Texas Supreme Court holds Public Utility Commission Cannot Revise Contract Formed before Deregulation

In Texas Municipal Power Agency v. Public Utility Commission of Texas, the Texas Supreme Court addressed the issue of whether the Public Utility Commission of Texas had jurisdiction to revise the sales rate set by a contract negotiated before deregulation. 253 S.W.3d 194 (Tex. 2007). The court held that no such jurisdiction exists, and recently denied rehearing of the issues involved.

This case involved a municipally owned utility that sold electricity at wholesale to four member cities (which were also municipally owned utilities) pursuant to identical sales contracts. These contracts were “bundled” contracts, meaning that the power seller provided generation, transmission, and distribution of power under a single contract. The sales rate under the contract was a “bundled” rate, meaning it did not include separate rates or charges for transmission service. This resulted in the member cities not being charged a separate price for transmission power. The only difference was in regards to the amount of power each city took and the point of delivery. The parties entered this contract in 1976.

In the late 1990s, the Texas legislature enacted various amendments to the Public Utility Regulation Act. Part of these amendments effectively required electric utilities to unbundle their services and deregulated generation and retail sales functions. These changes allowed a municipally owned utility to decide whether and how to participate in the deregulation and unbundling process.¹ These changes also enacted Commission-set transmission charges.

As these amendment became effective, one of the cities, Bryan, complained that the bundled sales rate it paid under the bundled contract was higher than it would have been were it able to pay the Commission-set charges. Bryan argued that this resulted in its paying part of the other cities’ more expensive transmission costs. Under the new rules, Bryan argued, it was entitled to demand to be separately charged for transmission services.

Both the Public Utility Commission and a state court agreed with Bryan. A court of appeals affirmed, holding that the Public Utility Regulation Act conferred jurisdiction on the Public Utility Commission to determine whether the terms on which the municipally owned utility provided transmission services to Bryan were reasonable. These decisions allowed the Public Utility Commission to demand that Bryan only pay the Commission-set charges for transmission services.

However, the Texas Supreme Court disagreed, holding that the Public Utility Commission did not have jurisdiction to modify, regulate, or abrogate the bundled contract or rates that Bryan was being charged. Specifically, the court held that the Public Utility Commission’s actions effectively unbundled the longstanding contract that Bryan and the municipally owned utility entered more than 30 years before. While the Public Utility Commission has the power to assess the reasonableness of rates charged by transmission services the Commission orders, it does not have general oversight capacity over charges for transmission services pursuant to a contract. Thus, the Public Utility Commission cannot unbundle or modify a sales contract between municipally owned utilities. Accordingly, when transmission service is provided pursuant to a contract, the Public Utility Commission has no power to review the reasonableness of the rates.