Texas Supreme Court Upholds Gas Utility's Rate Schedule Containing a Cost of Service Adjustment Clause

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On January 17, 2014, the Texas Supreme Court held that the Railroad Commission of Texas (the "Commission") has the authority to adopt a gas utility rate schedule providing for automatic annual adjustments based on increases or decreases in the utility's cost of service under the Gas Utility Regulatory Act ("GURA"). Tex. Coast Util. Coal. v. R.R. Comm'n of Tex., No. 12-0102 (Tex. Jan. 17, 2014), available HERE.

In 2008, CenterPoint Energy Resources Corporation ("CenterPoint") notified necessary parties of its intent to raise its rates with a proposed rate schedule that included a "cost of service adjustment" ("COSA") clause permitting the rate to increase or decrease annually without the necessity of a full rate case. Tex. Coast Util. Coal., slip op. at 1-2. Several cities and state agencies opposed the proposed rate increase before the Commission. Id. at 2. The Commission ultimately approved the rate increase, but not the full amount proposed by CenterPoint. The Commission also revised the COSA clause as part of the final rate schedule. Id. The rate schedule approved by the Commission included three main components – a base rate, a tax adjustment tariff, and a Purchased Gas Adjustment tariff. The revised COSA clause was included as part of the base rate. Id. at 12.

The cities and state agencies opposing CenterPoint's rate schedule argued that (1) GURA does not authorize the Commission to include COSA clauses as a component of a base rate; and (2) the COSA clause violates GURA by avoiding CenterPoint's procedural requirements for future rate increases and depriving municipalities of their original jurisdiction over those proceedings. Id. The Supreme Court disagreed. Id.

The Texas Supreme Court held that GURA expressly authorizes the Commission to include COSA clauses in base rate components. Id. at 13-14. As justification for its holding, the Court first concluded that GURA authorizes the Commission to establish rates. TEX. UTIL. CODE §§ 104.001(a), 104.105(a), 104.110(a)(1), and 103.055(b). The Court then concluded that the COSA clause constituted a "rate" as that term is defined in §101.003(12). In making this determination, the Court looked at the two-part definition of "rate" and found that GURA authorizes the Commission to establish what a utility demands, observes, charges or collects, as well as practices affecting a utility's charges and compensation. The COSA clause, the Court concluded, is a practice affecting a utility's charges and compensation. Tex. Coast Util. Coal., slip op. at 13-14. The Court rejected the opposition's arguments that this construction of GURA is inconsistent with the Gas Reliability Infrastructure Program statute, prior court holdings regarding PGA tariffs, or the Commission's own rules. Id. at 14-22.

The Court also held that the revised COSA clause complied with GURA and did not usurp the municipalities' jurisdiction. Id. at 22-30. GURA requires a utility to timely file a statement of intent to increase its rate which permits a regulatory authority or affected person to contest the proposed increase. TEX. UTIL. CODE §§ 104.102(a), 104.105. However, the Court noted that once a rate is approved pursuant to a proper rate proceeding, it does not need to be re-approved each time it is applied. Tex. Coast Util. Coal., slip op. at 24. Because the Court concluded the revised COSA clause was, by definition, a "rate," changes in the amount charged to a customer due to fluctuations in the variable inputs of the COSA clause did not constitute a change in "rate." Id. The COSA clause formula remained the same, thus the "rate" remained the same. Id. Similarly, the Court concluded that the COSA clause did not need to provide for a full GURA rate case prior to an annual adjustment because the COSA clause and adjustment are the product of a full rate case, in which the municipalities were afforded all of the jurisdiction, powers, and duties that GURA grants to them. Id. at 28-29. Furthermore, the revised COSA clause permitted municipalities to either deny an annual adjustment and participate in an appeal process to the Commission or initiate a ratemaking proceeding to decrease CenterPoint's rate if they considered the rate as a result of the COSA clause to not be "just and reasonable." Id. at 29.

This decision solidifies the Commission's authority to approve rate schedules including a cost of service adjustment clause providing for automatic annual adjustments based on increases or decreases in the utility's cost of service under the Gas Utility Regulatory Act. This authority helps to reduce regulatory lag and allows the utility's actual revenues to more closely match the approved rate of return.