CenterPoint Energy Houston Electric, LLC v. Public Utility Commission of Texas

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO.03-11-00065-CV

CenterPoint Energy Houston Electric, LLC, Appellant

v.

Public Utility Commission of Texas, Appellee

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 345TH JUDICIAL DISTRICT
NO. D-1-GN-10-000119, HONORABLE STEPHEN YELENOSKY, JUDGE PRESIDING

OPINION

This case involves judicial review of a Public Utility Commission (PUC) order

disallowing part of a performance bonus that appellant CenterPoint Energy Houston Electric, LLC

was entitled to for exceeding its 2008 energy-efficiency goals. The district court affirmed the PUC’s

order, but for the reasons we explain below, we will reverse the district court’s judgment and remand

the cause to the PUC for recalculation of CenterPoint’s 2008 performance bonus and carrying costs.

Background

CenterPoint, which owns and operates transmission and distribution facilities

that deliver electricity to certain areas in Texas, is an electric utility governed by the Public Utility

Regulatory Act (PURA). See Tex. Util. Code §§ 11.002, .004, 31.002(6); see generally id.

§§ 11.001–66.016 (provisions of PURA). Under PURA, CenterPoint’s rates, operations, and

services are regulated by the PUC. See id. § 32.001(a). CenterPoint’s rates, which are determined

through contested-case hearings before the PUC, must be set at a level that accounts for its costs of
providing service plus a reasonable rate of return on its investment. See id. §§ 36.001(a), 39.051.

Of relevance here, CenterPoint’s costs of providing service include its mandatory expenditures on

energy-efficiency programs designed to meet the Legislature’s goal of reducing energy consumption

in Texas. See id. § 39.905 (“Goal for Energy Efficiency”).

Since 1999, PURA has included a provision establishing energy-efficiency goals

designed to reduce Texas customers’ energy consumption. See Act of May 27, 1999, 76th Leg.,

R.S., ch. 405, § 39, 1999 Tex. Gen. Laws 2543, 2600 (codified at Tex. Util. Code § 39.905).1 These

energy-efficiency goals consist of specified reductions—i.e., a slowing—in the anticipated growth

in demand for electricity through energy-savings incentive programs administered by the electric

utilities. See Tex. Util. Code § 39.905(a)(3). In 2007, the Legislature amended section 39.905 to

increase the energy-efficiency goals and to direct the PUC to adopt rules and procedures to facilitate

meeting these goals. See Act of May 28, 2007, 80th Leg., R.S., ch. 939, § 22, sec. 39.905, 2007 Tex.

Gen. Laws 3241, 3248 (codified at Tex. Util. Code § 39.905(a)–(b)). Specifically, the Legislature

directed the PUC to create a mechanism to ensure that the cost of meeting these goals was passed

1
This provision was included as part of the Legislature’s 1999 restructure and partial
deregulation of the electric industry in Texas. See Act of May 27, 1999, 76th Leg., R.S., ch. 405,
1999 Tex. Gen. Laws 2543, 2558–2602 (codified at Tex. Util. Code §§ 39.001–.916); see also
City of Corpus Christi v. Public Util. Comm’n, 51 S.W.3d 231 (Tex. 2001) (describing legislation
in detail); State v. Public Util. Comm’n, 246 S.W.3d 324 (Tex. App.—Austin 2008, pet. denied)
(same); Office of Pub. Util. Counsel v. Public Util. Comm’n, 185 S.W.3d 555 (Tex. App.—Austin
2006, pet. denied) (same). Because the generating companies and retail electric providers had to use
the existing power lines to move electricity from the plant to the retail customer’s home or business,
the 1999 legislation regarded transmission and distribution utilities like CenterPoint as regulated
monopolies within their respective service areas and mandated that their rates continue to be
regulated by the PUC. See Tex. Util. Code § 39.001(a), (b).

2
through to ratepayers in a timely fashion and to establish an incentive to reward utilities for

exceeding the energy goals:

The commission shall provide oversight and adopt rules and procedures to ensure
that the utilities can achieve the goal of this section, including:

(1) establishing an energy efficiency cost recovery factor for ensuring timely and
reasonable cost recovery for utility expenditures made to satisfy the goal of
this section;

(2) establishing an incentive under Section 36.204 to reward utilities
administering programs under this section that exceed the minimum goals
established by this section;

....

Tex. Util. Code § 39.905(b).

In response to this legislative directive, the PUC repealed and amended its prior

rule 25.181 to create an energy efficiency cost recovery factor (EECRF) and to establish a

performance bonus to reward utilities that exceeded the energy-efficiency goals. See 33 Tex. Reg.

3585 (2008) (proposed Nov. 2, 2007) (codified at 16 Tex. Admin. Code § 25.181). PUC rule 25.181

emphasizes that its purpose, like that of PURA section 39.905, is to ensure that electric utilities

administer energy-efficiency programs that are available to utility customers and, in furtherance of

meeting the energy-reduction goals set forth in the rule, that the electric utilities provide incentives

for customers to acquire cost-effective energy efficiency. See 16 Tex. Admin. Code § 25.181(a)

(Public Util. Comm’n, Energy Efficiency Goal) (2008).2 The rule specifies that the incentives be

2
All citations to PUC rule 25.181 are to the version that went into effect as of May 4, 2008,
which is the version that was in effect when the PUC issued its order in this case. See 33 Tex. Reg.
3585, 3630 (2008) (proposed Nov. 2, 2007) (codified at 16 Tex. Admin. Code § 25.181)
(establishing effective date of May 4, 2008).

3
provided through “market-based standard offer programs or limited, targeted, market-transformation

programs.” See id. § 25.181(a)(3).3 To recover the costs expended on these energy-efficiency

programs, the rule allows a utility to apply to the PUC to establish through a ratemaking proceeding

an EECRF “to timely recover the reasonable costs of providing energy efficiency programs.” See

id. § 25.181(f). And for those utilities that exceed the demand-reduction goal set forth in

subsection (e) of the rule, the rule mandates that they be awarded a performance bonus based on the

utility’s energy-efficiency achievements for the previous calendar year. See id. § 25.181(h). That

performance bonus is a capped percentage share of the net benefits realized in meeting the

energy-reduction goals. See id. But, of particular relevance here, “[t]he bonus calculation shall not

include demand or energy savings that result from programs other than programs implemented

under this [rule].” Id.

During 2008, CenterPoint implemented fourteen energy-efficiency programs, all of

which were the type of programs required by PUC rule 25.181—specifically, they were all market-

transformation or standard offer programs. At that time, the PUC-approved rates for CenterPoint,

which derived from a 2001 PUC-approved rate tariff with CenterPoint’s residential, commercial, and

industrial ratepayers, were designed to generate $23 million in revenues for energy-efficiency

programs, with $13 million of that amount coming from its 2001 PUC-approved rate and $10 million

from the terms of a 2006 settlement agreement between CenterPoint and certain of its customers.4

The 2006 settlement agreement resulted from a contested rate case in which the PUC determined that

CenterPoint was over-collecting revenues by approximately $68 million—i.e., CenterPoint’s then-

3
The rule contains more detailed information. See 16 Tex. Admin. Code § 25.181.
4
For ease of reading, we have rounded the exact amounts, which are $22,925,492 (total) and
$12,925,492 (2001 approved rates).

4
current base rates collected $68 million more in revenue than CenterPoint needed to regain its costs

plus a reasonable rate of return. In the settlement agreement, the parties agreed that $5 million of

the over-collected $68 million would be allocated to CenterPoint’s wholesale customers through

a base-rate reduction that lowered CenterPoint’s revenues by $5 million per year. The remaining

$63 million would be allocated to its retail customers, but instead of a corresponding base-rate

reduction equaling $63 million per year, the parties agreed that CenterPoint’s yearly revenues would

be reduced by $53 million and that CenterPoint would invest an additional $10 million in energy-

efficiency programs. More specifically, the parties agreed—

CenterPoint Houston shall spend not less than $10 million (including costs of
administering the programs) in addition to the $13 million of energy efficiency
program costs used in setting CenterPoint Houston’s existing rates for a total of
approximately $23 million.

So instead of reducing their annual rates by an additional $10 million, CenterPoint’s residential and

commercial customers agreed that CenterPoint would continue to collect the $10 million annually

through its base rates, but CenterPoint in turn agreed to spend that $10 million on additional,

specifically designated energy-efficiency programs. CenterPoint also agreed to include separate

line-item designations in its annual energy-efficiency plan reports regarding how it spent this

$10 million. See 26 Tex. Admin. Code § 25.181(m) (requiring utility to file annual energy-efficiency

plan and report). Thus, once the PUC approved the settlement agreement, CenterPoint’s rates were

set at a level designed to collect $23 million in revenues designated for energy-efficiency programs.

During 2008, however, CenterPoint spent more than $23 million on energy-efficiency

programs—specifically, it spent $1.3 million more, or $24.3 million total.5 And by all accounts,

5
The exact amounts are $1,344,530 and $24,270,022 respectively.

5
CenterPoint’s 2008 energy-efficiency programs were extremely successful. Not only did CenterPoint

meet its target of a 15% reduction in the annual growth of electricity demand, its programs

actually reduced demand growth by 30%, which was 200% of its 2008 energy-efficiency goal. See

id. § 25.181(e). This reduction translated into a savings of approximately $83.4 million to

CenterPoint’s residential and commercial ratepayers.

In May 2009, CenterPoint filed an application with the PUC requesting approval

of a new EECRF that would serve as a rider to CenterPoint’s then-existing base rates to allow it

to recover the extra $1.3 million it had spent on energy efficiency programs and also to collect

the performance bonus it was entitled to for exceeding its 2008 energy-efficiency goals. In the

application, CenterPoint claimed it was entitled to a performance bonus of $4.85 million,6 which

it calculated using the formula set forth in PUC rule 25.181. See id. § 25.181(h) (providing

performance bonus based on capped percentage of net energy-efficiency savings). The calculation

of the bonus begins with the amount of net savings, here $83.4 million, realized by CenterPoint’s

customers—i.e., the sum of total avoided cost associated with the eligible programs administered

by the utility minus the sum of all program costs. See id. § 25.181(h)(2). The maximum bonus a

utility can receive under the rule is 1% of net benefits for every 2% that the utility exceeds its target,

further capped at 20% of the utility’s program costs. Id. § 25.181(h)(3). Here, because CenterPoint

exceeded its goals by 100%, it calculated that it was entitled to a maximum of 50% of the net

benefits, or approximately $41.7 million, which amount is further capped at 20% of CenterPoint’s

total energy-efficiency program costs. See id. CenterPoint calculated its total energy-efficiency costs

using the $13 million from its 2001 PUC-approved rate, the $10 million from its 2006 settlement

6
The exact amount is $4,854,004.

6
agreement, and the $1.3 million it spent in excess of its designated amounts, for a total of $24.3

million. The result of CenterPoint’s calculations was a performance bonus of $4.85 million—i.e.,

20% of its $24.3 million in expenditures on energy-efficiency programs. Because it was subject to

a rate freeze under the 2006 settlement agreement, however, CenterPoint also sought in its

application to defer implementation of its EECRF until July 2010 when its then-current rate freeze

expired and, in conjunction with that, requested $154,269 in carrying costs—i.e., interest on the

deferred performance-bonus amount—for the deferral period between January 1, 2010 until the

EECRF became effective. See Tex. Util. Code § 39.905(b)(3) (allowing deferral); 16 Tex. Admin.

Code § 25.181(f)(7) (allowing deferral and for recovery of interest on deferred amount).

The Office of Public Utility Counsel (OPC) requested a hearing on CenterPoint’s

EECRF application, so the PUC referred the matter to the State Office of Administrative Hearings

for a contested-case hearing. The parties to the contested-case hearing agreed that CenterPoint was

entitled to a performance bonus for exceeding energy-efficiency goals, but PUC staff, the OPC, and

Texas Industrial Energy Consumers (TIEC)7 asserted that it would be inequitable and contrary to the

law to include the $10 million that was required to be spent on energy-efficiency programs under the

settlement agreement in the calculation of CenterPoint’s bonus computation because the ratepayers

provided the $10 million and because inclusion is contrary to PUC regulations. Instead, OPC and

TIEC urged, CenterPoint’s bonus should be calculated using $14.3 million as the amount of program

expenditures—i.e., the total energy-efficiency program expenditures less the $10 million from the

settlement agreement that was also spent on those programs—which yields a $2.85 million

performance bonus. After the parties submitted the case on briefs and filed evidence with the

7
TIEC is a voluntary association of companies that operate industrial facilities in Texas.
See City of Corpus Christi v. Public Util. Comm’n, 51 S.W.3d 231, 257 (Tex. 2001).

7
administrative law judge regarding the contested issues, which included the proper allocation of the

$10 million in calculating the performance bonus, the administrative law judge issued a proposal for

decision, most of which the PUC adopted in its final order. Specifically of relevance here, the PUC’s

final order concluded—

• “CenterPoint is entitled to a performance bonus” under PUC rule 25.181(h);

• “[PUC rule 25.181(h)] excludes from the calculation of a performance bonus the demand
or energy savings that result from programs other than programs implemented pursuant to
Rule 25.181.”

• “The settlement energy-efficiency program approved by the [PUC in the 2006 settlement
agreement] is a program not implemented under [PUC rule 25.181] and must therefore be
excluded from the calculation of CenterPoint’s performance bonus.”

• CenterPoint’s 2008 performance bonus is “20 percent of the statutory energy-efficiency
program cost which CenterPoint reports as $14,271,681. The resulting performance bonus
from this calculation is $2,854,336.”

• Based on the recalculation of the performance bonus, CenterPoint’s carrying costs are
$123,049.

After exhausting its administrative remedies, CenterPoint filed this suit for judicial

review in Travis County district court to overturn the PUC’s decision regarding the performance

bonus. See Tex. Gov’t Code § 2001.171 (authorizing judicial review of agency decision after

administrative remedies exhausted). CenterPoint’s principal argument was that the PUC’s decision

to partially deny the bonus violated PURA section 39.905 and PUC rule 25.181 because all of

CenterPoint’s energy-efficiency programs, including those funded by the settlement agreement, were

implemented under PUC rule 25.181 and thus should be included in calculating its performance

bonus. The PUC argued in response that because CenterPoint had agreed to expend $10 million on

energy-efficiency programs under the terms of its 2006 settlement agreement, the portions of its

8
programs supported by that $10 million were not “programs implemented under [PUC rule 25.181],”

and thus could not be included in the calculation of its performance bonus. After a bench trial on

the matter, the district court issued a final judgment affirming the PUC’s final order. CenterPoint

now appeals.

Discussion

CenterPoint raises two issues on appeal. In the first, it argues that the PUC’s partial

denial of CenterPoint’s performance bonus violates PURA and PUC rules because all of

CenterPoint’s 2008 energy-efficiency programs were “implemented under” PURA section 39.905

and PUC rule 25.181. In its second issue, which depends on a favorable resolution of its first,

CenterPoint asserts that it was error for the PUC to reduce CenterPoint’s carrying costs.

Standard of review

This appeal concerns a suit for judicial review of a final agency decision in a

contested case. In general, our review of the PUC’s order is governed by section 2001.174 of the

Administrative Procedure Act. See Tex. Util. Code § 15.001; Tex. Gov’t Code § 2001.174. This

standard requires that we reverse or remand a case for further proceedings “if substantial rights of

the appellant have been prejudiced because the administrative findings, inferences, conclusions, or

decisions” are

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

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

(C) made through unlawful procedure;

(D) affected by other error of law;

9
 (E) not reasonably supported by substantial evidence considering the
reliable and probative evidence in the record as a whole; or

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

Tex. Gov’t Code § 2001.174(2). Here, there are no underlying fact disputes, only a dispute over the

PUC’s interpretation of its rule 25.181. Thus, this case raises a question of rule construction, which

we review de novo. See Rodriguez v. Service Lloyds Ins. Co., 997 S.W.2d 248, 254 (Tex. 1999).

We interpret administrative rules, like statutes, under traditional principles of statutory construction.

See TGS-NOPEC Geophysical Co. v. Combs, 340 S.W.3d 432, 438 (Tex. 2011); Rodriguez,

997 S.W.2d at 254. Accordingly, our primary objective is to ascertain and give effect to the agency’s

intent and, ordinarily, the truest manifestation of what the agency intended is what it enacted. See

First Am. Title Inc. Co. v. Combs, 258 S.W.3d 627, 632 (Tex. 2008) (discussing principles of

statutory construction); Rodriguez, 997 S.W.2d at 254 (“Unless the rule is ambiguous, we follow the

rule’s clear language.”). If the rule is ambiguous or leaves room for policy determinations, we defer

to the agency’s interpretation, but not where the administrative interpretation is plainly erroneous

or inconsistent with the regulation or its underlying statutes. Rodriguez, 997 S.W.2d at 254–55

(quoting Public Util. Comm’n of Tex. v. Gulf States Util. Co., 809 S.W.2d 201, 207 (Tex. 1991)).

If an agency has failed to follow the clear, unambiguous language of its own regulation, we must

reverse its action as arbitrary and capricious. See Rodriguez, 997 S.W.2d at 255.

Programs implemented under rule 25.181

The PUC’s final order partially reduced CenterPoint’s 2008 performance bonus

based on the PUC’s interpretation of the phrase “implemented under [rule 25.181]” found in

subsection (h) of that rule. See 16 Tex. Admin. Code § 25.181(h) (“The bonus calculation shall

10
not include demand or energy savings that result from programs other than programs implemented

under this section.”) (emphasis added). Specifically, the PUC concluded in its order that the

energy-efficiency programs funded with the $10 million from the settlement-agreement were

programs “not implemented under [rule 25.181],” and thus could not be included in the performance

bonus calculation. See id. Instead, the PUC determined that only the programs funded with the

$14.3 million of CenterPoint’s “statutory program funding”—i.e., the money from CenterPoint’s

base rates originally designated for energy-efficiency programs plus the extra $1.3 million

CenterPoint spent on energy-efficiency programs—were programs “implemented under

[rule 25.181]” that could be included in the performance-bonus calculation. Emphasizing that we

must defer to its interpretation of PURA and its own rules, the PUC argues on appeal it was

appropriate for it to consider the source of a program’s funding to determine whether the program is

“implemented under” PUC rule 25.181 because that undefined phrase limits the performance bonus

based on the specific source of funds expended on the energy-efficiency programs. We disagree.

While it is technically true that the phrase “implemented under” as it is used in

rule 25.181(h) creates a limit—i.e., confining application of subsection (h)’s calculation to only those

programs “implemented under” the rule—the PUC’s position here unnecessarily complicates what

is fairly standard statutory and regulatory language.8 “Implement” simply means “carry out.” See,

e.g., Webster’s Third New Int’l Dictionary 1134 (2002). In the statutory and regulatory context, this

8
Our research revealed several statutes and rules that use the phrase “implemented under”
in this context. See generally, e.g., Tex. Gov’t Code §§ 411.381(11), 531.024171(d), 536.203,
536.205; Tex. Educ. Code § 39.233; Tex. Health & Safety Code §§ 363.063(d), 382.209(f);
Tex. Parks & Wild. Code § 11.081(5); 1 Tex. Admin. Code § 210.1 (2013) (Dep’t of Info.
Resources, Applicable Terms and Technologies for State Electronic Portal); 30 Tex. Admin. Code
§ 114.661 (2013) (Tex. Comm’n on Envtl. Quality, Criteria for Prioritizing Facilities Eligible to
Receive Grant); 31 Tex. Admin. Code § 25.1(8) (2013) (General Land Office, Definitions).

11
phrase is used as a sort of short-hand reference to the general contents or substance of the statute

or rule to which it refers. And although its use does “limit,” it does not create the type of uncertainty

or require the scrutiny that the PUC’s interpretation here suggests. Rather, the proper application

of the phrase “implemented under [rule 25.181]” simply requires a plain-meaning review of

rule 25.181 and application of that plain meaning to the programs in question.

The plain and unambiguous text of rule 25.181 shows that its purpose is to achieve

the Legislature’s overarching goal of improving energy efficiency in Texas by requiring electric

utilities like CenterPoint to administer certain types of energy-efficiency programs to achieve a set

percentage reduction—15% in 2008, see 16 Tex. Admin. Code § 25.181(e)—in the utility’s annual

growth demand of residential and commercial customers. See id. § 25.181(a). The energy-efficiency

programs provided by utilities under this rule must be of three specific types:

[E]ach electric utility annually provides, through market-based standard offer
programs, or limited, targeted, market-transformation programs, incentives
sufficient for retail electric providers and competitive energy service providers to
acquire additional cost-effective energy efficiency for residential and commercial
customers . . . .

Id. § 25.181(a)(3) (emphases added); see also Tex. Util. Code § 39.905(a)(3) (specifying same

programs). And to encourage utilities’ full involvement in the energy-efficiency goals, the rule

creates a mechanism that allows utilities to recoup the costs expended on the programs and, for

those utilities that exceed the rule’s goals, mandates a bonus based on the net savings achieved. See

16 Tex. Admin. Code § 25.181(f), (h). The remaining terms of the rule, although important, deal

with matters ancillary to the above, such as a cost-effectiveness standard, incentive payments to

energy-efficiency providers, administration costs, penalties, and reporting, review and inspection

12
requirements. See generally id. § 25.181(c)–(u). So at its core, rule 25.181 sets the minimum

energy-efficiency goals that utilities must meet annually, requires that they meet these goals by

providing incentives through two specifically identified types of programs, allows for the utilities

to recover the costs of the programs, and mandates a bonus for those utilities exceeding their energy

goals. Thus, under a plain-meaning review of rule 25.181, a program is implemented or carried out

under the rule if it is a “market-based standard offer program or a limited, targeted, market-

transformation program” that is provided or administered by a utility to achieve the energy efficiency

goals of the rule.

Here, it is undisputed that all of the 2008 energy-efficiency programs, including

the ones funded with the $10 million from the 2006 settlement agreement, were administered

by CenterPoint, were market-based standard offer programs or targeted market-transformation

programs that were provided to achieve, and did achieve according to PUC’s order, cost-effective

energy efficiency for CenterPoint’s customers. In fact, CenterPoint’s administration of these

programs resulted in a reduction in demand that significantly exceeded the rule’s minimum goals.

Accordingly, these programs were “programs implemented under [rule 25.181]” and, as such, the

savings from these programs should be included in the calculation of the performance bonus that

CenterPoint is entitled to for exceeding its energy-efficiency goals.

The PUC advances several arguments to support its conclusion that the CenterPoint

energy-efficiency programs funded with money from the settlement agreement are not “programs

implemented under [rule 25.181],” but these arguments are inconsistent with the rule’s text and

are thus unpersuasive.

13
 1. Whether the programs funded by $10 million were necessary to meet goals

In the proceedings that led to the 2006 settlement agreement, the PUC determined that

CenterPoint’s then-existing rates created more revenue—specifically $68 million more—than

CenterPoint needed to earn a profit and recover its reasonable and necessary expenses, including

those for energy-efficiency programs. Thus, CenterPoint could have funded its energy-efficiency

programs sufficiently to meet its demand-reduction goals even in the absence of the $68 million in

revenue. Therefore, the PUC argues, because the $10 million at issue in this case was part of that

$68 million of excess revenue, the energy-efficiency programs funded by that amount were not

necessary for CenterPoint to meet its goals. Stated another way, the PUC argues that the programs

funded by the $10 million were in addition to what was required by rule or statute to meet energy-

efficiency goals and, as such, they were not “implemented under [rule 25.181].” We disagree.

There is no textual support in the rule, or its enabling statute, for the conclusion that

programs are implemented under the rule only to the extent that they meet the minimum energy

efficiency goals. Likewise, there is nothing in the text of the rule to support the related argument

that expansion of existing energy-efficiency programs beyond what is required to meet the rule’s

minimum goals cannot be part of a “program implemented under [rule 25.181].” To the contrary,

PURA’s stated purpose in directing the PUC to create a performance bonus is “to reward utilities

administering programs under [section 39.905] that exceed the minimum goals established by

[section 39.905].” See Tex. Util. Code § 39.905(b)(2). And the rule, which tracks the Legislature’s

purpose, grants such a performance bonus to those utilities that exceed their minimum demand and

energy reduction goals. See 16 Tex. Admin. Code § 25.181(h). Thus, the statutory and regulatory

energy-efficiency scheme at issue here actually encourages the expansion of the energy-efficiency

programs beyond the minimum energy-efficiency goals. Likewise encouraging is the rule’s EECRF

14
provision, which provides a mechanism that allows a utility to recover the full costs of providing its

portfolio of energy-efficiency programs. See id. § 25.181(f)(4), (6) (allowing EECRF adjustment

to permit recovery of past under-recovered energy-efficiency program costs). Those costs are limited

only by the requirement that they be reasonable, see id. § 25.181(f), and not in excess of the

stated percentage caps, see id. § 25.181(f)(8). Thus in this case, because it had spent more money

on energy-efficiency programs than was forecast in its rates, CenterPoint requested and the PUC

order approved an EECRF rate rider designed to recover the energy-efficiency expenses that

CenterPoint incurred in excess of the estimated expenditures covered by its existing base rates.

2. Whether the $10 million belonged to CenterPoint’s ratepayers, not CenterPoint

In another argument, the PUC characterizes the $10 million from the settlement

agreement as a “gift” or “grant” from CenterPoint’s commercial and residential ratepayers to be

dedicated to expanding energy-efficiency programs. As such, the PUC asserts, the programs funded

by this amount were not provided by CenterPoint to comply with its statutory and regulatory energy-

efficiency goals and, as a result, were not “implemented under [rule 25.181].” Again, we disagree.

First, we would disagree with the PUC’s characterization of the $10 million as a

gift or grant. This amount was part of a negotiated agreement to settle a contested PUC rate case in

which several different parties participated, and we will not second guess the purposes or motives

behind such a settlement agreement. But regardless, in the absence of textual support for the

contention that a utility must provide the funds from its rate-designated revenue, we fail to see how

the source of funding for these programs affects whether the programs were carried out to comply

with the Legislature’s energy-efficiency goals. Ultimately, all utilities’ costs, including those for

energy-efficiency programs, are funded by ratepayers, see Tex. Util. Code § 36.051 (establishing

15
rates), and we fail to see how the intermediate source of the funding informs our decision here. This

is best illustrated by the fact that the effect of PUC’s approval of the settlement agreement was to

set CenterPoint’s rates such that they recovered $23 million—not $13 million—designated for

energy-efficiency programs. Further, these programs exist to achieve the overarching purpose of

the statutory and regulatory scheme at issue here—i.e., energy-efficiency. Thus, the rule does not

distinguish between intermediate funds and ratepayer funds, but only whether the funds were spent

on the programs required by the rule, the programs were administered by CenterPoint, and the

programs actually achieved energy-efficiency.

Relatedly, the PUC argues that the $10 million cannot be considered in the calculation

of CenterPoint’s performance bonus because the programs funded by that amount did not “cost”

CenterPoint anything. See 16 Tex. Admin. Code § 25.181(h)(2) (defining “net benefit,” which is

element of performance bonus, as sum of total avoided costs minus the “sum of all program costs”).

Stated another way, the PUC contends that because CenterPoint did not have to pay for the

expansion of the programs out of its own funds, that part of those programs was not “implemented

under [rule 25.181]”. First, we would note that CenterPoint collected the $10 million in the same

manner that it collected the other money spent on energy-efficiency programs—i.e., through its PUC-

approved rates. Further, the rule’s description of the calculation simply references “program costs”

without limitation. See id. § 25.181(h)(2). To that extent, the rule offers no textual support for the

PUC’s argument here. And, as noted previously, the PUC’s focus on the source of funds in this

context is a distinction without a difference given that CenterPoint’s ratepayers ultimately pay all

the utility’s costs, one way or the other. For this same reason, although not raised by the PUC here,

we would note that the rule’s reference to “the utility’s program costs” in the rule’s 20% cap, see id.

§ 25.181(h)(3) (emphasis added) (capping bonus at “20% of the utility’s program costs”), does not

16
inform our decision here. In sum, there is nothing in the rule to preclude inclusion of the cost of

these programs based simply on the intermediate source of funds for those costs.

3. Other programs

The PUC also argues that its treatment of the $10 million is appropriate here because

it mirrors subsection (p)’s treatment of weatherization programs for low-income customers:

Targeted low income energy efficiency program. Unless funding is provided under
PURA § 39.903, each unbundled transmission and distribution utility shall include
in its energy efficiency plan a targeted low-income energy efficiency program as
described by PURA § 39.903(f)(2). A utility in an area in which customer choice is
not offered may include in its energy efficiency plan a targeted low-income energy
efficiency program that utilizes the cost-effectiveness methodology provided in
paragraph (2) of this subsection. Savings achieved by the program shall count toward
the utility’s energy efficiency goal.

Id. § 25.181(p) (emphases added). Although it does not explain its basis for this argument and that

basis is not immediately obvious from text of subsection (p), we infer that the PUC’s argument here

stems from subsection (p)’s reference to, as emphasized above, the “funding” of energy-efficiency

programs “provided under PURA § 39.903.” See id. But subsection’s (p)’s reference here does

not support the PUC’s interpretation of subsection (h) to allow an inquiry into the source of an

energy-efficiency program’s funds to determine whether that program was “implemented under

[rule 25.181].” See id.

Subsection (p) of PUC rule 25.181 requires utilities to provide weatherization

programs for low-income customers unless PURA section 39.903 provides the funding for such

a program. See id. It also specifies that any savings achieved by a weatherization program provided

by the utility count towards the utility’s energy-efficiency goals. See id. The PURA provision

referenced in subsection (p) authorizes funding from an account in the general revenue fund for

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programs benefitting certain low-income electric customers, including “targeted energy efficiency

programs to be administered by the Texas Department of Housing and Community Affairs in

coordination with existing weatherization programs.” See Tex. Util. Code § 39.903(f)(2). So read

together, if the Department of Housing and Community Affairs administers a weatherization

program funded under PURA section 39.903(f)(2), the utility servicing those customers does not

need to provide such a program. See id.; 16 Tex. Admin. Code § 25.181(p). If the Department does

not administer such a weatherization program, however, the utility must provide the program and

is credited for any subsequent energy savings. See 16 Tex. Admin. Code § 25.181(p). But contrary

to the PUC’s implied assertion here, the focus of this scheme is not on the source of funding,

but instead on which entity actually administers the weatherization program. See Tex. Util. Code

§ 39.903; 16 Tex. Admin. Code § 25.181(p). Thus, a utility administering a weatherization program

under subsection (p)—i.e., where the Department is not doing so under PURA section 39.903—is

credited for any savings resulting from that weatherization program not because of how the program

is funded, but because the utility, not the Department, actually administered the program.

Conversely, a utility, in whose service area the Department administers a weatherization program

under PURA section 39.903, is not credited with any savings resulting from that program because

the Department, not the utility, administers the program. To that extent, subsection (p)’s treatment

of the weatherization programs, instead of supporting the PUC’s position in this case, is consistent

with our holding here that “programs implemented under [rule 25.181]” are “market-based standard

offer programs, targeted market-transformation programs, or utility self-delivered programs”

administered by utilities to achieve a reduction in demand growth.

In a related argument, the PUC offers its rule regarding advanced metering systems

as further support for its focus on the source of a program’s funding in rule 25.181. See 16 Tex.

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Admin. Code § 25.130 (2013) (Pub. Util. Comm’n, Advanced Metering).9 The advanced-metering

rule regulates utilities’ use of advanced meters and allows those utilities that choose to adopt

advanced metering systems to assess a surcharge to recover costs incurred for deploying the systems.

See id. Although use of advanced meters can result in decreased demand for electricity because,

among other reasons, they allow users to directly monitor and control their energy consumption,

utilities may not include these savings in their bonus calculation because the advanced-meter

program is carried out—i.e., implemented—under rule 25.130, not 25.181. See id. § 25.181(h). The

PUC somehow extrapolates from this result that because the excluded savings are from programs

funded through a surcharge, it should consider the source of a program’s funding in determining

whether the program is implemented under rule 25.181. But the savings from advanced metering

programs are not included in a performance bonus because those programs are implemented under

rule 25.130, not because they are funded differently than energy-efficiency programs. Further, the

purpose behind advanced metering systems is not to promote energy efficiency, as is rule 25.181’s

purpose, but “to increase the reliability of the regional electrical network, encourage dynamic pricing

and demand response, make better use of generation assets and transmission and generation assets,

and provide more choices for consumers.” See Act of May 29, 2005, 79th Leg., R.S., ch. 1095, § 8,

2005 Tex. Gen. Laws 3615, 3618.

In sum, we hold that under PUC rule 25.181’s plain language, CenterPoint’s 2008

energy-efficiency programs, including those funded with money from the 2006 settlement agreement,

9
Advanced meters, which are part of “Smart Grid Technology” and are often referred to as
“smart meters,” are digital meters that offer two-way, real-time communication between a metered
location and the electric utility. See Sonia K. McNeil, Privacy and the Modern Grid, 25 Harv. J.L.
& Tech. 199, 200 (2011). They also allow users to monitor and remotely control their electrical use.
See id.

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were programs “implemented under [rule 25.181]” because they were “market-based standard offer

programs or limited, targeted, market-transformation programs” provided or administered by an

electric utility to achieve the rule’s energy-efficiency goals. The PUC, by limiting CenterPoint’s

performance bonus based on the specific source of funds expended on the energy-efficiency

programs,” rather than based on the above, adopted an interpretation that is contrary to the rule’s

plain language. Thus, the PUC’s actions here were arbitrary and capricious and require reversal.

See Rodriguez, 997 S.W.2d at 254–55 (“If the Commission does not follow the clear, unambiguous

language of its own regulation, we reverse its action as arbitrary and capricious.”). Accordingly, we

sustain CenterPoint’s first issue.

Carrying costs

In its second issue, CenterPoint asserts that because the PUC erred in reducing

CenterPoint’s performance bonus as discussed above, it was likewise error for it to reduce

CenterPoint’s carrying costs. See 16 Tex. Admin. Code § 25.181(f)(7) (providing that utility that

is subject to a rate freeze, as CenterPoint was here, is entitled to defer recovery of its costs until after

the rate freeze expires, and those deferred costs bear interest). The PUC, although disagreeing that

it erred in partially denying CenterPoint’s performance bonus, agrees that a proper calculation of

CenterPoint’s carrying costs depends on the correct amount of its performance bonus. Accordingly,

because the PUC’s calculation of CenterPoint’s carrying costs was improperly based on its award

of a partial performance bonus, CenterPoint is entitled to a recalculation of its carrying costs under

rule 25.181(f)(7).

We sustain CenterPoint’s second issue.

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 Conclusion

Having sustained both of CenterPoint’s issues on appeal, we reverse the

district court’s judgment. We likewise reverse the parts of the PUC’s order regarding CenterPoint’s

2008 performance bonus and carrying costs and remand this cause to the PUC for recalculation of

those amounts consistent with this opinion.

__________________________________________

Jeff Rose, Justice

Before Justices Puryear, Rose, and Goodwin

Reversed and Remanded

Filed: August 16, 2013

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