TXU Generation Company, L.P. TXU Portfolio Management Company, L.P. Oncor Electric Delivery Company Coalition of Wholesale Electric Market Participants Occidental Chemical Corporation And Occidental Permian, Ltd. v. Public Utility Commission of Texas

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03-04-00148-CV

TXU Generation Company, L.P.; TXU Portfolio Management Company, L.P.; Oncor
Electric Delivery Company; Coalition of Wholesale Electric Market Participants;
Occidental Chemical Corporation; Occidental Permian, Ltd.; Occidental
Power Marketing, L.P.; Occidental Power Services, Inc.; Oxy
Vinyls, L.P.; Ingleside Cogeneration, L.P.; and
Coral Power, L.L.C., Appellants

v.

Public Utility Commission of Texas, Appellee

DIRECT APPEAL FROM THE PUBLIC UTILITY COMMISSION OF TEXAS

OPINION

In this direct appeal, we consider a challenge to the validity of the Public Utility

Commission’s rule, 29 Tex. Reg. 1899 (2004) (to be codified at 16 Tex. Admin. Code § 25.503

(Pub. Util. Comm’n)),1 governing its oversight of the competitive wholesale electricity market.

Appellants and intervenor (collectively, “market participants”)2 contend that the WMO Rule (1)

1
Although the commission’s rule has not yet been codified, we will use its administrative
code citation for the sake of clarity and convenience. We will refer to the rule as the Wholesale
Market Oversight Rule (WMO Rule).
2
Appellants include TXU Generation Company, L.P., TXU Portfolio Management
Company, L.P., TXU Electric Delivery Company (collectively, TXU); Coalition of Wholesale
exceeds the Commission’s statutory authority, (2) is unconstitutionally vague, (3) represents an

unconstitutional taking, and (4) was passed in violation of provisions of the Administrative

Procedure Act (APA). We affirm the Commission’s order adopting the rule.

BACKGROUND

An understanding of the structure of the electricity market in Texas is important to

a proper determination of the validity of the challenged rule. The electricity market is unlike an

ordinary market for goods or services because of the unique attributes of electricity. Electricity

cannot be easily stored once it is generated and it relies on a complex infrastructure to deliver electric

power from generators to the consumer. Because of constraints in the transmission system, electric

power generated in some areas of the market may not be available for use in other locations. As we

will discuss throughout this opinion, these attributes create problems that do not arise in other

competitive markets.

There are three principal components to the electricity industry: “generation of power;

transmission of that power on high-voltage lines over long distances; and distribution of power over

shorter distances to the ultimate consumer.” City Pub. Serv. Bd. of San Antonio v. Public Util.

Comm’n, 9 S.W.3d 868, 870 (Tex. App.—Austin 2000), aff’d, 53 S.W.3d 310, 312 (Tex. 2001). The

entire industry has historically been considered a natural monopoly. Reliant Energy, Inc. v. Public

Electric Market Participants (Coalition); Occidental Chemical Corporation, Occidental Permian,
Ltd., Occidental Power Marketing, L.P., Occidental Power Services, Inc., Oxy Vinyls, L.P., Ingleside
Cogeneration, L.P. (collectively, Occidental); Coral Power, L.L.C.; and Texas Genco, L.P. is the
intervener.

2
Util. Comm’n, 101 S.W.3d 129, 133 (Tex. App.—Austin 2003), rev’d and remanded Centerpoint

Energy, Inc. v. Public Util. Comm’n, 143 S.W.3d 81 (Tex. 2004). More recently, in recognition that

the power generation and power distribution components of the electricity industry are not

monopolies warranting strict regulation, the legislature has opened the wholesale electricity markets

and retail electricity market to competition and market forces. See Tex. Util. Code Ann. § 39.001(a)

(West Supp. 2004-05) (production and sale of electricity not monopoly warranting regulation of

rates, operation and services). The transmission component of the industry remains closely regulated

by the Commission. See Tex. Util. Code Ann. § 35.004 (West. Supp. 2004-05). This aspect of the

industry is administered by the independent organization Electric Reliability Council of Texas

(ERCOT).3

The WMO Rule at issue applies primarily to participants in the wholesale electricity

market. Both electric power and capacity are available in the wholesale market through (1) bilateral

agreements and (2) the balancing energy services (BES) or ancillary services market.4 See Tex. Com.

Energy v. TXU Energy, Inc., 2004 U.S. Dist. LEXIS 13908, at *11 (S.D. Tex. June 24, 2004). The

unique nature of electricity presents challenges to the industry. The transmission of electric power

relies on a complex transmission grid which itself needs to be balanced by either adding power or

removing power from the grid. The transmission grid is kept in balance with power and capacity

3
ERCOT is also a term used to refer to the transmission system which provides power to
roughly 85 percent of the State.
4
The BES is a market for same day purchases of power made in fifteen-minute intervals.
The ancillary services market is a market for same day or day-ahead purchases of capacity.

3
purchased through the BES market. Although the majority of electric power is bought and sold

through bilateral contracts, retailers may purchase short term power through the BES market as well.

See id. at *7.

In restructuring electricity markets in favor of competition, the legislature was aware

that the unique nature of electricity and the industry was not wholly consistent with a fully

deregulated market and the application of established antitrust principles. In recognition of this fact,

the legislature decided to retain a regulatory scheme with regard to transmission services. See Tex.

Util. Code Ann. § 35.004. It allowed utilities to recover the costs of prudently incurred expenditures

that were rendered unrecoverable as a result of the deregulated market. See id. §§ 39.251-.265 (West

Supp. 2004-05); Reliant Energy, 101 S.W.3d at 132. Specific consumer protection provisions were

added to ensure that deregulation, in fact, achieves a benefit to the consumer. See id. § 39.101 (West

Supp. 2004-05).

Furthermore, the legislature directed the Commission to monitor and address market

power abuses associated with the generation, transmission, distribution, and sale of electricity. See

id. § 39.157 (West Supp. 2004-05). A review of the record reflects that the legislature’s concerns

about anticompetitive practices and manipulation in the wholesale market were well founded.

One instance of market manipulation involved power generators overscheduling the

amount of power they anticipated adding to the transmission grid. This overscheduling created

congestion in the grid which those same generators were then paid to relieve. The Commission

became aware of this practice and eventually required participants to refund $30,000,000 obtained

as a result of these improper practices. See Tex. Com. Energy, 2004 U.S. Dist. LEXIS 13908, at *13.

4
The Commission has identified the practice of “hockey stick bidding” as another example of

anticompetitive manipulation of the wholesale market. This bidding process involved a pricing

strategy that created short term artificial price spikes in the BES market. See id. at *14-15

(describing February 2003 price spike in BES market). A Commission report states that this bidding

practice added at least $17 million in additional cost to power used over the course of two days in

February 2003.

The Commission has also given considerable attention to the conduct of market

participants in the California electricity market where abusive practices resulted in power shortages

and soaring prices. See Enron Corp. v. California ex rel. Lockyear (In re Enron Corp.), 314 B.R.

524, *8-11 (D.N.Y. Sept. 29, 2004) (describing manipulation of California wholesale electricity

market). Against the backdrop of these abusive practices, the Commission established the WMO

Rule to articulate standards that the Commission will apply in monitoring the activities of those

participating in the wholesale electricity markets. See 16 Tex. Admin. Code. § 25.503(a).

The WMO Rule addresses the Commission’s oversight of the wholesale market by

enumerating the duties of market participants and defining prohibited activities. See id.

§ 25.503(f),(g). The rule provides a defense to a market participant who engages in a prohibited

activity if the participant demonstrates that the otherwise prohibited activity served a legitimate

business purpose and that its adverse effects were not foreseeable. See id. at § 25.503(h). The rule

defines the role of ERCOT in enforcing operating standards for market participants and establishes

a process for market participants to clarify ERCOT protocols to ensure compliance. See id. at

§25.503(i),(j). Finally, the rule establishes record-keeping requirements for market participants and

5
ERCOT, and details the Commission’s investigation process. See id. at §25.503(k),(l). The

challenges raised in this direct appeal apply almost exclusively to those portions of the rule that

define the duties of market participants and those activities which are prohibited.

DIRECT APPEAL

In a direct appeal of a Commission rule pursuant to section 39.001(e) of the Public

Utilities Regulation Act (PURA), we are limited to reviewing the rule’s validity. See Tex. Util.

Code. Ann. § 39.001(f) (West Supp. 2004-05); Office of Pub. Util. Counsel v. Public Util. Comm’n,

104 S.W.3d 225, 232-33 (Tex. App.—Austin 2003, no pet.), City Pub. Serv. Bd. v. Public Util.

Comm’n, 96 S.W.3d 355, 359 (Tex. App.—Austin 2002, no pet.). A validity challenge tests a rule

on procedural and constitutional grounds. City of Alvin v. Public Util. Comm’n, 143 S.W.3d 872,

878 (Tex. App.—Austin 2004, no pet.). A validity challenge may also question the agency’s

statutory authority to promulgate the rule. Id. An agency rule is presumed valid, and the challenging

party bears the burden to demonstrate its invalidity. Office of Pub. Util. Counsel, 104 S.W.3d at 232.

In this case, the market participants raise issues concerning the statutory authority of the Commission

to promulgate the WMO Rule, the constitutionality of the rule, and the procedures through which

the rule was enacted.

STATUTORY AUTHORITY

All of the market participants contend that, by enacting the WMO Rule, the

Commission has assumed powers that are not authorized by the legislature. The Commission is a

creature of the legislature and has no inherent authority. Public Util. Comm’n v. GTE-Southwest,

6
Inc., 901 S.W.2d 401, 406 (Tex. 1995). It “may exercise only those specific powers that the law

confers upon it in clear and express language. As a general rule, the legislature impliedly intends

that the agency should have whatever power is reasonably necessary to fulfill a function or perform

a duty that the legislature has expressly placed in the agency.” Id. at 407. Absent specific or implied

statutory authority, an agency rule is void because it is made without legal authority. Office of Pub.

Util. Counsel, 104 S.W.3d at 232.

The Commission may not exercise what is effectively a new power or a power

contradictory to the statute based merely on a claim that the power is expedient for administrative

purposes. GTE-Southwest, Inc., 901 S.W.2d at 406. Although a rule must comport with the

Commission’s authorizing statute, the legislature does not need to include every specific detail or

anticipate all unforeseen circumstances. Railroad Comm’n v. Lone Star Gas Co., 844 S.W.2d 679,

687 (Tex. 1992). To establish the WMO Rule’s facial invalidity, the market participants must show

that the rule: (1) contravenes specific statutory language; (2) runs counter to the general objectives

of the statute; or (3) imposes additional burdens, conditions, or restrictions in excess of or

inconsistent with the relevant statutory provisions. See City of Corpus Christi v. Public Util.

Comm’n, 51 S.W.3d 231, 236 (Tex. 2001); Office of Pub. Util. Counsel, 104 S.W.3d at 232. In

construing the Commission’s authority, we look to the statute as a whole, not any specific provision

in isolation. Reliant Energy, Inc. v. Public Util. Comm’n, 62 S.W.3d 833, 839 (Tex. App.—Austin

2001, no pet.).

We give serious consideration of the Commission’s interpretation of PURA, as long

as that interpretation does not contradict the plain language of the statute. Continental Cas. Co. v.

7
Downs, 81 S.W.3d 803, 807 (Tex. 2002). The legislature intends to give an agency, created to

centralize expertise in a certain regulatory area, a large degree of latitude in the methods it uses to

accomplish its regulatory function. State v. Public Util. Comm’n, 883 S.W.2d 190, 197 (Tex. 1994).

However, we need not give as much deference to an agency’s interpretation of its statute if that

interpretation deals with a non-technical question of law or a matter outside of the agency’s

expertise. Rylander v. Fisher Controls Int’l., Inc., 45 S.W.2d 291, 302 (Tex. App.—Austin 2001,

no pet.).

Statutory Powers of the Commission

Before addressing the contentions of the market participants, it is useful to review the

relevant statutory powers granted to the Commission by the legislature. Section 39.001(a) of PURA

explains that the statute’s purpose is to “protect the public interest during the transition to and in the

establishment of a fully competitive electric power industry.” Tex. Util. Code Ann. §39.001(a).

Section 39.001(d) states that this objective is to be carried out through competitive rather than

regulatory means to the greatest extent feasible, and that the Commission’s rules should be “practical

and limited so as to impose the least impact on competition.” Id. § 39.001(d). Several provisions

of the statute deal directly with the Commission’s authority to oversee the behavior of participants

in the wholesale electricity market.

The statute clearly gives the Commission broad authority to create rules governing

the conduct of market participants in the BES and ancillary services market. Section 35.004(e)

states:

8
 The commission shall ensure that ancillary services necessary to facilitate the
transmission of electric energy are available at reasonable prices with terms and
conditions that are not unreasonably preferential, prejudicial, predatory, or
anticompetitive.

Id. § 35.004(e).5 In addition the Commission has the authority to address the abuse of market power.

Section 39.157 commands the Commission to monitor the market power of those involved in

generation, transmission, distribution, and sale of electricity and to remedy abusive behavior by

seeking an injunction or civil penalties, imposing administrative penalties, or suspending, revoking,

or amending a participant’s certificate or registration. Id. § 39.157(a) (West Supp. 2004-05). Market

power abuses include predatory pricing, withholding of production, precluding entry, and collusion.

Id.

The Commission is also charged with protecting the consumer. For example, the

Commission must ensure that, by the time set for the establishment of competition in the retail

electricity market, protections are in place which entitle customers to “safe, reliable, and reasonably

5
Coalition contends that the final sentence in section 35.004(e) negates the Commission’s
authority over the ancillary services market once customer service is introduced. The final sentence
of section 35.004(e) states:

On the introduction of customer choice in the ERCOT power region, acquisition
of generation-related ancillary services on a nondiscriminatory basis by the
independent organization in ERCOT on behalf of entities selling electricity at
retail shall be deemed to meet the requirements of this subsection.

Tex. Util. Code Ann. §35.004(e) (West 2004-05) (emphasis added). Reading the statute as a whole,
however, it is clear that the legislature intended that only acquisitions of ancillary services by the
independent organization would be deemed to meet the requirements of the section. This is because
the independent organization is not affiliated with any market participant and is already subject to
Commission oversight. See id. § 39.151.

9
priced electricity.” Id. § 39.101(a)(1) (West Supp. 2004-05). A retail electricity customer is entitled

to protection from unfair, misleading, or deceptive practices. Id. § 39.101(b)(6). The Commission

is also directed to modify its rules regarding customer protections to ensure that “at least the same

level of customer protection against potential abuses and the same quality of service that exists [prior

to competition], is maintained in a restructured electricity market.” Id. § 39.101 (f). Although the

focus in section 39.101 is on the retail market, both wholesale and retail rates are now set by the

market, and consequently, behavior in the wholesale market which affects price and reliability will

directly impact the retail market as well.

Commission’s Authority Over the Wholesale Market

We initially address Coalition and Coral Power’s contention that the WMO Rule is

invalid because it unlawfully usurps authority granted to ERCOT by the legislature. See City Pub.

Serv. Bd., 53 S.W.3d at 316 (as creature of legislature, Commission has no authority beyond those

powers conferred by legislature). PURA section 39.151 calls for the establishment of an independent

organization charged with ensuring:

(1) access to transmission and distribution systems;

(2) reliability and adequacy of the regional electric network delegates;

(3) timely distribution of information concerning customer choice; and

(4) accurate accounting of production and delivery in the wholesale market.

Tex. Util. Code Ann. § 39.151(a). ERCOT is the established independent organization for most of

the State of Texas. See Hammack v. Public Util. Comm’n, 131 S.W.3d 713, 719 (Tex. App.—Austin

10
2004, pet. denied). Coalition and Coral Power insist that legislature granted this authority to ERCOT

and limited the Commission’s role in these matters to “oversight and review.” See id. § 39.151(d).

They contend that the WMO Rule’s detailed provisions governing the conduct of market participants

oversteps the role of oversight and review and assumes powers delegated to ERCOT.

Coalition and Coral Power’s contention is based on an incomplete reading of the

statute. The provision granting the commission “oversight and review” authority states:

An independent organization certified by the commission for a power region shall
establish and enforce procedures consistent with this title and the commission’s rules
relating to the reliability of the regional electric network and accounting for the
production and delivery of electricity among generators and all other market
participants. The procedures shall be subject to commission oversight and review.

Id. (emphasis added). Here, the plain language of the statute anticipates that the Commission will

have rules relating to reliability and accounting because the independent operator’s procedures are

to be made consistent with the Commission’s rules. Although Coalition and Coral power may

question the wisdom of establishing overlapping procedures of the independent organization and

Commission rules relating to reliability and accounting, this is a matter to be addressed to the

legislature.

Coalition further contends that the Commission lacks the statutory authority to

prohibit market power abuses in the wholesale bilateral contracts market. However, the statute gives

the Commission broad authority to monitor and remedy market power abuses. See id. § 39.157(a).

Indeed, some of the specific examples of market power abuses listed in the statute are clearly

possible in the wholesale bilateral contracts market. Furthermore, the structure of the Texas

11
electricity system requires the Commission to act in the wholesale market in order to fulfill its

statutory obligations to protect the consumer. In our system, price fluctuation in the wholesale

market will be reflected in the retail market. Thus, abusive practices in the wholesale market will

have a direct effect on price and reliability in the retail market. Because we find that the statute gives

both the Commission and ERCOT authority to address the behavior of market participants in the

wholesale market, and that such authority extends to the bilateral contracts market, we overrule

Coalition and Coral Power’s challenge to the validity of the rule on these grounds.

Intent as an Element

Next, Occidental, TXU, and Texas Genco challenge the WMO Rule on the grounds

that it lacks an intent element in defining prohibited conduct. See 16 Tex. Admin. Code § 25.503(g).

They argue that the Commission lacks the statutory authority to prohibit conduct that is not

intentional and that the prohibition’s inclusion of unintentional conduct runs counter to the general

objective of the statute to impose only “practical and limited” rules favoring competition rather than

regulation. However, Occidental, TXU, and Texas Genco’s argument relies on the incorrect

assumption that the only statutory basis for the WMO Rule’s prohibited activities is the prevention

of market power abuse pursuant to PURA section 39.157. Because we hold that the Commission

is empowered to regulate conduct in the wholesale market for the purposes of protecting consumers

and ensuring reasonably priced power for ancillary services, we will overrule Occidental, TXU, and

Texas Genco’s contention.

Texas Genco directs this Court to antitrust principles in the context of interpreting

the term “market power abuses.” It contends that the element of intent is inherent in the term

12
“market power abuse” and therefore any prohibited activities included in the rule must also contain

an element of intent. In fact, the United States Supreme Court has read an intent element into the

Sherman Antitrust Act. See Verizon Communications Inc v. Trinko, 124 S. Ct. 872, 878-79 (2004);

United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966). The Sherman Act prohibits

monopolization and does not expressly contain an element of intent. 15 U.S.C.A. § 2 (West 1997)

(“Every person who shall monopolize . . . shall be deemed guilty.”). The court explained that an

offense under the act requires, “in addition to the possession of monopoly power in the relevant

market, ‘the willful acquisition or maintenance of that power as distinguished from growth or

development as a consequence of a superior product, business acumen, or historic accident.’”

Verizon, 124 S. Ct. at 878 (citing Grinnell Corp., 384 U. S. at 570–571). The court further justified

reading willfulness into the statute:

The mere possession of monopoly power, and the concomitant charging of monopoly
prices, is not only not unlawful; it is an important element of the free-market system.
The opportunity to charge monopoly prices—at least for a short period—is what
attracts “business acumen” in the first place; it induces risk taking that produces
innovation and economic growth. To safeguard the incentive to innovate, the pos-
session of monopoly power will not be found unlawful unless it is accompanied by
an element of anticompetitive conduct.

Id. at 878-79. Similarly, the Supreme Court has interpreted language in the Securities and Exchange

Act which prohibits the use of any “manipulative or deceptive device or contrivance” in the sale or

purchase of securities to include an element of willfulness. Ernst & Ernst v. Hochfelder, 425 U.S.

185, 199 (1975) (terms “manipulative, device, and contrivance” indicate willful conduct).

13
 Although antitrust law does not control our interpretation of PURA,6 the reasoning

of the Supreme Court in interpreting the Sherman Antitrust Act and the Securities and Exchange Act

is persuasive when interpreting the Commission’s authority to monitor and remedy “market power

abuse.” See Tex. Util. Code Ann. 39.157(a). Abuse is defined as “a corrupt practice” or “deceitful

act.” Webster’s New International Dictionary 8 (3rd ed. 1986). The term “market power abuse”

suggests that the legislature intended to prohibit only intentional or willful conduct. See Ernst &

Ernst, 425 U.S. at 197.

Section (g) of the WMO Rule prohibits “any act or practice that materially and

adversely affects the reliability of the regional electric network or the proper accounting for the

production and delivery of electricity.” While this general prohibition lacks any element of intent,

the rule then lists a number of specific practices that all appear to include an element of intent. The

dissent insists that an element of intent be implied in the WMO Rule. If the authority for this rule

was derived only from section 39.157(a) governing “market power abuse,” we would agree that an

element of intent is implied. However, we look to the statute as a whole, not any specific provision

in isolation, to determine the Commission’s statutory authority. See Reliant Energy, 62 S.W.3d at

839.

The dissent, Occidental, TXU, and Texas Genco all contend that the absence of an

intent element in the WMO Rule exceeds the Commission’s statutory authority. The dissent states

6
Texas Genco cites language in PURA section 39.158(b) that the statute is intended to
complement other existing state and federal antitrust law. It contends that this provision indicates
the legislature’s intent that the statute be construed using “established antitrust principles.” Texas
Genco’s contention is based on a reading of one sentence in section 39.158(b) in isolation. Section
39.158(b) has nothing to do with construing other provisions within the statute; it merely states that
the remedies in the statute were intended to add to, not replace, existing antitrust provisions.

14
that both chapter 39 of PURA and the Texas Free Enterprise and Antitrust Act seek to balance the

policy goals of promoting competition and protecting the integrity of market mechanisms. It then

concludes that the majority ignores these antitrust principles. The dissent overlooks a vital objective

of PURA—to protect the consumer in the new competitive marketplace. See Tex. Util. Code Ann.

§§ 39.001(a) (West 2004-05) (“this chapter is enacted to protect the public interest during the

transition to and the establishment of a fully competitive electric power industry”), 39.101 (a) (1)

(consumers entitled to safe, reliable, and reasonably priced electricity) (West 2004-05). As we will

discuss below, the Commission also has statutory obligations to protect consumers in a deregulated

market and to ensure reasonably priced ancillary services for the transmission of electricity. The

WMO Rule’s prohibition of some unintentional conduct is authorized by these additional statutory

powers. See id.; Tex. Util. Code Ann. § 35.004(e) (West 2004-05).

Reviewing the Commission’s order, it is clear that the Commission relied on the

consumer protection provisions of PURA as a basis for its authority in drafting the WMO Rule, as

well as the market power abuse provision in section 39.157. See 29 Tex. Reg. 1905 (purpose of the

WMO Rule is to protect consumer). Section 39.101(a) of PURA commands the Commission to

establish protections which ensure that customers receive “safe, reliable, and reasonably priced

electricity.” Although section 39.101 was established to protect retail customers, the legislature has

decided that both the retail and wholesale electricity markets should be governed by market forces.

Thus, issues relating to reliability or price in the wholesale market will necessarily be reflected in

the retail market.7 In the market system established by the legislature, the Commission would be

7
Texas Genco acknowledges in its reply brief that increased prices in the Texas wholesale
market will be reflected in the retail market by distinguishing the Texas industry from California

15
unable to ensure retail customers “safe, reliable, and reasonably priced electricity” if its authority did

not extend to the wholesale market. See GTE-Southwest, Inc., 901 S.W.2d at 407 (legislature

impliedly intends agency has all power reasonably necessary to carry out statutory function).

In addition, the legislature specifically directed the Commission to oversee the

wholesale market to ensure reasonably priced electric power for ancillary services. Tex. Util. Code

Ann. 35.004(e). In the existing competitive wholesale market, scarcity of electric power will be

reflected in higher prices throughout the market, including prices for ancillary services. Thus, the

Commission’s statutory authority to ensure that ancillary services are available at reasonable prices

necessarily implies the power to regulate conduct that materially and adversely affects reliability.

See GTE-Southwest, Inc., 901 S.W.2d at 407.

Although many of the prohibited activities enumerated in the rule clearly contain an

element of intent, we will not imply an element of intent to the general definition of prohibited

activities in section 25.503(g) of the WMO Rule. The WMO Rule reflects the Commission’s

decision, based on its expertise, that both intentional and unintentional actions in the wholesale

market that adversely affect reliability must be prohibited in order to prevent market power abuse,

ensure retail customers “safe, reliable, and reasonably priced electricity,” and ensure reasonably

priced electric power for ancillary services. See Public Util. Comm’n, 883 S.W.2d at 197 (deference

given to agency interpretation of statute that relies upon agency expertise). We overrule Occidental,

where “utilities could not increase rates to reflect increases in wholesale power costs.” Occidental
also distinguishes the California system explaining that California “created a framework for retail
competition whereby the regulated retail prices became significantly divorced from wholesale prices.

16
TXU, and Texas Genco’s contention that the WMO Rule’s definition of prohibited activity must

contain an element of intent.

Rule Not Inconsistent With Statute

We also disagree with Occidental, TXU, and Texas Genco’s contention that the

prohibition of unintentional activities runs counter to the general objectives of the statute. They

argue that the WMO Rule (1) favors regulation over competition, and (2) is not practical and limited

in its impact on competition. See Tex. Util. Code Ann. § 39.001(d). Charged with preventing

market power abuse, see id. § 39.157, ensuring safe, reliable, and reasonably priced electricity for

consumers, see id. § 39.101(a)(1), and ensuring reasonably priced electricity for ancillary services,

see id. § 35.004(e), the Commission established the WMO Rule which allows the market to set the

price of electricity in accordance with the normal forces of supply and demand. Market participants

are merely prevented from manipulating the market or acting in such a way as to disrupt the

reliability of electricity service or artificially inflating price. Because the WMO Rule allows normal

market forces to set the price of power, it does not favor regulation over competition. In fact, the

limitations placed on market participants by the Commission exist for the purpose of fostering

competition in a market that is uniquely vulnerable to disruption and manipulation.

The WMO Rule is also practical and limited. The rule is broad enough to encompass

all activities that may materially affect reliability, but it is limited in its application. The affirmative

defense provision allows market participants to demonstrate that activities which may have

materially affected the reliability of electric service were in service of a legitimate business purpose

and the resulting effect on the market was not foreseeable. See 16 Tex. Admin. Code § 25.503(h).

17
 Occidental argues that the WMO Rule’s informal investigation process in which a

market participant may justify an otherwise prohibited activity is not “practical and limited.” See

Tex. Util. Code Ann. § 39.001(d). It explains that informal investigations are not limited in duration

and subjects market participants to “significant financial risk and uncertainty.” However, we hesitate

to second guess the Commission’s determination that the WMO Rule is a practical and limited

means to achieve the Commission’s legitimate goals. The WMO Rule balances the sometimes

competing statutory obligations of establishing a competitive market for electricity and ensuring safe,

reliable, and reasonably priced power for consumers and ancillary services by allowing market forces

to set the price of electricity, but prohibiting market manipulation and activities that will materially

affect reliability. The Commission was undoubtably aware that even an informal investigation of

those who might innocently engage in prohibited activities would impose a burden on the market

participant. But the Commission’s balancing of its statutory obligations through the WMO Rule

relies upon the Commission’s considerable understanding of the operation of the electricity market

and this is precisely the sort of agency interpretation that courts should give deference to. See Public

Util. Comm’n, 883 S.W.2d at197. We overrule Occidental, TXU, and Texas Genco’s contention that

the rule is inconsistent with the general objectives of the statute.

Burden of Proof

Because we hold that no intent element is mandated by statute, we also reject the

market participants’ contentions and the comments by the dissent that the WMO Rule impermissibly

shifts the burden of proof on intent to market participants through the affirmative defense provision

in section 25.503(h). More specifically, Occidental and Coalition insist that the WMO Rule is

18
invalid because it generally shifts the burden of proof from the Commission to market participants.

Coalition contends that section 25.503(l)(4) of the WMO Rule requires only a minimal showing of

a violation before it shifts the burden to a market participant to prove its innocence. However, this

provision governs the Commission’s procedure for requesting the initiation of an enforcement

proceeding after an informal fact-finding review, not the standards to be applied at such a hearing.

The rule requires the Commission to include specific information regarding its investigation “as part

of its prima facie case.” Id. § 25.503(l)(4)(A)-(D). We note that the rule does not equate the

required information with a prima facie showing of a violation in an enforcement proceeding.

Rather, it enumerates specific showings to be made by the Commission in order initiate an

enforcement proceeding. Our reading of the language of the WMO Rule is confirmed by the

Commission’s admission in its post-submission letter brief comparing the required showing of

prohibited conduct to a showing of probable cause and explaining that “[s]ubsection (l) does not

describe the evidence required for the Commission to find at the conclusion of [an enforcement

action] that a market participant has violated the Rule.” As referenced by the WMO Rule, an

enforcement action is governed by the procedures laid out in section 22.246 of the administrative

code. See 16 Tex. Admin. Code § 22.246 (administrative penalties).8 Because section 25.503(l)(4)

does not establish a burden of proof for enforcement proceedings, we reject Occidental and

Coalition’s challenge to the validity of the WMO Rule on these grounds.

8
Although the burden of proof is not discussed in section 22.246 of the administrative code,
the Commission states in its post-submission letter brief that “in all cases the burden is on the
Commission staff to demonstrate the elements of a prima facie case to the satisfaction of an
administrative law judge, if applicable, and ultimately to the Commissioners as decisionmakers.”

19
Scope of the Remedy

Coalition also contends that section 25.503(m) impermissibly expands the

Commission’s authority by authorizing the imposition of “any legal remedy” for a violation of the

rule by a market entity. However, the preamble of the rule states that subsection (m) was not

intended to expand or limit the types of remedies available to the Commission. Furthermore, the

Commission concedes in its brief that it only has authority to impose those remedies available under

PURA. We agree that subsection (m) of rule 25.503 applies only to those remedies specifically

authorized in PURA. See Tex. Util. Code Ann. §§ 15.023, .028, .030 (West 1998).

No Impermissible Regulation of Price

Coalition and Coral Power next contend that the Commission’s rule impermissibly

regulates the price of electricity by requiring market participants to charge marginal cost prices. This

contention relies on language in the preamble to the rule that states, “[p]ricing in excess of marginal

cost by a seller who is immune from the chastening hand of competition is an abuse of market

power,” and on additional language that the Commission has a duty to protect the public from prices

that are “substantially above the marginal cost of a marginally efficient unit when not tempered by

competition.” 29 Tex. Reg. 1916. We do not read these statements in the preamble to set the price

of power at “marginal cost.” In fact, the Commission deleted a provision in its proposed rule which

did exactly that. Read in context, the preamble merely makes the wholly unremarkable observation

that prices that are substantially above the marginal cost of power from the most expensive

generating unit, under circumstances where there is no possibility of a competing offer, are harmful

to the public. In light of the administrative record and the explicit statements by the Commission

20
that the WMO Rule does not require marginal-cost pricing, we find no merit in the theory that a

market participant will be coerced into setting prices at an unprofitable rate out of an unsubstantiated

fear that the Commission will initiate an investigation.

In a related point, Coalition and Coral Power defend the market’s susceptibility to

“temporary price spikes.” They contend that the WMO Rule interferes with “the normal forces of

competition,” and thus imposes regulatory rather than competitive means to control market behavior.

See Tex. Util. Code Ann. § 39.001(d). Presumably, Coalition and Coral Power adopt the reasoning

of the Supreme Court in Verizon, that the opportunity to impose monopoly prices provides incentive

to market participants to innovate and develop the industry. See Verizon, 124 S. Ct. at 878-79.

Although the statute clearly anticipates competition in both the wholesale and retail markets, the

Commission is also required to ensure that electricity is safe, reliable, and reasonably priced for

consumers. See id. § 39.101(a)(1). We conclude that the Commission’s rule adequately reflects the

legislature’s desire to balance market interests and consumer protections. We overrule Coalition and

Coral Power’s issues regarding the regulation of price.

Market Power

Coral Power contends that the Commission’s concept of market power is inconsistent

with the statute and case law defining market power. The WMO Rule specifies that a market

participant’s withholding of production constitutes an abuse of market power when that participant

has “market power.” The Commission explains in the preamble to the rule that its concept of market

power is necessarily fluid:

21
 In electricity markets, it is difficult to find markets that continuously operate under
a competitive environment, and it is not unusual to find local market power in
geographical pockets, even when the generation share of each resource owner is low,
because transmission constraints or other reliability constraints often give some
resource owners temporary or localized market power. Market power is a dynamic
phenomenon in electricity markets, and the commission must have the ability to
address abuses that occur during the times when the market is not competitive, even
as those times become less frequent.

29 Tex. Reg. 1916. Coral Power points to a provision of the statute which limits a generator’s share

of installed capacity to twenty percent of the total. See Tex. Util. Code Ann. § 39.154(a). Coral

Power also directs us to federal antitrust case law which states that claims of illegal monopolization

under the Sherman Act should usually be rejected when the alleged monopoly possesses less than

thirty percent market share. See M & M Med. Supply & Serv. v. Pleasant Valley Hosp., 981 F.2d

160, 168 (4th Cir. 1992) (en banc) (citing 3 Philip Areeda & Donald F. Turner, Antitrust Law ¶ 835,

at 350). Based on the statutory limit of generation capacity to twenty percent and federal antitrust

law, Coral Power argues that the Commission may not adopt its own concept of market power which

subjects to scrutiny those generators who possess less than twenty percent capacity.

We find no indication that the legislature intended to adopt twenty percent as a cutoff

definition of market power. Had the legislature believed that a generation capacity of more than

twenty percent is required to possess market power, then the limitations on generation capacity

would render PURA section 39.157's prohibition on market power abuse irrelevant. See Meritor

Auto., Inc. v. Ruan Leasing, 44 S.W.3d 86, 90 (Tex. 2001) (we presume entire statute intended to

be effective and “[w]hen possible, each sentence, phrase, clause and word is given effect, so that the

statute makes sense as a cohesive whole”). We also do not find the reasoning of the Fourth Circuit

22
in M & M Medical Supply to be applicable to the Texas electricity industry. See 981 F.2d at 168.

The electricity industry is inherently different from commerce in other goods and services. The sale

of electricity is bound to a transmission grid which may often obtain power or capacity only from

certain generators in certain locations. It would make little sense to determine market power as a

percentage of total capacity statewide in instances when only a portion of the capacity is actually

available. Furthermore, the Commission has substantial expertise in the application of market forces

to the electricity market. We grant deference to the Commission’s interpretation of PURA when that

interpretation is based on the Commission’s specialized expertise. See Public Util. Comm’n, 883

S.W.2d at 197. We hold that it is appropriate for the Commission’s rule to take into account the

unique nature of the electricity industry in defining market power and that the rule is not inconsistent

with the statute. We overrule Coral Power’s challenge to the WMO Rule’s use of the term market

power.

CONSTITUTIONAL CHALLENGES

Vagueness

All market participants allege that the WMO Rule is unconstitutionally vague. Their

primary concerns focus on the general definition of a prohibited activity in section 25.503(g) and the

prohibition of market power abuse in subsection (g)(7). The general provision prohibits “any act or

practice that materially and adversely affects the reliability of the regional electric network or the

proper accounting for the production and delivery of electricity.” 16 Tex. Admin. Code § 25.503(g).

The prohibition on market power abuse includes “withholding of production, whether economic

23
withholding or physical withholding, by a market participant who has market power.” Id.

§ 25.503(g)(7). The WMO Rule does not define the term market power.

Because this is a direct appeal, we may consider only a facial challenge to the rule:

that the rule is impermissibly vague in all of its applications. See Village of Hoffman Estates v.

Flipside, Hoffman Estates, Inc., 455 U.S. 489, 494-95 (1982); City Pub. Servs. Bd. of San Antonio,

96 S.W.3d at 359. In a facial challenge, we will consider any limiting construction of the rule

provided by the Commission. See Village of Hoffman, 455 U.S. at 494. Courts apply several

standards of review to vagueness challenges, depending on the subject of the statute or rule at issue.

We first note that the market participants do not allege that the WMO Rule impinges upon any

constitutionally protected conduct, and therefore, we do not apply the higher scrutiny of an

“overbreadth” challenge. See Village of Hoffman Estates, 455 U.S. at 494. Instead we will apply

the standards for determining whether the rule is unduly vague.

We will find a rule unconstitutionally vague only if it (1) does not give fair notice of

what conduct may be punished, and (2) invites arbitrary and discriminatory enforcement by its lack

of guidance for those charged with its enforcement.9 Rooms with a View, Inc. v. Private Nat.

Mortgage Ass’n, Inc., 7 S.W.3d 840, 845 (Tex. App.—Austin 1999, pet. denied); see Village of

9
We decline the Commission’s invitation to apply the less stringent standard for vagueness
applicable to economic regulation. Where, as here, a rule or statute carries “‘potentially significant
civil and administrative penalties, including fines and license revocation,’ quasi-criminal treatment
is appropriate and thus the more strict standard of review applies.” Ford Motor Co. v. Texas Dep’t
of Transp., 264 F.3d 493, 508 (5th Cir. 2001) (citing Women’s Med. Ctr. of N. W. Houston v. Bell,
248 F.3d 411, 422 (5th Cir. 2001)).

24
Hoffman Estates, 455 U.S. at 498; Commission for Lawyer Discipline v. Benton, 980 S.W.2d 425,

437 (Tex. 1998). The United States Supreme Court has explained:

Although the doctrine focuses both on actual notice to citizens and arbitrary
enforcement, we have recognized recently that the more important aspect of
vagueness doctrine ‘is not actual notice, but the other principal element of the
doctrine—the requirement that a legislature establish minimal guidelines to govern
law enforcement.’

Kolender v. Lawson, 461 U.S. 352, 357-58 (1983) (citing Smith v. Goguen, 415 U.S. 566, 574

(1974)). Moreover, Justice Tom C. Clark noted that courts must take a realistic approach to ruling

on vagueness:

[F]ew words possess the precision of mathematical symbols, most statutes must deal
with untold and unforeseen variations in factual situations, and the practical
necessities of discharging the business of government inevitably limit the specificity
with which legislators can spell out prohibitions. Consequently, no more than a
reasonable degree of certainty can be demanded. Nor is it unfair to require that one
who deliberately goes perilously close to an area of proscribed conduct shall take the
risk that he may cross the line.

Boyce Motor Lines, Inc. v. United States, 342 U.S. 337, 340 (1952); see Rooms with a View, 7

S.W.3d at 845 (statute not automatically void for vagueness simply because it is difficult to

determine whether certain “marginal” acts fall within its language).

The market participants contend that subsection (g) of the WMO Rule is

unconstitutionally vague because it does not give fair notice of what conduct may be punished under

the law. See Rooms with a View, 7 S.W.3d at 845. In determining whether a rule gives fair notice,

we examine whether the rule conveys sufficiently definite warning as to the proscribed conduct when

25
measured by common understanding and practices. See Pennington v. Singleton, 606 S.W.3d 682,

689 (Tex. 1980). Because our concern is for those to whom the WMO Rule is directed, we

scrutinize the rule by asking whether the ordinary participant in the wholesale electric power market

could understand and comply with it. See Commission for Lawyer Discipline, 980 S.W.2d at 437

(disciplinary rules scrutinized under “ordinary lawyer” standard).

Prohibited activities

Coalition, Texas Genco, TXU, and Occidental object to the general definition of a

prohibited activity contained in the WMO Rule. See 16 Tex. Admin. Code § 25.503(g). TXU

presents examples of mechanical failures and computer glitches which may adversely affect

reliability or accounting. It contends that the rule gives insufficient notice because a market

participant could be found to have engaged in a prohibited activity as a result of accidents or ordinary

mechanical breakdowns. It argues that an open-ended, broadly worded prohibition is confusing,

creates unknown risks to market participants and does not provide the specificity needed to allow

market participants to take measures to avoid violations. The dissent acknowledges these

contentions stating “the market participants go as far as to urge that [WMO Rule] is

unconstitutionally vague, and they are not far off the mark. . . .” However, we do not read this

subsection of the rule in isolation. See Reliant Energy, 62 S.W.3d at 839. The WMO Rule

specifically states that activities that would otherwise be prohibited, including practices that

materially and adversely affect reliability, are not violations when (1) they serve a legitimate business

purpose consistent with prices set by competitive market forces, and (2) the adverse effect on

reliability, price, or accounting was not known or foreseeable with the exercise of due diligence. 16

26
Tex. Admin. Code § 25.503(h). This provision gives clear notice that the unforeseen accidents

described by TXU will not give rise to liability under the rule.10 The fact that subsection (h) is an

affirmative defense does not lessen the notice to market participants of what conduct is prohibited.11

Certainly, participants in the wholesale electricity market can determine whether their actions are

taken in the service of a legitimate business purpose that is not anticompetitive. Furthermore, the

rule does not require clairvoyance as to whether an action will impact price, reliability, or

accounting—only diligence.

Courts have upheld similarly general prohibitions when challenged for vagueness.

For example, the Sherman Antitrust Act’s prohibition on anticompetitive behavior merely states that

“every person who shall monopolize, or attempt to monopolize, or combine or conspire with any

other person or persons, to monopolize any part of the trade or commerce among the several States

. . . shall be deemed guilty of a felony.” 15 U.S.C.A. § 2. This provision has consistently been found

to provide fair notice. See Nash v. United States, 229 U.S. 373, 781-82 (1913);12 Atlas Building

10
The Commission also points out in its post-submission letter brief that the ERCOT
protocols address issues such as scheduled maintenance and the shutdown of plants. When an action
is authorized by ERCOT under its protocols, it is not a prohibited activity. See 16 Tex. Admin. Code
§ 25.503(g) (prohibited activity excludes acts or practices expressly allowed by ERCOT protocols
or by official interpretations of protocols).
11
TXU complains of the stigmatizing effect of informal commission investigations in which
it is compelled to provide information demonstrating that certain actions served legitimate business
purposes. However, we cannot conclude that an informal investigation, even when it is disclosed
to the public, amounts to the sort of “punishment” which raises vagueness concerns.
12
In Nash, Justice Holmes explained that the constitution’s guarantee of fair notice does not
equate to perfect notice:

[T]he law is full of instances where a man’s fate depends on his estimating
rightly, that is, as the jury subsequently estimates it, some matter of degree. If

27
Prods. Co. v. Diamond Block and Gravel Co., 269 F.2d 950, 955 (10th Cir. 1959) (restraint of trade

and monopolization provision of Sherman Act have long been sustained against claim of

unconstitutional vagueness).

In Pennington, the state supreme court held that the Texas Deceptive Trade

Practices—Consumer Protection Act (DTPA) provided adequate notice to survive a vagueness

challenge. Pennington, 606 S.W.2d at 689-90. Although the supreme court allowed “greater

leeway” noting that the DTPA is a regulatory statute governing business activity, the similarities

between the DTPA and the WMO Rule make the reasoning persuasive. The DTPA contains a

general prohibition that “[f]alse, misleading, or deceptive acts or practices in the conduct of any trade

or commerce are hereby declared unlawful.” Tex. Bus. & Com. Code Ann. § 17.46(a) (West Supp.

2004-05). It then provides a non-exhaustive list of false, misleading, or deceptive acts. Id.

§ 17.46(b). The supreme court explained that the general nature of the statute was necessary:

The boundaries of illegality under the DTPA must remain flexible because it is
impossible to list all methods by which a consumer may be mislead or deceived.

his judgment is wrong, not only may he incur a fine or a short imprisonment,
as here; he may incur the penalty of death. . . . The criterion in such cases is to
examine whether common social duty would, under the circumstances, have
suggested a more circumspect conduct.

Nash v. United States, 229 U.S. 373, 781-82 (1913).

28
Pennington, 606 S.W.2d at 689.13 We note that the supreme court also declined to require an intent

element in order for the statute to pass constitutional muster. Id. at 689-90.

The dissent counters that the United States Supreme Court has imposed an element

of willfulness on the Sherman Act in order to cure vagueness. See United States v. Grinnell Corp.,

384 U.S. 563, 570-71 (1966); Verizon Communications, Inc. v. Law Offices of Curtis V. Trinko, 124

S. Ct. 872, 878-79 (2004). However, this element of intent was imposed as a matter of statutory

interpretation, not out of vagueness concerns. See Verizon Communications, 123 S. Ct. at 878-79;

see also Ernst v. Hochfelder, 425 U.S. 185, 199 (1975) (construing language of Securities and

Exchange Act to include element of intent).

The dissent also incorrectly construes language from the Texas Supreme Court’s

opinion in Caller-Times Pub. Co. v. Triad Comm., Inc., 826 S.W.2d 576, 581 (Tex. 1992). There,

the supreme court noted while interpreting the Texas Antitrust Act that a vague standard has a

“chilling effect” on business. Id. Again, this statement was made as a matter of statutory

interpretation, not in the context of a vagueness challenge. Moreover, the United States Supreme

Court has found a constitutional violation from the “chilling effect” of a law only where the law’s

vagueness would limit rights that are afforded heightened constitutional protection, such as free

13
In construing the DTPA, the supreme court noted the need for section 17.46(a)’s “catch-
all” provision:

A broad interpretation is warranted, however, due to human inventiveness in
engaging in deceptive or misleading conduct. The legislature did not intend its
express purpose of protecting consumers from false trade practices to be
circumvented by those who would seek out loopholes in the Act’s provisions.

Pennington v. Singleton, 606 S.W.2d 682, 688 (Tex. 1980).

29
speech. See Dumbrowski v. Pfister, 380 U.S. 479, 486-87 (1965). And even in the area of free

speech, the United States Supreme Court has never considered the chilling effect of a law to be a

sufficient basis, in and of itself, for prohibiting state action. Younger v. Harris, 401 U.S. 37, 51

(1971). Thus, we find no support in the decisions of the federal or state supreme courts for the

proposition that the WMO Rule is unconstitutionally vague.14

We hold that the WMO Rule’s general definition of prohibited activities provides the

fair notice required by the constitution. Reading the statute as a whole, we conclude that the broad

language in the definition is tempered by the availability of a defense when a market participant has

acted in accordance with ERCOT protocols, or has (1) pursued a legitimate business purpose and

(2) exercised due diligence to avoid an adverse affect on prices, reliability and accounting. See 16

Tex. Admin. Code § 25.503(h). We overrule Coalition, Texas Genco, TXU, and Occidental’s

vagueness challenge to the WMO Rule’s prohibited activities.

Market power

All market participants contend that the Commission’s failure to define market power

in the WMO Rule renders it unconstitutionally vague. They point to the prohibition of market power

abuse, which includes, “[w]ithholding of production, whether economic withholding or physical

withholding, by a market participant who has market power.” 16 Tex. Admin. Code 25.503(g)(7).

14
We also reject the dissent’s argument that vagueness in the WMO Rule would “chill
competition in a manner inconsistent with the legislature’s intent.” As we have discussed above, the
affirmative defense included in the WMO Rule alleviates much of the complained of uncertainty by
giving a market participant guidance that, if it is diligent as to the effects of its actions on the market,
the market participant will not be subject to liability under the rule. Nor do we conclude that any
remaining uncertainty in the WMO Rule would result in some sort of de facto regulation.

30
Market participants contend that, without a clear definition of market power, they cannot know if

or when they possess market power and, therefore, are uncertain when the rule may apply to their

decisions on when to operate generation resources and what price to set. Coral Power gives the

example of its generation resources which may provide power to ERCOT or to the Southwest Power

Pool (SPP). These resources consist of less than ten percent of the total ERCOT capacity. Coral

Power continually decides whether to sell power to ERCOT or SPP based on the expected market

price. It argues that, without a definition of market power, it cannot know whether the decision to

sell power to SPP rather than ERCOT will be considered withholding and, therefore, a violation

under section 25.503(g)(7). TXU asserts that the failure to define market power leaves enforcement

of the market power abuse rule completely in the Commission’s discretion, creating the possibility

of arbitrary enforcement. See Coffee City v. Thompson, 535 S.W.2d 758, 763 (Tex. Civ.

App.—Tyler 1976, writ ref’d n.r.e.).

Although the Commission agrees that a definition of market power is needed, it

provides some guidance in the preamble to the WMO Rule. The Commission explains that the

traditional concepts of market power do not fit the Texas electricity market. 29 Tex. Reg. 1916. It

characterizes market power in the wholesale electricity market as a “dynamic phenomenon” and

notes that constraints in transmission and reliability often give resource owners “temporary or

localized market power.” Id. The Commission points to similar language in an order by the Federal

Energy Regulatory Commission (FERC) in the rulemaking record stating that market participants

who normally do not possess market power may exercise market power in instances of extreme

supply or demand conditions.

31
 The lack of a well defined concept of market power does produce some uncertainty

in the enforcement of the rule. However, this more fluid concept of market power does not render

enforcement of the market power abuse provision so uncertain as to deprive market participants of

constitutionally required fair notice. See Boyce Motor Lines, 342 U.S. at 340 (“no more than a

reasonable degree of certainty can be demanded”). Notice is determined by reading the rule in its

entirety. As we discussed above, section 25.503(h) of the rule exempts otherwise prohibited conduct

when a market participant has acted in accordance with ERCOT protocols or has (1) pursued a

legitimate business purpose and (2) exercised due diligence to avoid an adverse affect on prices,

reliability and accounting. Thus, the examples brought forward where a market participant would

be found to have engaged in prohibited conduct because it was not aware that it possessed market

power are misplaced. The rule simply requires market participants to be diligent in avoiding adverse

affects on the market. If a diligent inquiry would not reveal the adverse affect of legitimate activity

on the market, the activity is excluded from the rule’s definition of market power abuse.15 See id.

The Commission’s fluid concept of market power also does not create the possibility

of arbitrary enforcement. TXU compares the failure to define market power in the WMO Rule with

the ordinance in Coffee City, where the issuance of building permits was left to the “arbitrary

discretion . . . of the city secretary without any rule or standard to follow.” Coffee City, 535 S.W.2d

15
Occidental contends that the prohibition on creating “artificial congestion” is
unconstitutionally vague because “a market participant cannot create artificial congestion without
knowing how others operate their units . . . and that market participants do not always have sufficient
knowledge to anticipate the effects the their actions may produce.” If, in fact, the market participant
lacked access to information which would reveal the possibility of creating congestion, section
25.503(h) would exempt the conduct from prosecution as a prohibited activity. See 16 Tex. Admin.
Code § 25.503(h).

32
at 763. By contrast, the WMO Rule provides detailed guidance on how violations of the rule are to

be investigated, see 16 Tex. Admin. Code § 25.503(l)(1-3), prosecuted, see id. § 25.503(l)(4), and

enforced. See id. § 22.246 (entitlement to a hearing before administrative law judge). Reading the

WMO Rule in its entirety, and in context of other administrative code provisions dealing with

enforcement, we conclude that the absence of a definition of market power does not render the rule

unconstitutionally vague. We overrule all market participants’ issues concerning the vagueness of

the WMO Rule’s use of the term market power.

Miscellaneous provisions

A variety of other provisions in the WMO Rule have been challenged as

unconstitutionally vague. The arguments supporting these contentions stem primarily from reading

terms in the rule in isolation rather than in the context of the entire rule. See Reliant Energy, 62

S.W.3d at 839. We will address each specific contention to determine whether the rule provides the

reasonable degree of certainty required by the constitution.

TXU contends that the rule is unconstitutionally vague because it fails to define what

sort of conduct constitutes the “economic withholding” that is prohibited in section 25.503(g)(7).

TXU recognizes the Commission’s discussion of economic withholding in the preamble to the rule

but claims that the Commission requires market participants to price power at “marginal cost,” an

equally undefined term. See 29 Tex. Reg. 1916. We have already held in this opinion that the rule

does not “set prices” at marginal cost. The preamble gives an example of economic withholding in

which a market participant would bid all or a large portion of its production “at a very high price,

regardless of marginal costs.” Id. The Commission explains that a market participant who has

33
market power can be assured that its artificially high bid will be selected often enough to compensate

for those instances when the bids are not accepted because the market contains a sufficient supply

at a reasonable price. Id. The prohibition on economic withholding was established to prevent the

creation of artificial scarcity of reasonably priced power in the market. Considering the

Commission’s comments in the preamble, see Village of Hoffman, 455 U.S. at 494, and the fact that

the rule does not set the price of power at marginal cost, we hold that the rule provides reasonable

notice of the meaning of economic withholding to avoid vagueness.

Coalition challenges section 25.503(f)(12)’s requirement that a market participant

“who identifies a provision in the ERCOT procedures that produces an outcome inconsistent with

the efficient and reliable operation of the ERCOT-administered markets” call the provision to the

attention of the appropriate ERCOT subcommittee. Coalition complains that a market participant

may violate the rule simply because it does not share the Commission’s evaluation of the intent or

effect of a protocol. The rule defines “efficient operation of the market” as characterized by “the

fullest use of competitive auctions to procure ancillary services, minimal cost socialization, and the

most economical utilization of resources, subject to operational and other constraints.” 16 Tex.

Admin. Code Ann. § 25.503(c)(2). This definition certainly provides guidance of what the

Commission is seeking. More importantly, the rule does not impose a duty to scour the protocols

for inefficiency. There is a duty to report only if a market participant subjectively believes that a

procedure produces an outcome inconsistent with the efficient and reliable operation of the market.

The provision is not unconstitutionally vague.

Coalition complains that section 25.503(I) requires market participants to follow

official interpretations of ERCOT protocols by ERCOT employees when the Commission may later

34
determine that the official interpretation violates the rule. It contends that provision violates due

process by requiring market participants to comply with vague and inconsistent legal requirements.

Again we find that the affirmative defense for actions taken with a legitimate business

purpose—coupled with the exercise of due diligence as to the effect on reliability, price, and

accounting—gives sufficient notice of what conduct may subject market participants to liability. See

id. § 25.503(h). Although subsection (i)(6) does state that reliance on informal communication with

ERCOT staff may not be relied on as an affirmative defense, reliance on an official interpretation

by ERCOT would represent diligence under the rule.

Coalition also challenges the WMO Rule’s guidance to the Commission in

monitoring the activities of market participants as unconstitutionally vague. It points to provisions

stating that the Commission will consider, in monitoring the market, whether an activity (1)

materially reduced competitiveness of the market, including whether the activity unfairly impacted

other market participants in a way that restricts competition, or (2) interfered with the efficient

operation of the market. See id. § 25.503(d)(2),(4). Despite the reference to enforcement in the title,

section 25.503(d) merely details subjects that the Commission should consider in monitoring the

market. Because nothing in section 25.503(d) will subject a market participant to punishment, we

overrule Coalition’s vagueness challenge.

The Commission’s rule does not enumerate all of the practices that are prohibited,

but the constitution does not require such precision. We hold that each of the challenged provisions

of the Commission’s rule, when read in the context of the entire rule, provides reasonable notice of

what conduct may be punished and does not invite arbitrary and discriminatory enforcement. See

35
Village of Hoffman Estates, 455 U.S. at 498; Commission for Lawyer Discipline, 980 S.W.2d at 437;

Rooms with a View, 7 S.W.3d at 845. We overrule all of the additional vagueness challenges.

Unconstitutional Taking

Coalition and TXU contend that the WMO Rule results in an unconstitutional taking

without just compensation. Because this is a direct appeal Coalition and TXU may only challenge

the facial validity of the rule: that the rule constitutes an unconstitutional taking in all of its

applications. See Village of Hoffman Estates, 455 U.S. at 494-95; City Pub. Serv. Bd., 96 S.W.3d

at 359. Both appellants cite language in the rule’s preamble which they interpret as requiring a

market participant to offer all of its capacity at “marginal cost” under certain circumstances. See 29

Tex. Reg. 1916-17. They contend that marginal cost does not encompass the full cost of producing

power and therefore the rule results in an unconstitutional taking.

As we explained in our discussion of whether the WMO Rule regulates price and our

discussion of economic withholding, the rule does not require market participants to sell power at

marginal cost. The preamble merely states that offering power at a price substantially above the

marginal cost of a producer’s least efficient unit, when competing offers are unavailable, is an abuse

of market power. Because we hold that the WMO Rule does not require market participants to sell

power at marginal cost, the rule is not an unconstitutional taking in all of its applications.16 We

overrule Coalition and TXU’s facial challenge to the rule as an unconstitutional taking.

16
Counsel for TXU acknowledged at oral argument that a facial challenge would be
inappropriate if the rule does not require a market participants to price power at marginal cost.

36
 COMPLIANCE WITH THE APA

Coral Power raises two issues contending the Commission failed to comply with the

APA. Coral Power contends that the Commission (1) failed to provide adequate notice as required

by sections 2001.024 and .029, and (2) failed to substantially comply with APA section 2001.033's

requirement of a concise restatement of the statutory authority of the rule.

Notice and Comment

Coral Power claims that the Commission failed to provide adequate notice that the

WMO Rule would define market power to include “local” or “momentary” market power. See 29

Tex. Reg. 1916. It contends that nothing in the Commission’s proposed rule indicated that market

power would be interpreted outside of traditional notions of that term, and therefore, Coral Power

was deprived of the opportunity for meaningful comment. See Unified Loans, Inc. v. Pettijohn, 955

S.W.2d 649, 651 (Tex. App.—Austin 1997, no pet.) (“Adequate notice is essential for fairness as

well as a meaningful opportunity to comment on a proposed rule.”).

The supreme court recently discussed the notice requirements of the APA in Texas

Workers’ Compensation Commission v. Patient Advocates of Texas, 136 S.W.3d 642, 649-50 (Tex.

2004). The supreme court cited a case from this court in which we held that proper notice is given

when a proposed rule is changed to incorporate comments and “and no new subjects of regulation

or persons besides those previously given notice are affected.” Id. (citing State Bd. of Ins. v.

Deffebach, 631 S.W.2d 794, 801 (Tex. App.—Austin 1982, writ ref’d n.r.e.)). The supreme court

also discussed the federal standard for adequate notice under the federal APA stating that the

modified final rule must be a “logical outgrowth” of the proposed rule. Id. “Stated differently, if

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the final rule does not materially alter the issues addressed in the proposed rule, then notice will be

deemed sufficient.” Id. The supreme court concluded that the two standards are consistent:

The relevant inquiry under both standards is whether the agency’s notice fairly
apprises affected parties of the pertinent issues to allow them to comment and
participate in the rulemaking process in a meaningful and informed manner.

Id.

We hold that the Commission’s proposed rule provided adequate notice of its more

fluid concept of market power. The proposed rule contains a section prohibiting “economic

withholding” and defines the term as “an offer of energy or capacity by a market participant in an

amount sufficiently large that the market cannot clear without the offer.” By defining economic

withholding in terms of whether the market can clear without the offer, the Commission indicated

that its prohibition on economic withholding would apply regardless of traditional notions of market

power. Moreover, Coral Power’s own comments in the rulemaking record regarding artificial

shortages and withholding of power reflect that it had notice that the rule’s provisions might affect

it. Because the proposed rule apprised Coral Power that it would be affected, and Coral Power

actually participated with meaningful comment, we hold that the Commission satisfied the notice

requirements of the APA. See id. We overrule Coral Power’s first issue concerning compliance

with the APA.

Concise Statement of Statutory Provisions

Coral Power also contends that the Commission failed to provide a concise

restatement of its statutory authority to enact the WMO Rule. See Tex. Gov’t Code Ann.

38
§ 2001.033(a)(2) (West 2000). Specifically, it contends that the only stated purpose for the rule is

to ensure reliability of electric power and that the rule oversteps the Commission’s statutory powers

to do so. Coral Power cites a statement in the third paragraph of the preamble that the new rule is

needed to ensure reliability of the markets and power during the transition to a fully competitive

market. 29 Tex. Reg. 1899. Based on this one sentence, Coral Power concludes that the

Commission’s stated authority is limited to its powers to ensure reliability during the transition to

competition.

However, the paragraph following the one cited by Coral Power states that the WMO

Rule was “proposed as part of the Commission’s efforts to adopt competition rules to protect the

public interest during the transition to and in the establishment of a fully competitive electric power

industry under Chapter 39 of [PURA].” 29 Tex. Reg. 1899. The preamble lists those functions

delegated to the commission by the statute:

Among those functions were the adoption and enforcement of rules to ensure
customer protections and customer entitlements; the establishment of rules governing
ERCOT and oversight of ERCOT activities; the assessment of market power; and the
mitigation of market power abuses.

29 Tex. Reg. 1900. The Commission then concludes that “in order to protect the public interest and

to assure that prices are determined by the normal forces of competition, the commission finds that

it must adopt this rule governing the enforcement of wholesale electricity markets and ERCOT

administered markets.” Id. Reading the preamble as a whole, we find that the Commission clearly

stated that the purpose of the rule extends beyond reliability and includes protecting retail customers

by addressing anticompetitive manipulation of the wholesale market.

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 Furthermore, the statutorily delegated functions listed by the Commission support its

authority to enact the rule. Although the Commission does not enumerate the specific provisions

in Chapter 39 of PURA that correspond with the delegated functions of ensuring reliability,

protecting customers and addressing manipulation of the wholesale market, our review of the statute

confirms that the Commission possesses these powers. The authority to ensure reliability is granted

by the consumer protections in PURA sections 39.101(a)(1) (customer entitled to safe, reliable, and

reasonably priced electricity) and 35.004(e) (relating to ancillary services market), and section

39.151(d) (independent organization’s procedures shall be consistent with Commission rules

regarding reliability). The authority to protect consumers stems from PURA section 39.101(a)(1),

(b)(6) (customer entitled to be protected from unfair, misleading, deceptive practices), and (f)

(commission shall modify rules to assure at least same quality of service that existed before

transition to competition). Finally, the Commission’s authority to address manipulation of the

wholesale market is found in PURA section 39.157(a) (Commission shall monitor market power and

address market power abuse), and through the statute’s reliability and consumer protection

provisions. Coral Power presents a chart in its brief that outlines why various statutory provisions

do not grant the Commission authority to enact the rule. All Coral Power’s arguments concerning

the scope of the Commission’s authority under the statute have been thoroughly discussed and

rejected earlier in this opinion. We hold that the Commission complied with the APA by including

a concise statement of its statutory authority to promulgate the rule.

Coral Power also contends that the Commission did not substantially comply with

the APA because the Commission’s reasoned justification does not demonstrate in a relatively clear

and logical fashion that the rule is a reasonable means to a legitimate objective. See Tex. Gov’t

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Code Ann. § 2001.035 (West 2000). Coral Power argues that the rule “far exceeds” the

Commission’s statutory reliability oversight and enforcement responsibilities. However, Coral

Power’s argument is premised on the incorrect assumptions that the Commission’s only objective

in the rule is to ensure reliability and that other statutory provisions do not grant the Commission the

authority to enact the rule. We have already held that the purpose of the rule also encompasses

protecting consumers and preventing manipulation of the wholesale market. These are legitimate

objectives authorized by the statute and Coral Power has not shown how the rule is not a reasonable

means of protecting consumers and preventing manipulation of the market. Because the purpose of

the WMO Rule extends beyond the objective of ensuring reliability, we overrule Coral Power’s final

substantial compliance challenge.

CONCLUSION

In summary, the appellants and the dissent ignore what the legislature fully

recognized when it restructured the state’s electricity market: In this transition period, a purely

competitive market would not serve the needs of either the utilities or the retail customers. For

example, utilities must be allowed to recover their investment costs that might be stranded and not

recouped in a market-driven rate structure; transmission and distribution must continue to be

regulated to a degree; and the transition to a competitive market must also safeguard retail customers

by ensuring “safe, reliable, and reasonably priced electricity.” Chapter 39 of PURA gives the

Commission the authority to address market power abuses, to provide reasonably priced ancillary

services, to protect utilities from some losses resulting from deregulation, and to protect the

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legislatively sanctioned “customer safeguards.”17 The Commission’s enactment of the WMO Rule,

giving it oversight of the wholesale market, furthers these combined statutory mandates and thus

does not exceed the Commission’s authority. Rather than chill competition, this rule reasonably

promotes a form of competition most likely to accomplish the goals the legislature envisioned in

restructuring the state’s electric market.

We hold that (1) the Commission possessed the statutory authority to enact the WMO

Rule, (2) the rule as adopted was consistent with the general objectives of the statute, (3) the rule is

not unconstitutionally vague, (4) the rule does not constitute an unconstitutional taking, and (5) the

Commission substantially complied with the requirements of the APA. Accordingly, we sustain the

validity of the WMO Rule as enacted by the Commission.

Bea Ann Smith, Justice

Before Chief Justice Law, Justices B. A. Smith and Pemberton: Opinion by Justice B. A. Smith;
Dissenting Opinion by Justice Pemberton

Affirmed

Filed: May 19, 2005

17
“On or before June 30, 2001, the commission shall modify its current rules regarding
customer protections to ensure that at least the same level of customer protection against potential
abuses and the same quality of service that exists on December 31, 1999, is maintained in a
restructured electric industry.” Sec. 39.101(f).

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