Nucor Steel, a Division of Nucor Corporation v. Public Utility Commission of Texas, TXU Electric Company, Texas Industrial Energy Consumers, Steering Committee of Cities Served by TXU Electric Company, and Office of Public Utility Counsel

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03-04-00742-CV

Nucor Steel, a division of Nucor Corporation, Appellant

v.

Public Utility Commission of Texas, TXU Electric Company, Texas Industrial
Energy Consumers, Steering Committee of Cities Served by TXU Electric
Company, and Office of Public Utility Counsel, Appellees

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 98TH JUDICIAL DISTRICT
NO. GN104176, HONORABLE JOHN K. DIETZ, JUDGE PRESIDING

OPINION

This is an appeal by Nucor Steel of a contested case proceeding, held before the

Public Utility Commission, regarding the design of TXU Electric Delivery’s1 transmission and

distribution rates. Nucor, an industrial TXU customer located in a non-municipal area, claims that

the rate design ordered by the Commission unfairly imposes charges on non-municipal customers

for costs incurred wholly within the municipality. Specifically, Nucor asserts that TXU should not

be permitted to pass along its “franchise charges” as part of its base rates for non-municipal

customers because those charges are calculated only on sales of electricity to municipal customers.

1
The parties collectively use “TXU” to refer to TXU’s transmission and distribution utility,
which is currently named “TXU Electric Delivery,” but was previously known by other names,
including “Oncor Electric Delivery Company.”
Appellees—the Commission, TXU, the Texas Industrial Energy Consumers, and the Steering

Committee of Cities Served by TXU Electric Company—counter that it is reasonable to collect these

charges from non-municipal customers because both municipal and non-municipal customers benefit

from the purpose served by the franchise charge, which is TXU’s ability to locate its electric lines

on municipal streets, alleys, and public rights-of-way in order to provide electric service to all of its

customers. Nucor also challenges the Commission’s order on the grounds that it improperly

allocates the franchise charges based on the volume of sales, as measured in kilowatt hours, rather

than on the sales revenue, as was historically done. Appellees contend that it was reasonable to base

the allocation on kWh because it tracks the 1999 amendments to the Public Utilities Regulation Act.2

Nucor urges this Court to reverse the Commission’s determination that the franchise

charges should be allocated based on kWh and collected from all customers (the “spread collection”

method), on the grounds that the order was arbitrary and capricious, an abuse of discretion, and a

violation of PURA. See Tex. Gov’t Code Ann. § 2001.174(2) (West 2000) (standards for substantial

evidence review of contested case); see also Tex. Util. Code Ann. §§ 33.008 (West Supp. 2004-05)

(discussing franchise charges), 36.003 (West 1998) (primary section Nucor claims is violated, stating

utility’s rates must be “just and reasonable”). Appellees claim that the order should be affirmed

because the Commission’s decisions on rate design matters are entitled to deference and the order

is supported by substantial evidence. We affirm the judgment of the district court upholding the

Commission’s order.

2
PURA is codified in title 2 of the Texas Utilities Code. Tex. Util. Code Ann. §§ 11.001-
63.063 (West 1998 & Supp. 2004-05).

2
 BACKGROUND

In 1999, the Texas Legislature passed Senate Bill 7 to deregulate aspects of the

electric utilities industry, making several amendments to PURA. See Act of May 27, 1999, 76th

Leg., R.S., ch. 405, 1999 Tex. Gen. Laws 2543. The legislative intent was to increase competition

by ending the monopoly historically enjoyed by a limited number of investor-owned utilities. Tex.

Util. Code Ann. § 39.001 (West Supp. 2004-05). The utilities were “unbundled” into three entities:

power generation companies, transmission and distribution utilities, and retail electric providers.

Id. § 39.051(b) (West Supp. 2004-05). Only the transmission and distribution utilities remained

subject to traditional, cost-based regulation after the start of competition in January 2002. Id.

§ 39.001.

Following the 1999 amendments, TXU applied to the Commission to establish cost-

of-service rates for its newly unbundled transmission and distribution utility. See id. § 39.201 (West

Supp. 2004-05) (requiring utilities to file proposed tariffs, including transmission and distribution

utility charges). Nucor Steel and each of the appellees participated in the proceedings, which

included a hearing at the State Office of Administrative Hearings, a motion for rehearing to the

Commission, and an appeal to the district court.

At issue, here are the rates charged by TXU’s transmission and distribution utility

under the 1999 statutory provisions. Pursuant to PURA section 33.008, which was enacted that year,

a municipality may impose a “franchise charge” on an electric utility3 that provides distribution

3
The statute expressly lists the following as the types of utilities upon which municipalities
may impose a franchise charge: electric utilities, transmission and distribution utilities, municipally-
owned utilities, and electric cooperatives. In discussing section 33.008, we will refer to these
specified utilities generally as “electric utilities.”

3
service within the municipality. Id. § 33.008. The term “distribution service” includes utilities that

provide both transmission and distribution service, and “service within the municipality” includes

utilities that serve customers both within and outside of the municipal borders, but excludes those

that serve only non-municipal customers. Id. § 33.008(a)(1) (excluding non-municipal service from

imposition of charges), (h) (“In this section, ‘distribution service’ means the delivery of electricity

to all retail customers.”). Because TXU is a transmission and distribution utility serving municipal

and non-municipal customers, it is subject to the franchise charges set forth in section 33.008. Id.

The purpose of the charge is to reimburse the municipality for a utility’s “use of a

municipal street, alley, or public way to deliver electricity to a retail customer.” Id. § 33.008(a). If

an electric utility locates its facilities and lines on municipal property then, in exchange, it must pay

the municipality a franchise charge. The statute defines the charge as a “reasonable and necessary

operating expense of each electric utility” and mandates that it be included in the utility’s

“nonbypassable delivery charges” pursuant to section 39.107. Id. § 33.008(c); see also id. §

39.107(d) (West Supp. 2004-05) (electric utilities “shall bill a customer’s retail electric provider for

nonbypassable delivery charges”).4

Section 33.008 specifies how the charge is to be calculated, but it is silent as to the

methods by which utilities are to allocate and collect the charges. Id. § 33.008(b). The formula for

calculating the franchise charge begins by dividing the “total franchise fee revenue collected by the

4
As a point of clarification, TXU’s franchise charges are initially passed along to retail
electric providers (REPs), who then shift the ultimate responsibility for payment to the customers.
As one such customer, Nucor challenges the method in which TXU allocates and collects these
charges.

4
municipality in 1998” by “the total kilowatt hours of electricity delivered by these utilities to

municipal customers in 1998.” Id. This yields the 1998 rate-of-revenue collected by a municipality

from a utility, per kilowatt hour of electricity sold by that utility within the municipality. To

determine the amount of the franchise charge, this 1998 rate is then multiplied by the total number

of kilowatt hours of electricity sold by a utility to its municipal customers during a specified time

period. Id. Therefore, while the rate of the franchise charge is derived from the amount of revenues

historically collected, the ultimate charge is dependent on the volume of electricity sold within the

municipality. As a result, the revenues collected by municipalities from franchise charges do not

increase and decrease with the price of electricity; rather, they fluctuate based on the volume of sales,

as measured in kWh. See id.

Historically, municipalities were entitled to collect “local gross receipts taxes”

(LGRTs) from electric utilities for the same purpose as the franchise charge—the utility’s use of

municipal streets and rights-of-way to run its electric lines. See Tex. Tax Code Ann. § 182.025

(West 2002).5 As implied by its name, the LGRT was historically based on the total amount of gross

revenues earned by a utility for the sale of electricity within a municipality; the historical method of

allocation was “direct” (allocated only on municipal sales) based on revenues, and the historical

5
Section 182.025 was originally codified in 1981 as part of the tax code’s “Subtitle G:
Gross Receipts Taxes, Subchapter B: Utility Companies,” stating that “[a]n incorporated city or
town may make a reasonable lawful charge for the use of a city street, alley, or public way by a
public utility in the course of its business.” See Act of May 31, 1981, 67th Leg., R.S., ch. 389, § 1,
1981 Tex. Gen. Laws 1490, 1716. This section was amended in 1999 as part of Senate Bill 7 to
bring it into conformance with the newly-enacted PURA section 33.008. See Act of May 27, 1999,
76th Leg., R.S., ch. 405, § 56, 1999 Tex. Gen. Laws 2543, 2623.

5
method of collection was “spread,” meaning that both municipal and non-municipal customers were

responsible for paying their portion of the LGRT.

The legislature was concerned that deregulation would erode the amount of LGRTs

collected by municipalities because, in the newly unbundled market, revenues would only accrue on

the sale of transmission and distribution services and would no longer accrue on the sale of

generation services. To prevent such revenue erosion, the legislature enacted section 33.008, which

modified the revenue-based LGRT into a volume-based franchise charge, thereby providing a more

stable source of compensation for the municipalities.6

In October 2000, an ALJ conducted a contested case hearing. See generally Tex.

Gov’t Code Ann. § 2001.051-.062 (West 2000) (rights and procedural rules regarding contested case

hearings). One issue addressed during that proceeding was the method by which TXU should

allocate and collect the franchise charges imposed on it by municipalities pursuant to section 33.008.

See Tex. Util. Code Ann. § 33.008.

Regarding the method of allocation, TXU, TIEC, and the Commission staff

recommended that the “direct” method be used, that is, that the charges be allocated only on

municipal sales, and that the basis of the allocation be the volume of sales within the municipality,

as measured in kWh. They urged that this plan would maintain the historical practice of direct

allocation while updating the basis of the allocation—to be based on sales volume, in kWh, rather

than on sales revenue—in order to parallel section 33.008’s calculation of the franchise charge. See

6
Nucor, TXU, TIEC, and the Commission agree on these historical facts and on the
legislative intent behind section 33.008.

6
id. Although Nucor did not dispute that a direct allocation method should be maintained, Nucor did

challenge TXU’s proposed basis of the allocation, contending that the franchise charges should

continue to be allocated based on sales revenue rather than on kWh. Nucor supported its

recommendation by arguing that, because the calculation of franchise charges under section 33.008

is dependent in part on the 1998 revenue data, the historical practice of basing the allocation on

revenues should not be altered.

Regarding the method of collection, TXU, TIEC, the Commission staff, and the Cities

recommended that the franchise charges be collected from all customers, whether they be municipal

or non-municipal residents; this is the “spread” collection method.7 Nucor, as a non-municipal TXU

customer, challenged this proposal and urged that a direct method of collection be used, meaning that

only customers residing within the municipal boundaries would be responsible for paying the charge.

The two proposals diverge on the issue of whether non-municipal customers benefit from the

purpose for which the charge is imposed—TXU’s ability to locate its electric facilities on municipal

streets, alleys, and rights-of-way. See id. Arguing that all customers benefit from the integrated

electric grid and that, historically, the LGRT was collected from all customers, TXU, TIEC, the

Commission Staff, and the Cities supported the spread collection method. Countering that the

franchise charge only benefits municipal customers and that it constitutes an improper tax by which

non-municipal customers are forced to subsidize municipal projects, Nucor supported the direct

collection method. Nucor further argued that the spread collection method violates PURA section

7
TIEC supported spread collection in the alternative.

7
36.003, which requires that utility rates be “just and reasonable,” because it unreasonably

discriminates against non-municipal customers. See id. § 36.003.

In March 2001, the ALJ issued a proposal for decision concluding, among other

things, that (1) the charges should be allocated using the “direct” method—based on sales within the

municipality rather than systemwide sales; (2) given the enactment of section 33.008, the basis of

the allocation should be the volume of sales, measured by kWh, rather than the historical method of

basing the allocation on the gross sales revenues; and (3) the charges should be collected from all

customers, both within and outside of the municipality—the “spread” collection method—because

the franchise charge “continues to serve the entirety of the transmission and distribution system,

benefits all customers in the system and, consequently, the costs should be shared among all

customers through base rates.” The ALJ determined that, pursuant to section 36.003, it is

“reasonable, not unreasonably preferential, prejudicial, or discriminatory” for TXU to adopt a

direct/spread plan based on an energy allocator. See id.

On October 3, 2001, the Commission issued a final order stating that its goal “is to

institute, to the extent possible, a generic rate design that would honor the principles of cost

causation, simplicity, and equity to customers.” The Commission determined that the ALJ’s

conclusion satisfied this goal and thus adopted the PFD, finding that the franchise charges “should

be allocated using a direct allocation and employing the energy allocator . . . [and] collected from

all customers on TXU’s system.” The Commission agreed with the ALJ’s conclusion that the direct

allocation based on kWh and spread collection methods “honors the principles of equity” because

the “franchise arrangement serves the entirety of the transmission and distribution system [and]

8
benefits all customers in the system.” Further, the Commission concluded, as a matter of law, that

the direct/spread methods comply with PURA sections 33.008 and 36.003. Nucor filed a motion for

rehearing and then appealed the Commission’s order to the district court. In October 2004, the

district court affirmed the Commission’s order.

ANALYSIS

Nucor appeals to this Court, claiming in a single issue that the final order should be

reversed because it was arbitrary and capricious, an abuse of discretion, and a violation of section

36.003 for the Commission to permit TXU to allocate its franchise charges using the direct method

based on kWh sales and to collect these charges from municipal and non-municipal customers using

the spread method. Because the final order was supported by substantial evidence, we affirm the

judgment.

Standard of Review

We review commission proceedings under the substantial evidence rule. Id. § 15.001

(West 1998). That standard affords great deference to the Commission’s decisions on topics that the

legislature has determined are within the agency’s discretion, such as rate design. Tex. Gov’t Code

Ann. § 2001.174. “PURA generally confers authority upon the PUC to regulate and supervise public

utilities, to fix and regulate rates of public utilities, and to insure rates, operations, and services [] are

just and reasonable to the consumers and to the utilities.” Public Util. Comm’n v. GTE-Southwest,

Inc., 901 S.W.2d 401, 407 (Tex. 1995).

9
 Pursuant to the substantial evidence rule, we may not substitute our judgment for that

of the Commission and we are to reverse or remand the case only if the Commission’s decision (1)

violates a constitutional or statutory provision, (2) exceeds the agency’s authority, (3) was made

through unlawful procedure, (4) is affected by another error of law, (5) is not reasonably supported

by substantial evidence when considering the reliable and probative evidence in the record as a

whole, or (6) is arbitrary or capricious or characterized by an abuse of discretion. Nucor challenges

the Commission’s decision on grounds (1), (5), and (6).

To prevail, Nucor bears the burden of overcoming a presumption that the

Commission’s findings are supported by substantial evidence. Reliant Energy, Inc. v. Public Util.

Comm’n, 153 S.W.3d 174, 184 (Tex. App.—Austin 2004, no pet.). The evidence may actually

preponderate against the Commission’s finding and this Court must still uphold it if enough evidence

suggests that the Commission’s determination was within the bounds of reasonableness, that is, if

substantial evidence supports its determination. Southwestern Pub. Serv. Co. v. Public Util.

Comm’n, 962 S.W.2d 207, 215 (Tex. App.—Austin 1998, pet. denied). “The true test is not whether

the agency reached the correct conclusion, but whether some reasonable basis exists in the record

for the action taken by the agency.” City of El Paso v. Public Util. Comm’n, 883 S.W.2d 179, 185

(Tex. 1994). Although the record may contain conflicting evidence, credibility is lent to the

Commission’s ultimate resolution of those conflicts when, as here, “the record, evaluated as a whole,

reflects a process of discussion, careful consideration, and compromise.” Pedernales Elec. Coop.

v. Public Util. Comm’n, 809 S.W.2d 332, 341 (Tex. App.—Austin 1991, no writ).

10
Rate Design

PURA grants the Commission authority to “establish and regulate rates of an electric

utility” and “to do anything . . . that is necessary and convenient to the exercise of [its regulatory]

power.” Tex. Util. Code Ann. §§ 14.001, 36.001 (West 1998). The Commission has “discretion to

determine the method of rate design,” which is “a complex problem that involves many factors.”

Texas Alarm & Signal Ass’n v. Public Util. Comm’n, 603 S.W.2d 766, 772 (Tex. 1980). The

supreme court has rejected the notion that the Commission’s rate design decisions must be based on

a precise list of factors; while the Commission must address the rate considerations set forth in

PURA, such as section 36.003’s requirement that rates be “just and reasonable,” it has discretion

over the particular factors to consider and the weight to be given to those factors. Cities of Abilene

v. Public Util. Comm’n, 854 S.W.2d 932, 949 (Tex. App.—Austin 1993), partially rev’d on other

grounds, 909 S.W.2d 493 (1995); see also Tex. Util. Code Ann. § 36.003. Cost is not the only factor

that is pertinent to the Commission’s decision; the Commission may also consider the purpose for

which the service is received, the quantity received, the time of use, and the consistency and

regularity of use, among other factors. Texas Alarm & Signal Ass’n, 603 S.W.2d at 772; see also

Public Util. Comm’n v. AT&T Communications, 777 S.W.2d 363, 366 (Tex. 1989).

Rate design is the “distribution of the revenue requirements among the various

services” provided by the utility. Texas Alarm & Signal Ass’n, 603 S.W.2d at 768 n.2; see also

Michael Little, Rate Design, 28 Baylor L. Rev. 1083 (1976) (discussing overall goals of rate design).

The rate design process relies on the Commission’s “informed judgment and expertise and utilizes

projections and estimates in virtually all areas.” GTE-Southwest, Inc., 901 S.W.2d at 411; see also

11
Southwestern Pub. Serv. Co., 962 S.W.2d at 214 (logical for Commission to have discretion over

rate design based on complexity of issues and procedures). When PURA is silent as to an aspect of

rate design, it demonstrates the legislature’s intent to leave that decision within the Commission’s

discretion. Reliant Energy, Inc., 153 S.W.3d at 189.

The questions at issue here, which regard the proper methods for TXU to allocate and

collect its franchise charges as part of its customers’ base rates, are rate design matters within the

Commission’s discretion. Rate design proceedings are frequently characterized by a utility’s filing

of a “statement of intent” to change its rates, which is then formally acted on by the Commission.

See Southwestern Pub. Serv. Co., 962 S.W.2d at 219; see also Tex. Util. Code Ann. §§ 33.024,

36.102 (West 1998). As part of deregulation, utilities were required to file “proposed tariff”

documents with the Commission for the purpose of setting new rates. Id. § 39.201. Such filings are

akin to statements of intent in that they characterize the proceedings as being for rate design

purposes. Furthermore, PURA does not specify the methods by which TXU’s franchise charges

should be allocated and collected. See id. § 33.008 (specifying only the method of calculating the

charges).8 Because these issues are rate design matters upon which the statute is silent, the

Commission’s conclusions are entitled to great deference.

8
Nucor acknowledges that the statute is silent on this matter. Nucor’s expert, Dennis W.
Goins, testified that “neither Senate Bill 7 nor PURA indicate whether or how LGRT should be
allocated to rate classes in unbundled cost-of-service analyses. Moreover, they indicate only that the
LGRT charge must be included in nonbypassable delivery charges without specifying the form that
an LGRT charge should take—for example, a uniform charge applicable to all customers, [or] a
charge applicable only to customers . . . within the boundaries of municipalities . . . .”

12
Direct Allocation Based on kWh

Nucor claims that the franchise charges are “driven by historical revenue sales” and,

thus, it is inconsistent with the goal of cost-causation9 to allocate them based on “present kWh

sales.” Instead, Nucor urges, TXU should continue to use “the historical method of allocating

franchise charges on the basis of gross revenues derived by TXU.” Appellees counter that the

Commission’s decision to allocate the franchise charges based on kWh is supported by substantial

evidence.

At the SOAH hearing, TXU’s expert, J. Michael Sherburne, testified that the benefits

of basing the allocation on kWh include that “(1) it maintains the existing rate structure, (2) it is

consistent with metering facilities available for this type of service, and (3) it eliminates cost shifting

due to a change in rate design.” Sherburne urged that the only basis for Nucor’s proposal was that

it “would virtually eliminate any allocation of [the charge] to [Nucor].” Sherburne also rebutted

Nucor’s proposal by stating that it is “contrary to TXU’s past allocation method . . . and is contrary

to the clear cost causative factor.” Jeffry Pollock, an expert witness for TIEC, testified that, while

he would have preferred that the legislature not have modified the calculation of the charge from

being based on revenues to being based on volume (kWh), that change has been made and, thus, the

allocation of the charge needs to be uniformly modified; “like it or not, it’s a kilowatt-hour based

9
At oral argument, the Cities defined “cost-causation” as “the Commission’s policy of
allocating costs in a non-discriminatory manner; the Commission has great discretion in this regard.”
At the hearing, a TIEC witness defined it as “dictat[ing] that only those customers whose energy
usage determines the amount of the [franchise charge] should be required to pay [it].”

13
[charge].” Pollock also testified that the direct allocation based on kWh method is consistent with

cost-causation principles.

The record reflects substantial evidence upon which the Commission could determine

that the allocation of TXU’s franchise charges should be based on kWh sales. Furthermore, the

statute is silent on the proper method of allocation, the Commission’s chosen method parallels the

calculation set forth in section 33.008, the Commission has broad discretion over rate design issues,

and the record reflects that a “process of discussion, careful consideration, and compromise”

occurred here. Given these facts, Nucor has failed to show that the Commission’s order allocating

the franchise charges based on kWh was arbitrary and capricious, characterized by an abuse of

discretion, or in violation of a statute or constitution. See Pedernales Elec. Coop., 809 S.W.2d at

341. Nucor’s challenge to the direct allocation based on kWh is overruled.

Spread Collection

Nucor claims that, because franchise charges are incurred only on municipal sales and

non-municipal customers do not benefit from the purpose served by the franchise charge, it was an

abuse of discretion and a violation of section 33.006 for the Commission to order that TXU collect

its franchise charges from both municipal and non-municipal customers.10 Nucor’s challenge to the

spread collection method is primarily based on its claim that the franchise charge is a “tax” that

10
Nucor also challenged the spread collection method on the ground that transmission-only
customers (such as Nucor) should not be responsible for the franchise charges because section
33.008 states that the charges are to be calculated based on sale of “distribution service.” Given that
the statute defines “distribution service” as “the delivery of electricity to all retail customers,”
however, Nucor conceded at oral argument that it was included in this definition and therefore
abandoned this argument. See Tex. Util. Code. Ann. § 33.008 (West Supp. 2004-05).

14
should not be paid by non-municipal customers who do not benefit from its collection. Nucor claims

that, by allowing TXU to collect a portion of the franchise charge from non-municipal customers,

the Commission’s order forces non-municipal customers (such as Nucor) to subsidize municipal

activities, resulting in “taxation without representation.”

Appellees counter that the franchise charge is not a tax but is, instead, akin to a

“rental fee,” which TXU pays in exchange for the ability to locate its electric lines on municipal

streets, alleys, and public rights-of-way. Appellees urge that there is substantial evidence in the

record to support the Commission’s determination that all customers benefit from the purpose served

by the charge and, hence, that all customers should share responsibility for the cost.

Much of the debate over the nature of the charge—whether it is a tax or a rental

fee—stems from the use of imprecise nomenclature. Historically, the phrase “local gross receipts

tax” was used to describe the money that municipalities could collect from utilities for locating their

electric facilities on municipal property. This was set forth in the tax code. See Tex. Tax Code Ann.

§ 182.025. As of 1999, however, the legislature determined that it was more appropriate to refer to

these fees as “franchise charges” and to include them in the utilities code. PURA section 33.008,

titled “Franchise Charges,” was therefore enacted, expressly stating that the purpose was “a

reasonable charge . . . for the use of a municipal street, alley, or public way to deliver electricity to

a retail customer” and that the “franchise charges authorized by this section shall be considered a

reasonable and necessary operating expense of each electric utility . . . .” Tex. Util. Code Ann.

§ 33.008(a), (c). Despite this clear legislative expression that the nature of the franchise charge is

a fee, not a tax, many parties continued to use the old terminology, referring to the charge as an

15
“LGRT.” But simply calling the charge an LGRT does not make it so. The legislature determined

the franchise charge should not be labeled as a tax and should not appear in the tax code because the

charge is not imposed like a tax. Utilities only incur the charge in exchange for the use of municipal

streets, alleys, and rights-of-way; if a utility does not locate its electric facilities on municipal

property, it does not incur the charge. Nucor recognized this: its expert, Dennis W. Goins, testified

that “while this assessment is commonly called a tax, the ‘tax’ nomenclature should not disguise the

fundamental nature of this fee as a charge for a specific purpose,” and Nucor’s motion for rehearing

urged that the “underlying basis for the fee” is “a charge to use city streets and public ways.”

Nucor also relies on City of Houston v. Public Utility Commission to support its claim

that the franchise charge is a tax. 656 S.W.2d 107 (Tex. App.—Austin 1983, writ ref’d n.r.e.). This

Court in City of Houston held that there was substantial evidence to affirm a Commission order that

determined, in the context of telephone rates, that LGRTs should only be collected from municipal

customers because “rural” customers derive no benefits from them. Id. at 108-09. Appellees argue

that City of Houston does not support Nucor’s claim. First, the court merely held that the direct

collection was a “reasonable means which the Commission could permissibly adopt” under those

circumstances; it did not hold that direct collection was the only appropriate method or that spread

collection could never be reasonable. Id. at 110. Here, the appellees contend that the statute is silent

as to the method of collection, and Nucor has offered nothing to show that the spread method is

impermissible. Second, City of Houston pertained to telephone rates. The court noted that it was

reasonable to collect the charge from only municipal customers because they were the “predominant

16
users” of the telephone services; the same is not necessarily true with electric utilities because some

of the largest industrial customers—such as Nucor—are located outside of the municipal borders.

Id. at 111. Finally, the appellees assert that the legislature, by enacting section 33.008 with express

language that the franchise charges are “operating expenses,” rejected the “tax” argument advanced

in City of Houston.

In addition to rebutting Nucor’s argument that the franchise charge is an

“impermissible tax,” the appellees offered evidence to support the spread collection method on the

basis that all customers should be responsible for the charges because all customers benefit from

their purpose. Section 33.008 expressly states that franchise charges are incurred by TXU to pay for

its ability to locate electric lines on municipal streets, alleys, and rights-of-way. Tex. Util. Code

Ann. § 33.008. Sherburne testified that all customers, whether located within or outside of the

municipal borders, benefit from TXU’s ability to locate its facilities in municipal areas because the

electricity travels to all customers over an integrated grid and, therefore, all customers should be

responsible for a portion of the costs TXU incurs in providing transmission and distribution service

over these lines. TIEC and the Cities concurred with Sherburne’s assessment, based on the notion

that these lines do not abruptly end at the municipal border; rather, they run continuously from

municipal locations to non-municipal areas.

Appellees also urged that simplicity and consistency are important factors to consider

in rate design and that the spread collection method serves both of these goals because it applies a

uniform policy to all customers and maintains the historical practice of collecting the fees from both

17
municipal and non-municipal customers. Pointing to Docket 5640,11 Sherburne testified that, since

1984, the Commission has consistently approved these charges “as a system cost because all

customers, including [Nucor], receive the benefits of the voltage support, improved power factor,

and increased efficiency that the devices provide”; thus, for over twenty years, the franchise charges

have been “recovered from all of TXU customers, regardless of whether the customer is located

inside or outside of a taxing municipality’s boundaries.” The supreme court stated in Texas Alarm

and Signal Association that, when a concept has historically been “widely accepted as a proper

pattern for rate design” it “should not be discarded by the Commission without concrete data to

support such a change.” 603 S.W.2d at 768. The Cities argued that the Commission cannot alter

its historical practice of spread collection without a geographically based cost-of-service study,

which Nucor failed to provide.

Moreover, the appellees claimed that Nucor’s proposal for a direct collection method

would be problematic. Raymond Stanley, an expert for Texas Industries (TXI),12 testified that the

direct collection method would adversely affect municipal customers by shifting costs to them that

were historically paid by non-municipal customers. Sherburne testified that Nucor’s proposal “is

contrary to efforts to create simple, easy to understand charges and billing mechanisms for REPs.

For TXU, this suggestion would require approximately 400 different rates, one for each of the cities

11
Tex. Pub. Util. Comm’n, Application of Texas Utilities Electric Company for a Rate
Increase, Docket No. 5640, 10 Tex. P.U.C. Bull. 659, 853 (Feb. 1985) (“All of TUEC’s customers
are served from an integrated system; thus all customers benefit from the rights of the company to
maintain its facilities on municipal property. Furthermore, it is clear that customer confusion and
administrative burdens to the company would increase by virtue of [charging different rates based
on geography].”).
12
TXI is not an appellee but was a participant below.

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in which it provides a distribution service. This is obviously not simple, would create confusion and

is contrary to the ‘historical precedent’ as stated above.” Nucor’s expert, Goins, acknowledged that

the direct collection method would “require identifying each class’ LGRT cost responsibility and

developing separate LGRT cost-recovery factors by class for each taxing jurisdiction,” but claimed

this was a reasonable approach because it is the one used by Reliant Energy.13 Sherburne responded

that, just because one utility chooses to allocate or collect costs a certain way does not mean that all

utilities are bound by that decision. He further testified that, due to the differences in utilities, the

Commission has noted that allocation and collection methods should be determined on a utility-

specific basis and need not be standardized among utilities.

With these competing views before it, the Commission ultimately determined that

TXU’s franchise charges should be collected from all customers because the purpose of the

charge—TXU’s ability to locate its electric facilities on municipal property—benefits both municipal

and non-municipal customers. The Commission concluded that the spread collection method

complied with PURA sections 33.008 and 36.008. We must not substitute our judgment for that of

the Commission, and its order should be affirmed if the record demonstrates any reasonable basis

for it. City of El Paso, 883 S.W.2d at 185.

The record evidences that the legislature intended the franchise charge to be a rental

fee or an operating expense, not a tax, and that all customers derive a benefit from the service for

which the charge is imposed. The record also demonstrates that implementing Nucor’s direct-

13
Beyond such general assertions, nothing in the record establishes the exact collection
methods used by Reliant.

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collection proposal would be “problematic,” as found by the Commission, because it would result

in different rates based on geography and would substantially deviate from the historical practice of

collecting the charges from all customers, both within and outside of the municipality. Thus,

substantial evidence exists upon which the Commission could determine that the franchise charges

should be collected from all customers, and Nucor failed to demonstrate that the order was

characterized by an abuse of discretion, was arbitrary and capricious, or was in violation of a statute

or constitution. See Pedernales Elec. Coop., 809 S.W.2d at 341. Nucor’s challenge to the collection

method is overruled.

CONCLUSION

The Commission issued a final order adopting the ALJ’s proposal for decision

concluding that TXU’s franchise charges should be allocated using the direct method based on kWh

and collected using the spread method as part of its base rates from all customers. This order was

affirmed by the district court. Because the record demonstrates substantial evidence to uphold the

Commission’s determinations on these rate design matters over which the Commission is afforded

discretion, we affirm the judgment of the district court.

Jan P. Patterson, Justice

Before Chief Justice Law, Justices Patterson and Puryear

Affirmed

Filed: June 23, 2005

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