CenterPoint Energy Entex v. Railroad Commission of Texas, Victor Carrillo, Elizabeth A. Jones, Michael Williams, City of Tyler and State of Texas

Citation: Not availableDocket: 03-04-00731-CV

Court: Court of Appeals of Texas; February 23, 2006; Texas; State Appellate Court

Original Court Document: View Document

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The Texas Court of Appeals addressed whether the Texas Railroad Commission has the authority to conduct a retroactive prudence review of charges under a purchased gas adjustment clause (PGA clause) and to order refunds for imprudent charges. The court confirmed that the Commission can conduct such reviews and order refunds but determined that this process does not constitute a "ratemaking proceeding," which would entitle a participating municipality to reimbursement for expenses. 

CenterPoint Energy Entex, a gas utility regulated under the Gas Utility Regulatory Act, has used PGA clauses in its rate schedules for over twenty-five years to adjust customer charges based on gas cost fluctuations. The City of Tyler approved these tariffs and was notified monthly by Entex regarding changes in gas costs. In 2002, the City raised concerns about Entex’s procurement practices, particularly regarding the disparity in pricing between two gas contracts. Entex allegedly charged residential and small commercial customers higher rates while providing lower-priced gas to larger customers, prompting the review by the City. 

The court affirmed part of the district court's ruling but reversed other aspects, clarifying the nature of the Commission's review authority in this context.

The City alleged that Entex overcharged residential and small commercial customers by approximately $39 million due to higher gas prices passed through PGA clauses. Additional claims included misleading tariffs, failure to request annual price redeterminations, and not charging non-Tyler customers their share of capital costs. Subsequently, Entex filed suit in Travis County, claiming the City lacked authority to order refunds and sought an injunction against the city council's consideration of the issue, asserting that the Commission held exclusive jurisdiction over gas distribution refunds. 

Both parties agreed to submit their dispute to the Commission instead of continuing litigation. They jointly petitioned for a review of Entex’s gas sales charges from November 1, 1992, to October 31, 2002, seeking remedies, including refunds. On January 8, 2003, the City relinquished its jurisdiction over the matter to the Commission. However, the parties disagreed on the Commission's review scope. Entex contended that the Commission could only assess whether it charged correctly according to its tariffs, and could not evaluate the prudence of its gas purchases, which it argued would constitute retroactive ratemaking. 

Conversely, the City argued for a comprehensive review that included prudence assessments and sought reimbursement for its expenses, claiming the proceeding was a "rate case." Entex countered that this was not a ratemaking proceeding, thus denying the City expense recovery. The Commission appointed hearing examiners who ruled that the reasonableness of Entex’s gas costs would be included in the review. Initially, the examiners ruled that the City was not entitled to reimbursement, but the Commission later overturned this decision, awarding the City 90% of its expenses. Entex subsequently filed a new suit, challenging the Commission's authority to conduct a retroactive prudence review and the classification of the proceeding regarding expense reimbursement.

The district court ruled that the Commission has the authority to conduct a retroactive prudence review of gas purchases made by Entex, allowing the City to recover expenses. Entex appealed this decision, seeking to halt the Commission's review via a writ of mandamus, which was denied. The Commission subsequently completed its review, concluded that no refund was owed, and separated the City's reimbursement claim, which was also denied. The appeal raises two main issues: the Commission's authority regarding retroactive prudence reviews of gas purchases and whether such reviews qualify as ratemaking proceedings eligible for expense reimbursement by the City. The appellate court reviews these issues based on statutory construction, aiming to discern legislative intent while adhering to the principle that the Commission can only exercise powers explicitly granted by the legislature. The legislature mandates that the Gas Utility Regulatory Act (GURA) be interpreted liberally to enhance regulatory effectiveness. However, the Commission, as an administrative agency, possesses no inherent authority and must operate within the explicit powers granted to it, with a degree of latitude to effectively fulfill its regulatory responsibilities.

An agency cannot exercise a new power or act contrary to existing statutes under the pretext of implied powers, nor can it contravene specific statutory provisions or impose additional burdens beyond what is legislatively allowed. Entex contends that the regulatory commission lacks authority to conduct retroactive prudence reviews of gas purchase charges under a PGA (Purchased Gas Adjustment) clause or to mandate refunds, asserting that such actions would violate the filed rate doctrine and constitute prohibited retroactive ratemaking. 

The legislative framework for gas utilities establishes a comprehensive system of traditional rate regulation, as gas utilities operate as monopolies without the competitive pressures typical in free markets. The goal of the Gas Utility Regulatory Act (GURA) is to ensure just and reasonable rates and services for consumers and utilities alike, with the Commission tasked to ensure compliance with these obligations. The legislature has empowered the Commission to regulate utility rates and operations, emphasizing that each rate must be just and reasonable, allowing utilities a fair return on their invested capital.

PGA clauses, which enable automatic adjustments to utility charges in response to fuel cost fluctuations, originated to address the volatility of coal prices during World War I. These clauses function as fixed rules that determine future rates based on changes in the wholesale cost of gas, allowing for ongoing adjustments in utility rates.

Cost components of rate schedules are based on historical projections of future costs, with fixed elements reflecting gradual and predictable increases, while fuel costs are prone to significant fluctuations. This differentiation is viewed as acceptable due to the potential financial harm to utilities from regulatory delays in adjusting rates for fuel increases. Purchased Gas Adjustment (PGA) clauses allow utilities to pass fuel cost changes directly to customers, mitigating regulatory lag by aligning customer charges more closely with current fuel costs without frequent rate filings. 

PGA clauses are typically part of a regulatory commission's ratemaking authority rather than rulemaking and are integral to a utility’s rate structure. Their use is justified by four main benefits: reducing the frequency and costs of rate proceedings, providing smaller incremental increases for consumers, enhancing utility financial stability, and ultimately lowering the cost of capital for consumers. Regulatory commissions may implement these clauses either through statutory authorization or their ratemaking authority, with judicial approval noted in various Texas cases.

In relation to Entex’s approved rate, the Gas Utility Regulatory Act (GURA) defines a "rate" as encompassing various charges and rules that affect compensation. The approved rate schedules include a three-step process for calculating customer charges: a minimum monthly bill, a defined gas price per unit, and the PGA clause, which adjusts the net monthly rate based on the natural gas purchase price for resale, currently set at $4.5705 per Mcf.

The actual customer charge for gas is determined by the base rate, which is adjusted based on the deviation of Entex's gas purchase costs from an assumed price of $4.5705 per Mcf. This adjustment aligns with the statutory definition of "rate" as outlined in Tex. Util. Code Ann. 101.003(12)(B). Entex's gas rate comprises its entire rate schedule, which can lead to varying customer charges each month, and these charges are not protected by the prohibition against retroactive ratemaking. Entex contends that the review period for these charges lacks constitutional validity under the retroactive ratemaking prohibition. However, the conclusion is reached that the rule does not apply to retroactive reviews of gas purchase costs under a Purchased Gas Adjustment (PGA) clause, affirming the Commission's authority to conduct such reviews and order refunds without violating the filed rate doctrine or the retroactive ratemaking rule.

Regarding expense reimbursement, Entex argues that the retroactive review of its gas purchases does not constitute a "ratemaking proceeding" that would obligate it to reimburse the City for review-related costs. The Commission agrees, clarifying that under the Texas Utilities Code, a ratemaking proceeding must directly change customer rates, which this review does not. Only proceedings that result in actual changes to rates are classified as ratemaking proceedings, ensuring they are focused specifically on rate-setting rather than peripheral issues. The City’s position is contrasted with the precedent set in Southwestern Public Service Co. v. Public Util. Comm’n of Tex., which emphasizes that only direct rate changes constitute ratemaking proceedings.

The proceedings considered involve the City’s challenge to Entex’s gas purchases and their compliance with approved rates, specifically under the PGA clauses. The court distinguishes these proceedings from “ratemaking proceedings” as defined in Southwestern Public Service Co., where fuel reconciliation was deemed the equivalent of ratemaking due to fixed prior rates. In contrast, the City is not attempting to modify the PGA clauses or set new rates; rather, it seeks a review of past gas purchases to ensure compliance with existing rates.

The court concludes that the Commission has the authority to review Entex’s past gas purchases and can order refunds for imprudent costs. However, it clarifies that such a prudence review does not constitute a ratemaking proceeding under utilities code section 103.022(b), and thus the City is not entitled to reimbursement for expenses incurred during its participation in these reviews. The court affirms the district court’s judgment regarding the Commission's authority and the nature of the proceedings but reverses the part of the judgment that would entitle the City to expense recovery. The document is affirmed in part and reversed in part regarding the City’s entitlement to expenses.

Natural gas supplied is intended solely for the customer’s individual use at a designated delivery point and is prohibited from resale or sharing. The net monthly rate is structured as follows: the first 400 cubic feet costs $9.19, the next 2,600 cubic feet is charged at $0.6536 per 100 cubic feet, the following 7,000 cubic feet at $0.5412 per 100 cubic feet, and any amount over 10,000 cubic feet is charged at $0.5208 per 100 cubic feet. The minimum monthly bill is set at $9.19. Bills are issued monthly and must be paid within ten days of the billing date. 

The rates are based on a natural gas purchase price of $4.5705 per Mcf. Adjustments to the net monthly rate will occur if the purchase price of natural gas changes, reflecting variations in the cost of gas per unit sold and corresponding changes in gross receipts taxes. ENTEX is authorized to determine these costs based on its suppliers and geographical considerations. If ENTEX receives refunds for increased gas costs that were previously passed on to customers, those refunds will be returned to customers under this rate schedule.