472 State Agencies & Institutions of Higher Educ. 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.
 
State Agencies & Institutions of Higher Educ. v. R.R. Comm’n of Tex., 421 S.W.3d 690 (Tex. App.—Austin 2014, no pet.) affirms a rate setting procedure in which the Railroad Commission of Texas (“TRC”) adjusted the total revenue requirement for a utility by a formula tied to other revenue received from unregulated customers, without inquiring into the actual cost of service to the unregulated customers.  The TRC determines a utility company’s total revenue requirement based on three factors: (1) the utility’s reasonable and necessary operating expenses; (2) the rate base; and (3) a reasonable rate of return.  The total revenue requirement must be set at a level that allows the utility company to earn a reasonable return on invested capital and that will cover necessary operating expenses in providing service to the public.  Atmos Pipeline – Texas (“Atmos”) provides services to regulated customers under two tariffs:  (1) to local distribution companies and other city-gate–service customers, who are charged pursuant to “Rate CGS” (“CGS” is short for City Gate Service), and (2) for interruptible transportation services to certain on-system industrial customers (whose rates are regulated because there is no alternative to Atmos), who are charged pursuant to “Rate PT” (“PT” is short for Pipeline Transportation).  Atmos also serves unregulated customers who are charged negotiated rates.  The revenue generated from the services provided to unregulated customers is called “Other Revenue.”  Atmos proposed and the TRC adopted “Rider Rev,” which is an adjustment mechanism that increases or decreases the capacity charge component of Rate CGS and Rate PT (for regulated customers) when Other Revenue actually received is either above or below a fixed amount determined by the TRC.  In summary, the TRC determined that (1) the total net revenue requirement was $226,772,532, and (2) that Other Revenue was $83,723,391.  The TRC then applied the Other Revenue as a credit against the total net revenue requirement, which resulted in a reduced total net revenue requirement of $143,049,141.  The TRC then set Rate CGS and Rate PT at levels that would allow recovery of the reduced amount.  However, Other Revenue results from negotiated rates and varies from year to year from the targeted $83,723,391.  The formula adopted gave regulated customers the benefit of 75% of any increase and required regulated customers to bear 75% of any decrease from the targeted $83,723,391.  The issue was whether the rate design system “Rider Rev” was properly approved by the TRC as being in the public interest.
 
Plaintiffs claimed that the TRC erroneously approved this rate design system on several bases.  First, the rates that the TRC approves must be “just and reasonable,” “sufficient, equitable, and consistent in application to each class of customer,” and not “unreasonably preferential, prejudicial, or discriminatory.”  The TRC has broad discretion under this type of statutory language.  The court refused to consider the matter de novo and found that the TRC’s decision was based on substantial evidence which provided a reasonable basis for the TRC’s approval of Atmos’ rates.  The court held that most of the system’s costs:

were related to installing and maintaining facilities sized to meet the peak needs of the regulated, non-interruptible, customers and that it was appropriate to credit revenue received from the competitive customer’s use of the system’s available excess off-peak capacity against the total revenue requirement assessed to the regulated customers in their cost-of-service-based rates rather than establish a separate Other Revenue rate class.

 
The effect of Atmos’ credit against the revenue requirement was to reduce the amount of money that regulated users must pay in their use of the pipeline system.  In other words, the “Rider Rev” mechanism tracks the changes in the amount of Other Revenue received from year to year and adjusts the capacity-charge component of Rate CGS and Rate PT accordingly.  The adjustment ensured that the rate the regulated customers pay is an accurate reflection of the amount of Other Revenue actually generated.  The TRC is expressly authorized to establish gas utility rates under GURA, including formula rates, provided they do not conflict with GURA.  The court found that “Rider Rev” “assists in accomplishing the TRC’s objective of setting rates at a level that will generate revenue for the utility sufficient to give it a reasonable opportunity to earn a reasonable return.”
 
Because the challenges raised were generally procedural or addressed to the formula adopted by the TRC, the opinion is predictable in deferring to the agency on agency-specific matters and in affirming after finding substantial evidence of a reasonable basis for the agency’s decision.