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Glenn E. Johnson Kelly Hart & Hallman LLP 301 Congress Ave. Suite 2000 Austin, Texas 78701 (512) 495-6423

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Presentation on theme: "Glenn E. Johnson Kelly Hart & Hallman LLP 301 Congress Ave. Suite 2000 Austin, Texas 78701 (512) 495-6423"— Presentation transcript:

1 Glenn E. Johnson Kelly Hart & Hallman LLP 301 Congress Ave. Suite 2000 Austin, Texas (512)

2 Summary of Railroad Commission Sunset Process The Railroad Commission issued its report to the Sunset Commission in September The Sunset Commission recommended establishing the Texas Oil and Gas Commission, governed by a single, elected Commissioner, to assume the regulatory role currently served by the Railroad Commission. Senate Bill 655, as passed by the Senate, included all of the Sunset Commissions recommendations, as well as a provision to suggest that the first Governor-appointed Oil and Gas Commissioner be the last elected Railroad Commissioner. The House amended S.B. 655, maintaining many of the Sunset Commissions recommendations, but significantly modifying the provisions relating to governance. Notably, the House altered the bill to maintain a three-member, elected commission and establish an elected chairman. The House also removed the provisions in the bill that transferred certain hearings to SOAH, and added a number of provisions, including limiting campaign contributions and requiring a commissioner to resign before seeking another elected office. The bill went to conference committee, but the committee did not come to an agreement regarding the bills provisions. As a result, the Legislature did not pass S.B Senate Bill 652, 82 nd Legislature, Regular Session, continues the agency until 2013, and provided for the Sunset Commission to re-examine the Railroad Commission in full and make recommendations to the 83 rd Legislature regarding its continuation and functions. 2

3 MICHAEL L. WILLIAMS (succeeded Carole Keeton Rylander) January 4, 1999 to March 31, 2011 VICTOR G. CARRILLO (succeeded Tony Garza) February 19, 2003 to January 3, 2011 ELIZABETH AMES JONES (succeeded Charles R. Matthews) February 9, 2005 to February 28, 2012 DAVID PORTER (succeeded Victor G. Carrillo) January 5, 2011 to Present BARRY T. SMITHERMAN (appointed by Gov. Perry to succeed Michael L. Williams) July 8, 2011 to Present BUDDY GARCIA (appointed by Gov. Perry to succeed Elizabeth Ames Jones) April 16, 2012 to Present 3 Recent Commissioner Changes

4 Tara Partners, Ltd. v. Centerpoint Energy Resources Corporation Court of Appeals of Texas, Houston (1 st Dist.) April 19,

5 Tara Partners sued CenterPoint Energy for breach of contract, alleging CenterPoint billed Tara Partners for more natural gas than it actually used. 5 Tara Partners Case Basis of Suit

6 CenterPoint plea to the jurisdiction was that the trial court lacked jurisdiction because Texas Utilities Code established a regulatory scheme that confers exclusive jurisdiction for claims regarding rate disputes and refunds for overcharges on the Railroad Commission or on the municipality involved. 6 Plea to the Jurisdiction Tara Partners Case

7 Tara Partners attempted to file a complaint with the Railroad Commission, which dismissed the complaint. 7 Railroad Commission Action on Complaint Tara Partners Case

8 Railroad Commission advised that consumer bill complaints [are handled] through the Market Oversight Section's consumer complaint function, but it concluded, Since the dispute is the subject of a lawsuit, the matter has proceeded beyond this Division's ability to facilitate a resolution. 8 Railroad Commission Action on Complaint Tara Partners Case

9 The statutory description of GURA as comprehensive demonstrates Legislature's intent that GURA encompass all or virtually all pertinent considerations involving gas utilities operating in Texas. Sections and grant exclusive original jurisdiction over the rates and services to the municipality or to the Railroad Commission when no municipality is involved. 9 Legislative Intent Tara Partners Case

10 Tara Partners' claim that CenterPoint incorrectly charged for natural gas falls under the statutory definitions of rate or service over which the municipality or Railroad Commission has exclusive original jurisdiction. 10 Claim is a Rate Issue Tara Partners Case

11 Tara Partners was required to exhaust all administrative remedies before seeking review of the agency's action in the district court. 11 Administrative Remedies not Exhausted Tara Partners Case

12 Tara Partners argued that GURA does not apply to its private contract claim. However, the plain language of GURA defines a rate over which the municipality or Railroad Commission has exclusive original jurisdiction as including a contract affecting the compensation, tariff, charge, fare, toll, rental, or classification charged by a gas utility. 12 Holding: Suit on gas utility charges is a rate and not a contract matter Tara Partners Case

13 Atmos Energy Corporation v. The Cities of Allen, et al., and Railroad Commission of Texas Supreme Court of Texas, 353 S.W.3d 156 (MRH filed) November 18,

14 Cities filed declaratory judgment action against Railroad Commission, seeking declaration that rule promulgated by Commission governing gas utilities' filings for interim rate adjustments under Gas Utility Regulatory Act (GURA) was void to extent it prohibited cities from intervening and obtaining an evidentiary hearing on appeals to the Commission from cities' denials of filings. Gas utilities intervened in support of validity of rule. 14 Atmos Energy Case Declaration Sought on Validity of GRIP Rule

15 In 2003, the Texas Legislature amended the Gas Utility Regulatory Act (GURA) to allow gas utilities an opportunity to recover capital investments in Texas' gas pipeline infrastructure made during the interim period between rate cases. The amendment and rules became known as the Gas Reliability Infrastructure Program (GRIP). 15 Statutory Background Atmos Energy Case

16 The GRIP statute permits a gas utility to file a new tariff adjusting its base rates to recover the costs of new capital investment made in the preceding calendar year, without the necessity of filing a rate case. 16 Statutory Background Atmos Energy Case

17 After passage of the GRIP statute, Atmos Energy Corporation (Atmos) filed interim rate adjustments, or GRIP filings, with the Commission and several municipalities to charge adjusted rates. The Commission approved Atmos' GRIP filings, but numerous municipalities denied Atmos' filings. 17 Filing of Atmos Atmos Energy Case

18 Atmos appealed the Cities' denials to the Commission. Cities sought to intervene in the appeals and to require the Commission to hold contested case proceedings in the appeals. Commission denied interventions and requests for evidentiary hearings on the ground that neither the GRIP statute nor the GRIP rule authorizes contested case proceedings in GRIP filings. 18 Appeal to Railroad Commission Atmos Energy Case

19 Because (b) purports to give the Commission exclusive appellate jurisdiction to review the matter and the Cities could not appeal the Commission's rulings because they were not parties, the Cities did not believe they had a way to appeal the Commission's rulings. 19 Declaratory Judgment Atmos Energy Case

20 Fifty-one Texas cities then pursued a declaratory judgment action in district court against the Commission, challenging the validity of Commission Rule , the GRIP rule. 20 Declaratory Judgment Action Atmos Energy Case

21 The trial court issued a final judgment denying the Cities' request for declaratory relief, but issued findings of fact and conclusions of law stating that subsections (g)(2)(B) and (g)(2)(C) of the Commission's GRIP rule were void. The trial court held that the Legislature did not intend to authorize municipalities to conduct a substantive review of GRIP filings, only a ministerial review of the compliance with basic requirements. The trial court held that the Cities have no authority to deny utilities' interim filings under section (a). 21 Trial Court Atmos Energy Case

22 The trial court also held that a utility does not have the authority to appeal an improper denial to the Railroad Commission because the Legislature did not provide an appellate mechanism in the GRIP Amendment (section (a)), and the Railroad Commission does not have the authority to apply its Rule to the action of a city. 22 Trial Court Atmos Energy Case

23 The court of appeals affirmed the judgment of the trial court, holding that a ministerial review for compliance is all that is required. The court of appeals also affirmed that GRIP rule subsections (g)(2)(B) and (g)(2)(C) are only void to the extent the Commission attempts to reject a GRIP filing over which it holds regulatory authority for any reason other than failure to comply with the statutory requirements. 23 Court of Appeals Atmos Energy Case

24 The court of appeals also held that appellate review by the Commission is not available when a municipality denies a GRIP filing after conducting a ministerial review for compliance with the statute because there is no indication that a municipality's denial of a GRIP filing for failure to comply with the statutory requirements is considered an order or ordinance of a municipality as contemplated by section Court of Appeals Atmos Energy Case

25 1) Commission had appellate jurisdiction over municipal denials of gas utilities' requests for interim rate increases, and 2) Commission's appellate jurisdiction was limited to review of utilities' filings for compliance with GURA and applicable administrative rule. 25 Supreme Court Atmos Energy Case

26 Section (b) of the Texas Utilities Code provides: The railroad commission has exclusive appellate jurisdiction to review an order or ordinance of a municipality exercising exclusive original jurisdiction as provided by this subtitle. This grant of appellate authority clearly gives the Commission jurisdiction to review the Cities' denials of the interim rate increases. 26 Atmos Energy Case Supreme Court

27 The view that the Legislature had withheld appellate jurisdiction in this case from the Commission could frustrate GRIP's purpose. The Legislature designed GRIP to incentivize gas utilities to expand infrastructure and empowered them to file interim rate adjustments in between rate cases. 27 Atmos Energy Case Supreme Court

28 The Legislature intended a streamlined process, and an evidentiary review beyond a compliance check could frustrate that purpose. 28 Atmos Energy Case Supreme Court

29 Legislature implemented protections for the ratepayers when a utility makes a GRIP filing. A utility may not avail itself of the interim rate adjustment unless that utility brought a rate case pursuant to Chapter 104, Subchapter C, within the two years prior to its GRIP filing. 29 Atmos Energy Case Supreme Court

30 A utility that makes interim rate adjustments is also required to undergo another rate case within five years and six months after implementing its first amended tariff or rate schedule. 30 Atmos Energy Case Supreme Court

31 A gas utility seeking to implement an interim rate adjustment must electronically file with the Commission an annual earnings monitoring report as part of the application describing the investment projects completed and placed in service. 31 Atmos Energy Case Supreme Court

32 Any amounts collected as interim rate adjustments are subject to a full refund to the extent the interim recovery of infrastructure investments are later disallowed at the next rate case. 32 Atmos Energy Case Supreme Court

33 Under GURA the Commission or a municipality retains authority to institute a proceeding, either on its own or at the complaint of a party, to determine if a utility's rates are unreasonable or in violation of the law. A municipality could file a rate case on its own motion whenever it perceives the need after a GRIP filing. 33 Atmos Energy Case Supreme Court

34 We conclude that the Railroad Commission has appellate jurisdiction under section (b) of the Texas Utilities Code over municipalities' orders or ordinances concerning interim rate adjustments, limited to the review of the Utilities' filings for compliance with the GRIP statute, section , and the GRIP rule, section of 16 Texas Administrative Code. This review involves examination of the statutory requirements for processing a utility's application to amend its tariff or rate schedule under the GRIP statute and rule, and whether the GRIP filing satisfies those requirements. We affirm the judgment of the court of appeals. 34 Atmos Energy Case Supreme Court

35 The Railroad Commission of Texas v. Texas Coast Utilities Coalition Court of Appeals of Texas, Austin 357 S.W.3d 731 October 27, 2011 Motion for Rehearing Overruled December 21,

36 Whether the Legislature's statutory delegation of authority to the Railroad Commission to regulate the rates of gas utilities empowers it to approve or impose a rate schedule that includes a mechanism for annually adjusting customer charges based on the utility's actual operating expenses, return on investment, and franchise tax payments without the need or requirement to initiate a subsequent rate proceeding. 36 Texas Coast Case Issue

37 Disagreeing with the Commission's view of its authority, the district court reversed the Commission's order approving CenterPoint's rate schedule. CenterPoint and the Railroad Commission appeal. 37 District Court Texas Coast Case

38 Commission findings relating to expenses paid to affiliated companies were inadequate and that it had exceeded its authority in adopting the COSA clause. The Commission did not have statutory authority to impose [the COSA] on the [TCUC] cities with original jurisdiction... [or]... to adopt the COSA in [the environs]. 38 District Court Texas Coast Case

39 CenterPoint and the Railroad Commission each brought a single issue asserting that the district court erred in concluding that the Commission lacked authority to adopt or impose the COSA clause within either the environs or the TCUC municipalities. 39 Court of Appeals Texas Coast Case

40 With the express goal of reducing volatility of cost risks and the need or impetus for full- blown rate proceedings in the event such risks came to fruition, the Railroad Commission approved, as part of CenterPoint's rate schedule, a version of a cost-of-service- adjustment (COSA) rate schedule or clause that CenterPoint had requested. 40 Court of Appeals Texas Coast Case

41 While we acknowledged that GURA does not explicitly mention PGA clauses, we concluded that the act's broad definition of rate nonetheless encompassed and contemplated this sort of adjustment mechanism. 41 Court of Appeals Texas Coast Case

42 We agree with appellants that GURA section The [R]ailroad [C]ommission is vested with all the authority and power of this state to ensure compliance with the obligations of gas utilities in [GURA]represents an extraordinarily broad delegation of authority to the Commission in regard to rate regulation. 42 Court of Appeals Texas Coast Case

43 This discretion provides sufficient flexibility to enable the Commission to effectuate the ultimate goal of just and reasonable rates through the use of variable or formula rates and not merely fixed charges. 43 Court of Appeals Texas Coast Case

44 The COSA clause would, all other things being equal, come within GURA's definition of rate, as it is a rule, regulation, [or] practice... affecting the compensation, tariff, charge, [or] fare imposed by CenterPoint. 44 Court of Appeals Texas Coast Case

45 We conclude that the Railroad Commission's delegated authority under GURA encompasses the power to adopt or impose the COSA clause in both the Texas Coastal Division environs and the TCUC municipalities. We sustain appellants' sole issue on appeal. 45 Court of Appeals Texas Coast Case

46 Rate Treatment of Pension and Post- Employment Benefit Costs Proposed Amendment to 16 Tex. Admin.Code § November 11,

47 The Railroad Commission of Texas (Commission) proposed to amend §7.501 to implement a new section of the Texas Utilities Code, § , which purportedly required gas utilities to establish reserve accounts to track changes in pension and post-employment benefit costs, and required the Commission to allow recovery of those costs as the Commission deems reasonable and necessary. 47 Rule Rulemaking Proposal

48 The effect of the rule was to change the treatment of certain pension and post-employment benefit costs from a test year expense to an accrual- accounting-based investment. Heretofore, pension and post-employment benefit costs were treated as a test year expense, rather than as an amortized investment. 48 Rulemaking Proposal Rule 7.501

49 The Commission proposes new subsection (b) to be effective on and after January 1, 2013, one year after the establishment of reserve accounts on January 1, 2012, as required by Texas Utilities Code, § Proposed new subsection (b) authorizes a gas utility to request recovery of pension and post- employment benefits costs in the context of a general rate proceeding. 49 Rulemaking Proposal Rule 7.501

50 Atmos Energy Corporation claimed that the statute gave a simple straightforward and discretionary process to establish reserve accounts to track changes in pension and post-employment benefit costs. However, the proposed rule conflicts with the plain language of the statute and imposes significant and unnecessary compliance costs ultimately to be borne by the customers. The provisions of the statute are discretionary, yet the rule imposes mandatory requirements to establish reserve accounts as a prerequisite to recovery of any pension or post-employment benefit costs. The proposed rule establishes disallowances not imposed or contemplated under the statute. The proposed rule impermissibly limits recovery of pension and post- employment benefit costs to general rate proceedings. 50 Atmos Energy Comments Rule 7.501

51 The rule erroneously claims that the statute eliminates the need for gas utilities to recover test year expenses. The proposed rule would increase rate case expenses. The proposed rule creates inconsistencies among Atmos utility operating divisions with a mandated amortization period that is based on timing between rate case filings. The rule establishes a best available evidence standard that is undefined 51 Atmos Energy Comments contd Rule 7.501

52 Centerpoint Energy Comments The proposed amendments make statutory provisions mandatory. The rule impermissibly limits consideration of reserve accounts to proceedings after January 1, The rule required utilities to record only test year amounts and reserve accounts that is contrary to the statute. The rule requirement that affidavits and actuarial opinions is contrary to the statute and unnecessary. The rule impermissibly requires establishing separate reserve accounts for post-employment benefits as of January 1, The rule establishes a factor for determining reasonableness and necessity not supported by the statute. 52 Rule 7.501

53 Texas Gas Service Comments Disagreed with the rule mandating that a natural gas utility establish reserve accounts. Disagreed with the rule requiring reserve accounts be established by January 1, The rule requirement for attestation would increase rate case expenses. Disagreed that the rule should set out items that will be excluded from recovery through rates. The term test year amounts is ambiguous. 53 Rule 7.501

54 Comments of Atmos Cities Steering Committee and City of Houston The cities disagreed with the rule in that it gave the Commission the right to determine matters using best available evidence if the information in a general rate proceeding is insufficient. The cities disagreed that the cap on the pension and post-employment benefit cost recovery should be capped at $500,000 for individuals rather than its suggested amount of $200, Rule 7.501

55 Proposed amended §7.501, published in the November 11, 2011, issue of the Texas Register (36 TexReg 7631), is withdrawn. The agency failed to adopt the proposal within six months of publication. (See Government Code, § , and 1 TAC §91.38(d). 55 Railroad Commission Response Rule 7.501

56 56 Conclusion Uncertainty at the Railroad Commission due to Sunset review and adjustment of new commissioners will continue. The Railroad Commission has broad discretion in fashioning rates. The Railroad Commission staff efforts to expand upon legislative enactments in the face of industry opposition were not acceptable to the Commissioners.


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