Gas Utility Uses Railroad Commission to Force Cities to Accept Rate Hikes

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The Texas Supreme Court last week gave approval to gas utility rate schedules that adjust automatically.

The case concerned CenterPoint Energy Resources Corp., a gas utility that distributes natural gas to counties east of Austin, including areas surrounding Katy, Houston, and Galveston. In 2008, CenterPoint filed a statement of intent to raise its rates with the Railroad Commission of Texas (the “Commission”) and the municipalities that would be affected, and it published the notice in newspapers serving those areas. Thirty-eight municipalities approved the utility rate changes; nine refused.  The utility appealed to the Commission to force the remaining nine cities to accept the rate increases.

CenterPoint sought two things: rate increases that would generate $2.9 million in additional annual revenue (the Commission ultimately approved $1.2 million); and streamlining an additional level of Commission oversight by including a new clause in their rate schedule.

To see how the court sided with utility, read below the jump.  RATE INCREASE WITHOUT REVIEW

The new clause, called a “cost of service adjustment” (“COSA”) clause, would allow the utility to increase rates annually without undergoing the normal procedure of making a full rate case to the Commission each time.  It shifts authority to determine “just and reasonable” rates from the Commission and the municipalities to the utility which is granted a de facto monopoly and which charges the rates.

The Commission modified – then accepted – CenterPoint's COSA clause, tying annual rate increases to the utility's operating expenses, return on investment, Texas franchise tax liability, and non-gas and other revenues.  On the one hand, the clause protects an implicit subsidy for the utility's franchise tax liability; on the other, it caps any year-on-year increase to a customer's bill at 5%.    

The Commission accepted this new procedure for automatic increases, ruling that municipalities that objected still had sufficient safeguards available to them.  The Commission also noted that the new rate-change clause did not prevent any regulatory agency from exercising discretionary authority and stepping in to examine rate changes.  The Commission, however, inserted no new mandatory triggers to ensure such action.

The cities which had rejected the rate change proposal then united and filed suit against CenterPoint.  


Towns and other municipal entities that object to rate changes for utilities have some protections available to them, but on balance, they appear to fall short relative to the Commission and utilities.  Under the Gas Utility Regulation Act (GURA), municipalities have exclusive original jurisdiction over the rates and services of gas utilities that distribute gas within them, but the Commission can review a town's determination de novo. In short, the Commission can issue its own decision that overrides any town's determination concerning utility rates.  

Additionally, municipalities can postpone a rate change from going into effect for 90 days; the Commission can postpone a rate change for 150 days.  Further, the Commission does not have to issue a ruling as to why it accepts or rejects a change in utility rates; if the Commission does not rule, the rate change automatically goes into effect with any objecting towns or customers left to reason why.

In fighting the COSA clause, the coalition of towns made two arguments: (1) that the COSA clause allowed CenterPoint to change its rates without complying with established procedures; and (2) that the COSA clause gutted the municipalities' jurisdiction over utility rates within their own borders.  The court rejected both of these arguments, concluding that the COSA clause did not make an end run around the rate change case procedure, but rather was a product of the procedure itself and, therefore, satisfied the requirements of GURA.

The court did not review the Commission's decisions de novo, as the Commission will do to a town rejecting a rate change or method for deciding a utility rate. Instead, the court simply decided whether the Commission had the authority to accept or reject the COSA clause that the utility had proposed.

Moreover, as in other cases, in trying to parse the meaning of the law and definitions at issue, the court deferred heavily to the determinations of the agency which regularly works with the laws – in this case, the Commission – automatically giving greater credence to one party in the suit than to another.  The court also relied on a 2006 case – also involving CenterPoint – from the Austin-based Third Court of Appeals as a basis for its interpretation of GURA in this case.

The case is Texas Coast Utilities Coalition v. Railroad Commission of Texas, et al., 12-0102


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