471 Tex. Coast Utilities Coal. v. R.R. Comm’n of Tex.

Richard F. Brown

 
The following is not a legal opinion.  You should consult your attorney if the case may be of significance to you.
 
Tex. Coast Utilities Coal. v. R.R. Comm’n of Tex., 423 S.W.3d 355 (Tex. 2014) held that the Railroad Commission of Texas (“TRC”) is expressly authorized under the Gas Utility Regulation Act (“GURA”) to include cost of service adjustment (“COSA”) clauses in rate schedules because a COSA clause is a “rate” as defined by GURA.  In this case, the TRC approved a gas utility’s rate schedule that included a COSA clause, which permits rate increases and decreases based on a formula set by the TRC, without the requirement of a full rate case proceeding in connection with each increase or decrease.  A group of municipalities and state agencies (“Coalition”) contested the TRC’s authority to establish and regulate rates under a COSA clause on the grounds that it violates GURA’s jurisdictional and procedural requirements.  The Texas Supreme Court rejected the Coalition’s arguments.
 
Under GURA, the Legislature authorized the TRC to “establish and regulate rates of a gas utility,” which the Court concluded includes COSA clauses.  GURA defines a rate as “a rule, regulation, practice, or contract affecting the compensation, tariff, charge, fare, toll, rental, or classification.”  The Court read these provisions together to hold that GURA expressly grants the TRC the authority to “establish rates.”  The Court concluded that a COSA clause is a “rate” because a COSA clause establishes a “‘practice’ that ‘affects’ gas utility’s charges and compensation.”
 
The Coalition argued that this COSA did not comply with GURA’s notice and hearing procedures, and that the COSA usurps municipalities’ exclusive jurisdiction to set rates within its borders.  The Court disagreed with the contention that any increase in a utility rate must follow GURA’s notice and hearing procedures.  Instead, the Court determined that whether the approved rate is a fixed dollar amount, a formula with fixed inputs, or a formula with variable inputs (e.g., a COSA), GURA does not require that the rate be re-approved each time the variable inputs change the utility’s rate.  In other words, “[t]he TRC’s rate-making authority includes the authority to establish ‘practice[s]’ that ‘affect[ ]’ the basis by which the amount of a customer’s bill is determined, and . . . [a]pplication of a ‘practice’ that ‘affect[s]’ a ‘charge’ necessarily changes the charge in some manner.”  Therefore, requiring a new rate case proceeding for every increase or decrease in utility charges would render meaningless the TRC’s explicit authority to establish rates based on a practice.
 
The Court also determined that the COSA clause did not usurp the municipalities’ exclusive jurisdiction to set rates or challenge rates under a full GURA rate case, because the COSA clause is the product of a full rate case in which “municipalities were afforded all of the jurisdiction, powers, and duties that GURA grants them.”  The COSA clause also retains municipalities’ authority to: (1) deny an annual adjustment and to participate in any appeal of that decision to the TRC; (2) initiate a ratemaking proceeding to decrease a utility’s rate; and (3) review a rate adjustment.
 
The significance of this case is the holding that GURA authorizes the TRC to include COSA clauses in rate schedules.  This holding confirms GURA’s authorization of the TRC to establish utility rates that are intermittently modified by variable inputs.  Variable inputs have encouraged utility companies’ new capital improvements and protected utility companies from unsustainable losses due to market fluctuations in gas prices.  The Court’s affirmation of the TRC’s authority to utilize COSA clauses protects an important and vital tool for the TRC and utility companies to quickly adjust charges based on market forces and new capital needs.