Appellants argue that the fuel-factor increase violates a set limit on the price-to-beat.

See PURA § 39.202(p). That section provides:

12
“It is at best treacherous to find in congressional silence alone the adoption of a controlling
rule of law.” Girouard v. United States, 328 U.S. 61, 69 (1946), quoted in Boys Markets, Inc. v.
Retail Clerks Union, Local 770, 398 U.S. 235, 241 (1970).

23
 On finding that a retail electric provider will be unable to maintain its financial
integrity if it complies with Subsection (a), the commission shall set the retail electric
provider’s price-to-beat at the minimum level that will allow the retail electric
provider to maintain its financial integrity. However, in no event shall the price-to-
beat exceed the level of rates, on a bundled basis, charged by the affiliated electric
utility on September 1, 1999, adjusted for fuel as provided by Subsection (b).

Id. Appellants argue that the phrase “in no event” means that the price-to-beat can never exceed the

September 1, 1999 rate (“the 1999 rate”) and that application of the statute is not limited to situations

in which the provider’s financial integrity is threatened. They assert without contradiction that the

fuel-factor adjustment in this case causes First Choice’s price-to-beat to exceed its 1999 rate.

The Commission argues that the adjustment in subsection (p) relates only to the initial

setting of the price-to-beat. Subsection (p) refers to hardships imposed by compliance with

subsection (a), which defines the price-to-beat and its period of applicability:

(a) From January 1, 2002, until January 1, 2007, an affiliated retail electric provider
shall make available to residential and small commercial customers of its
affiliated transmission and distribution utility rates that, on a bundled basis, are
six percent less than the affiliated electric utility’s corresponding average
residential and small commercial rates, on a bundled basis, that were in effect
on January 1, 1999, adjusted to reflect the fuel factor determined as provided by
Subsection (b) and adjusted for any base rate reduction as stipulated to by an
electric utility in a proceeding for which a final order had not been issued by
January 1, 1999. These rates on a bundled basis shall be known as the “price-to-
beat” for residential and small commercial customers, except that the “price-to-
beat” for a utility is the rate in effect as a result of a settlement approved by the
commission after January 1, 1999, if the commission determines that base rates
for that utility have been reduced by more than 12 percent as a result of a final
order issued by the commission after October 1, 1998.

(b) The commission shall determine the fuel factor for each electric utility as of
December 31, 2001.

PURA § 39.202.

24
 We conclude that subsection (p) does not prevent the price-to-beat from rising above

the 1999 rates due to fuel-factor adjustments under subsection (l). Subsection (p) expressly applies

only when the Commission finds that the provider will be unable to maintain its financial integrity

if it complies with subsection (a). The “in no event” language applies to that situation alone; i.e.,

regardless of the threat to financial integrity, the rate cannot exceed the 1999 price. The interaction

of other provisions supports this constraint on the reach of subsection (p). Subsection (a) establishes

the price-to-beat at a rate 6% below the rate charged on January 1, 1999, modified by the fuel factor

determined under subsection (b). See id. § 39.202. Subsection (b) concerns only the initial setting

of the fuel factor on December 31, 2001. The specificity of subsection (b) ties these interconnected

subsections to the outset of the transition period. By contrast, the twice-yearly adjustments permitted

under subsection (l) are not mentioned by subsection (p); we conclude that the adjustments under

subsection (l) are not limited by subsection (p). Consumers get an initial price break of up to 6%,

but adjustments due to increases in the market price of gas and energy can thereafter drive the price-

to-beat higher.

Even if subsection (p) applied through the entire transition period, its express terms

limit its application to adjustments to the price-to-beat based on preservation of financial integrity

as described in the first sentence of subsection (p). Reading it to limit adjustments based on market

price under subsection (l) would cap the price-to-beat for several years regardless of energy prices,

rendering the fuel-factor adjustment provisions of subsection (l) essentially nugatory in an

inflationary energy market and preventing providers from recovering their fuel costs. The

Commission’s interpretation implements the legislature’s balance between protecting consumers and

fostering competition.

25
 As the State’s policy changes from regulation to competition in the provision of

electricity, so too must the measures taken to protect the customers. The legislature has placed its

faith in market forces to ultimately provide price control. The Commission’s implementation of its

rules, while a departure from historical procedure, is within the bounds of legislative directives and

the Commission’s rules.

45-day time limit

Appellants complain that the 45-day timeline for the fuel-factor adjustment process

is far too short. They contend that it prevents them from mustering evidence and having a

meaningful hearing. They argue that the timeline is unprecedented for a contested case and is driven

by the Commission’s desire to have an uncontested process.

This is primarily a challenge to the rule that would have been appropriate in the

rulemaking proceeding. When these arguments were raised regarding the amended rule, this Court

was not persuaded and concluded that the Commission had acted within its authority in adopting the

45-day timeline. 2003 Rulemaking Case, 131 S.W.3d at 325-26. This Court held that the 45-day

timeline satisfied the Administrative Procedures Act, that the relatively short period helped provide

market certainty and responsiveness to market shifts, and that the process of evaluating changes in

the NYMEX index was so straightforward that it did not require extensive preparation or lengthy

hearings. Id. at 326. This Court declined to rule out the possibility that a particular entity might be

able to show a deprivation of due process in a particular case.

Appellants do not show that the application of this rule has deprived them of due

process. They argue that they were prevented from developing and presenting evidence, but their

26
complaints concern evidence of First Choice’s actual costs and other factors beyond the NYMEX

index, all of which the Commission deemed irrelevant. They do not argue that the time limit

prevented them from mustering evidence pertaining directly to changes in the NYMEX index itself.

Because we have found no error in the exclusion of evidence not pertaining to the change in the

NYMEX index, we find no deprivation of due process if the 45-day time period prevented

development of any such evidence deemed irrelevant under the statutory and regulatory scheme.

Failure to require reimbursement of cities’ rate-case expenses

Appellants complain that the Commission violated statutory authority and agency

precedent by failing to require First Choice to reimburse the cities for reasonable expenses incurred

in this proceeding. The relevant statute provides:

(a) The governing body of a municipality participating in or conducting a
ratemaking proceeding may engage rate consultants, accountants, auditors,
attorneys, and engineers to:

(1) conduct investigations, present evidence, and advise and represent the
governing body; and

(2) assist the governing body with litigation in an electric utility ratemaking
proceeding before the governing body, a regulatory authority, or a court.

(b) The electric utility in the ratemaking proceeding shall reimburse the governing
body of the municipality for the reasonable cost of the services of a person
engaged under Subsection (a) to the extent the applicable regulatory authority
determines is reasonable.

PURA § 33.023. Appellants argued, and the ALJ found, that this is a ratemaking case and, for

purposes of ratemaking reimbursement, the Commission can require an AREP to “assume the role

27
of an electric utility.” The ALJ opined that requiring reimbursement of the cities’ expenses promotes

the goal of encouraging municipalities to participate in ratemaking proceedings.

The Commission acknowledged the policy concerns favoring reimbursement, but

concluded that the statutory exclusion of “retail electric provider” from the definition of “electric

utility” bars application of the responsibilities of an electric utility on First Choice, which is an

affiliated retail electric provider. See PURA § 31.002(6)(H) (“‘Electric utility’ . . . does not include

. . . a retail electric provider . . . .”). Although the statute separately defines AREPs (id. § 31.002(2))

and retail electric providers (id. § 31.002(17)), it defines AREPs as a subset of retail electric

providers. Id. § 31.002(2) (“‘Affiliated retail electric provider’ means a retail electric provider that

is affiliated with or the successor in interest of an electric utility certificated to serve an area.”).

Appellants contend that the reimbursement requirement applies to AREPs. They

contend that the fuel-factor adjustments are ratemaking proceedings and that AREPs are electric

utilities for the purpose of these proceedings. They assert without contradiction that the fuel-factor

adjustment is within the definition of a ratemaking proceeding. See Southwestern Pub. Serv. Co. v.

Public Util. Comm’n, 962 S.W.2d 207, 218-19 (Tex. App.—Austin 1998, pet. denied) (because fuel

cost reconciliation proceedings change rates, they are ratemaking proceedings and therefore require

reimbursement of municipalities’ costs). However, First Choice and the Commission oppose the

arguments that AREPs are utilities.

Appellants cite statutes defining utilities as well as more general provisions to support

their argument that AREPs are utilities for reimbursement purposes. They contend that the

definitions in section 31.002 exclude only retail electric providers—not AREPs—from the definition

of electric utility, and distinguish AREPs from retail electric providers. See id. § 31.002(2), 6(H),

28
(17). They contend that this distinction is real because AREPs remain under some regulation, while

retail electric providers are not regulated. Appellants contend that the larger context of PURA

supports treating the AREPs as utilities for this purpose. They cite the distinction between the

AREPs’ “rates” (indicating regulation) and the “prices” to be determined by competition (indicating

nonregulation) as showing that AREPs are more like regulated utilities than unregulated providers.

Compare id. § 39.202, with id. § 39.001. They argue that the placement of the burden of proof in

contested cases on the “incumbent electric utility” by PURA section 39.003 means that AREPs must

be utilities because otherwise AREPs would not have the burden of proof in the fuel-factor

adjustment cases like this one.

We disagree. The plainest reading of the definitions is that, because AREPs are a

subset of retail electric providers which expressly are not electric utilities, AREPs are not electric

utilities. While AREPs may be regulated more than unaffiliated retail electric providers, appellants’

argument that the general placement of the burden of proof on utilities requires that AREPs be

treated as utilities is unpersuasive because the fuel-factor adjustment statute itself specifically places

the burden of proof on AREPs. See id. § 39.202(l).

We conclude that First Choice is an AREP, not a utility, and that neither statutory

law, case law, nor agency precedent requires First Choice to reimburse the cities’ costs on these

facts.

CONCLUSION

Appellants brought many challenges to the Commission’s adjustment of First

Choice’s fuel factor. The district court correctly concluded that it had no jurisdiction over challenges

29
to the validity of the rule because appellants did not comply with the time and venue requirements

for such challenges. The district court correctly concluded that the remainder of the challenges were

without merit, finding that the Commission acted within its authority by raising the fuel factor and

by not ordering First Choice to reimburse the cities for their expenses. Because the Commission did

not abuse its discretion, exceed its authority, act arbitrarily, or otherwise err in any way shown

harmful to appellants, we affirm the district court’s judgment.

Mack Kidd, Justice

Before Justices Kidd, B. A. Smith and Pemberton

Affirmed

Filed: August 26, 2004

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