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Texas Performance Review
The Future of the Public Utility Commission in Texas

Background

During the 1960's and early 1970's, low energy prices accompanied by competition among suppliers blunted legislative moves toward statewide regulation of utilities. After the Arab oil embargo of 1973 and resulting national energy crisis, however, a public outcry improved prospects for a state commission regulating public utilities and telephones. "As the prospect of utility bills doubling and tripling became a reality, public interest and concern became apparent."[ 1 ]

Entering the 1975 regular session, state lawmakers generally agreed that the old way of regulating utilities-leaving rates up to sometimes overmatched local city governments-no longer made sense. As a key state senator wrote, "the general thinking of the members had passed the hurdle of `whether or not' and had reached the thinking of `what kind' of public utility commission would be created."[ 2 ]

Under state law dating to 1907, cities had the power to set utility rates, but quality and terms of service were usually left to utility companies. Natural gas regulation was left to the Texas Railroad Commission.[ 3 ] And in rural areas, electric and telephone companies could set rates and service standards with virtually no regulatory oversight. Competition was lacking because the newly emerging long-distance companies focused their efforts on more lucrative interurban routes. And smaller cities, which had the power to regulate telephone companies, lacked the resources to evaluate complex rate requests.[ 4 ]

The Public Utility Regulatory Act (PURA) of 1975 would change much of that.Electric and telephone utilities traditionally were allowed to operate as monopolies because this was considered the most efficient economic practice. As monopolies, utilities avoided the expense of constructing duplicate lines,generating plants, and other costly equipment. Because utility services were not subject to competitive forces, however, governments have been obliged to protect consumers by setting utility rates, designating service areas, and establishing quality standards.

LEGISLATIVE AUTHORITY

PURA established the legal framework for utility regulation in Texas. PUC began operating on January 1, 1976, with the mission of ensuring the availability of safe, reliable, high-quality utility service for all Texans at just and reasonable rates.

Under PURA, PUC's original jurisdiction included not only electric and telephone utilities but also water and sewer utilities. The Gas Utility regulatory Act, originally part of PURA, was separated from it in 1983; PUC's jurisdiction over water and sewer utilities was transferred to the Texas Water Commission in 1986, and is now administered by Texas Natural Resource Conservation Commission.

Initially, PUC focused on establishing each utility's geographic service area, registering all telecommunications providers in the state, and setting service standards for all utilities. PUC holds hearings to determine the reasonableness of proposed rate changes; monitors utility management and operations of utilities; brings court action against utilities that violatePURA, agency rules, or orders; and approves utility mergers and property sales.[ 5 ]

Since 1976, PUC's functions and responsibilities have undergone a series of legislative changes. A 1983 revision to PURA required electric utilities to begin filing notices of intent with PUC before building new generation plants.In addition, PUC was required to develop a long-term statewide energy forecast to be used in certification proceedings for these plants, and to conduct management audits of each utility under its jurisdiction once every 10years.[ 6 ]

The Office of Public Utility Counsel (OPUC) was also created as a separate state agency in 1983 in response to concerns that residential and small-business ratepayers were not adequately represented in rate cases at PUC.[ 7 ]

In 1987, the Legislature required PUC to determine the impact and scope of competition in the state's telecommunications industry. Since then, PUC has prepared four biennial reports addressing issues of competition. In 1989, PUC implemented Relay Texas, a statewide dual-party relay service that allows persons who are hearing or speech impaired to communicate via telephone line sand began to enforce a minimum level of regulation over operator service providers. The 1991 Legislature authorized PUC to assess administrative penalties against operators of automatic dial announcing devices for violations of rules and statutes.[ 8 ]

SIDEBAR

H.B. 2128 and Texas Telecommunications

H.B. 2128, which became law in 1995, was the Sunset legislation for PUC and the Office of the Public Utility Counsel. In addition to continuing both agencies with some modifications for six years, H.B. 2128 created major changes in Texas' telecommunications regulatory environment. The new law:

Grants more rate flexibility to small telephone companies by allowing them to institute minor service and rate changes without hearings before PUC; and partially deregulates telephone cooperatives if a majority of their members vote to do so.

Creates a certificate of operating authority and a service provider certificate of operating authority for new entrants to the telecommunications market. If a long-distance or local exchange service provider wants to offer service in Texas, they must obtain a certificate from the PUC to do so. The certificates created under H.B.2128 are less restrictive "tickets" into the market than the certificates of convenience and necessity required prior to passage of H.B. 2128.[ 9 ]

Establishes a voluntary incentive structure for local telephone companies that regulates rates via three "baskets" of services. Local phone companies that opt to participate would not be allowed to increase basic network services rates for four years, but could reduce their rates. For discretionary services,companies may set their rates anywhere between a floor and ceiling derived from current rate levels. Competitive services may be flexibly priced. If a company chooses to participate in this three-basket system, it is freed from hearings related to its rates, revenues, or rate of return. (GTE and Southwestern Bell have already elected into this plan.)[ 10 ] In exchange for this rate freeze,telephone companies are immune to rate cases, complaints, and hearings for four years.

Requires PUC to establish competitive safeguards to ensure fair competition and to accelerate the improvement of telecommunications.

Limits the involvement of local exchange companies in electronic publishing.

Creates a Telecommunications Infrastructure Fund, funded by telecommunications companies, to award grants and loans for the purchase of telecommunications equipment for educational programs. The state estimates it will collect close to $100 million per year over ten years to fund wiring and programs for public schools, hospitals, and libraries.

The 1995 legislative session brought substantial amendments to PURA in the form of House Bill 2128 and Senate Bill 373. H.B. 2128 allowed for incentive regulation for large telephone companies in exchange for infrastructure improvements and laid the foundation for new entrants into the market and competition for local exchange services. PUC must ensure that an appropriate regulatory framework continues to protect the public interest during the transition to deregulation.

S.B 373 transferred PUC's Hearings Division to the State Office of Administrative Hearings (SOAH), and enabled competition in the electric wholesale market by establishing open access transmission and allowing new market entrants.

End of SIDEBAR

SIDEBAR

S.B. 373: Restructuring Electric Utilities in Texas

In 1992, Congress passed the Energy Policy Act, which enabled wholesale competition in the interstate electric utility industry. The 1995 Texas Legislature passed S.B. 373 introducing wholesale competition into Texas' markets.[ 11 ] Major changes in S.B. 373 include the following:

Electric cooperatives can become partially deregulated if a majority of their members vote to do so; this allows cooperatives to change their rates without PUC review.

Exempt wholesale generators and power marketers can buy and sell wholesale energy after registering with PUC.

Utilities that own transmission systems must make them available under comparable fair market terms to buyers and sellers of wholesale electricity.

Utilities must develop plans to acquire new sources of electricity at the lowest reasonable cost using Integrated Resource Planning.

Utilities must seek competitive bids for new capacity before they can build anew plant.

PUC must issue Texas' first scope of competition report on the electric utilities market.[ 12 ] PUC also is required to prepare a report on the extent of "stranded costs"--capital investments by electric utilities that cannot be recovered in a competitive market.[ 13 ]

PUC, with the advice and consent of the governor, is required to appoint a five-member committee to advise the Legislature on interconnecting Texas' transmission grid with grids outside of Texas.

End of SIDEBAR

REGULATED ENTITIES

PUC regulates 158 electric and telecommunications utilities operating in Texas, which includes 58 local telephone companies, 10 investor-owned utilities, 86 electric cooperatives, and four river authorities.[ 14 ] PUC also has limited jurisdiction over municipal electric utilities. Texas has close to seven million electric customers who consumed 268 million megawatt-hours of electricity in 1995.[ 15 ] In 1995, there were 10.3million telephone access lines in Texas, excluding cellular and pager use; an estimated 91 percent of Texas households have telephone service in place.[ 16 ]

PUC regulates local exchange carriers, but does not have jurisdiction overlong-distance service provides like AT&T, Sprint, or MCI. PUC has limited jurisdiction over telephone operator service providers, pay phone providers,automatic dialing devices, and telephone solicitors. Texas electric and telephone utilities regulated by PUC have combined annual revenues of $20.5billion and Texas employment of more than 80,000.[ 17 ]

GOVERNANCE STRUCTURE, ORGANIZATION AND FUNDING

PUC's commission includes three full-time, salaried commissioners who are appointed by the governor with the advice and consent of the Senate.Commissioners serve staggered six-year terms. The commission chairman is designated by the governor.

PURA imposes post-employment restrictions on the commissioners; commissioners essentially are prohibited from working for any public utility for two years after their appointments to the commission end. Similar provisions are applicable to PUC employees as well.[ 18 ] Commissioners serve in a quasi-judicial capacity on utility rate cases and other proceedings, which allows them to act in the capacity of a judge when setting utility rates.Commissioners articulate agency policy through the issuance of final orders and rules. In addition, commissioners make legislative recommendations, develop long-range agency goals and plans, and supervise agency management.

PUC is one of Texas' largest regulatory agencies, with 245 full-time equivalent(FTE) employees in fiscal 1997.[ 19 ] Prior to September 1995, PUC was divided into seven operating divisions organized along industry and functional lines--Commissioners' Offices, Hearings, General Counsel, Electric, Telephone,Operations Review, and Administration. A September 1995 reorganization streamlined certain agency processes and fully integrated electric- and telephone-related staff responsibilities by function.

PUC reorganized its internal structure at the beginning of fiscal 1996. The transfer of the hearings function to the State Office of Administrative Hearings, as mandated by S.B. 373, pre-empted the agency's restructuring. The agency was reorganized around the following goals: to establish an up-front policy making process with the use of preliminary orders; to effectively streamline processes and prioritize work products; to integrate electric and telephone responsibilities by function; and to enhance cross-training between industries.

The agency now is organized into three operating divisions--the Office of Executive Director, the Office of Regulatory Affairs, and the Office of Policy Development (Exhibit 3). The heads of these three divisions--the executive director, chief of Regulatory Affairs, and chief of Policy Development--are co-equal in rank and all report directly to the commissioners. This is an innovative departure from traditional organizational structures in public utility commissions across the country.

Office of the Executive Director

The Office of the Executive Director oversees the agency's day-to-day operations. The office's Administrative Services Division provides traditional administrative and support functions including fiscal services and purchasing,an agency library, a personnel office, and a mail room. Budget preparation and administration, personnel matters, performance appraisals, strategic planning,and training all are handled under the direction of the executive director.

Legal Administration was created to handle those functions of the former Hearings Division that were not transferred to SOAH. Legal Administration manages and coordinates the processing of all cases filed with PUC. In addition, the division prepares proposed orders for the commission's unprotested cases which can be handled without a formal hearing. The Executive director also oversees a Central Records section, which is responsible for receiving and maintaining official records on all cases and providing requested documents to the public. Data Management is developing the agency's electronic access program.

The Public Information Division provides press information and answers general inquiries from the public. The Consumer Affairs Division responds to inquiries and complaints initiated by consumers; its staff members often help to resolve informal disputes between consumers and utilities. The Consumer Protection and Enforcement Division is authorized to impose administrative penalties for noncompliance with PURA or PUC rules or orders. Finally, the Information Systems and Services Division maintains the computer network, including the agency's Internet site, and provides support for agency computer users.

The divisions under the direction of the Executive Director were budgeted a combined 78.7 full-time equivalents (FTEs) and allocated $3.2 million for fiscal 1997.[ 20 ]

Office of Regulatory Affairs

The Office of Regulatory Affairs (ORA) litigates all of the agency's cases before the commission and provides expert testimony and agency legal representation in these cases; ORA represents the public interest in cases sent to SOAH. In addition, ORA reviews uncontested filings for consistency with agency policies, rules, and orders, and develops amendments to PUC rules on its own or with assistance from the Office of Policy Development. ORA also initiates and prosecutes enforcement actions. ORA is the agency's largest division with 117.5 FTEs. Forty-four percent of the agency's resources--$5.2million--are allocated to this division for fiscal 1997.[ 21 ]

Divisions in ORA include the Legal Division, made up of attorneys who manage cases and rule makings; Financial Review, which analyzes the operations and financial condition of utilities regulated by PUC; an Industry Analysis Division, responsible for telephone networks, tariffs, engineering issues,electric generation methods, and fuel analysis; and the Competitive Issues Division, which analyzes economic and regulatory issues associated with deregulation.

Office of Policy Development

The Office of Policy Development (OPD) was created in September 1995 to advise the commissioners on policy issues. OPD has 36.1 FTEs budgeted for fiscal 1997 and $1.7 million, or 14.7 percent, of the agency's total budget.[ 22 ]

The Texas Administrative Procedures Act, which governs the proceedings of state agencies, prohibits communications between the commissioners and any parties to the case unless all other parties are privy to the conversation. Thus, because of these ex parte prohibitions, OPD offers technical advice on matters before the commission without fear of breaching legal requirements. OPD also is responsible for drafting preliminary orders for contested cases; these orders represent the commission's initial attempt to articulate and define the key policy and evidentiary issues to be addressed in a case. OPD also is responsible for monitoring industry trends and helping the commission formulate policies to address these trends, usually in the context of a rule making, a report to the Legislature, or comments to federal agencies. OPD also prepares all of the commission's final orders in SOAH cases.

Funding

PUC's funding has risen to an estimated $12.2 million in fiscal 1996 and$11.9 million in fiscal 1997. The agency received an additional $5 million in appropriations for the 1996-97 biennium to execute changes mandated by H.B.2128 and S.B. 373.[ 23 ]

Texas levies an assessment of 0.167 percent on the gross receipts from rates charged by public utilities within PUC's jurisdiction, all of which is deposited in the General Revenue Fund.[ 24 ] The utilities gross receipts assessment raised $35.7 million in general revenue in fiscal 1996, and is expected to rise to $45.4 million during fiscal 1997.[ 25 ]

General revenue funds about 98 percent of PUC's appropriation.[ 26 ] Funding is also generated through an access line charge to telephone companies, the sale of agency publications, and reimbursement from the Universal Service Fund.

BASIC ACTIVITIES

PUC's mission is to "assure the availability of safe, reliable, high quality services that meet the needs of all Texans at just and reasonable rates."[ 27 ] To accomplish this mission, PUC carries out the functions described below.

Certificates of convenience and necessity

The PUC traditionally has controlled who could provide utility services by the issuance of certificates of convenience and necessity (CCN) because utilities have operated as monopolies.[ 28 ] CCNs also are required for the approval of any facility construction.[ 29 ] PUC will approve a CCN application if it finds that the certificate is necessary for the public's convenience or safety.

A CCN or an amendment to an existing CCN is required for a change in service area, a new electric generating unit or transmission line, and any new electric substation outside the utility's certified service area. To approve applications for new electric generating facilities, PUC must determine that the proposed generating unit is the best and most economical choice of technology for the service area, and that other cost-effective conservation and alternative energy measures cannot meet the area's needs as well. Utilities under PUC's certification jurisdiction include electric and telephone investor-owned utilities, cooperatives, and municipally-owned electric utilities.

Rate setting

PUC was created to regulate public utilities in Texas. Regulation was established as a substitute for competition, with PUC responsible for setting rates and maintaining services that were fair to both the consumer and the utility. A rate case is a quasi-judicial hearing intended to set rates and establish fair rates of return on a public utility's operations. Most rate cases are contested by a number of affected parties, as the issues generally are complex and subject to differing interpretations or methods of calculation.Rate cases often proceed to the hearing stage, although settlements are sometimes achieved without a hearing. Rate cases can be requested by the utility, PUC, or any third party.

When a rate case is filed with PUC, an initial review of the case is conducted by PUC's Office of Regulatory Affairs. Any deficiencies in the information supplied are identified and described to the Legal Division, which must file a list of such deficiencies within 20 days after filing. The utility then must provide additional information to satisfy any deficiencies noted. At the same time, PUC and any other parties in the case ask the utility for information concerning substantive issues in the filing. The utility has 20days to provide such requested information. The Office of Policy Development(OPD) then compiles a list of contested issues for the commission's consideration and the commissioners issue a preliminary order outlining significant policy issues they believe should be discussed in the case.

Rate analysis and hearing

As staff analysis of the filing proceeds, Office of Regulatory Affairs(ORA) analysts, economists, and engineers provide input to the Accounting Section for the development of a revenue-requirements model of the utility.This model determines the utility's total expenses; only those expenditures that are reasonable and necessary to serve the public can be included as allowable expenses.[ 30 ] The revenue-requirements model then is used by the Rate Analysis Section to allocate costs by customer rate class.

Staff members prepare testimony describing and defending their recommendations.This testimony must be reviewed by division managers and the assistant general counsel assigned to the case, and then distributed to all parties to the case within 90 days of the case filing.

Parties to the rate case meet to discuss the issues in the case. If they cannot reach settlement on all issues, the case is transferred to the State Office of Administrative Hearings (SOAH) for a hearing on any outstanding issues. The utility can file rebuttal testimony to PUC in response to PUC's and other parties testimony. During the hearing, parties' attorneys, including PUCstaff, may cross-examine witnesses who present testimony in the case.

SIDEBAR

Stranded Investment Issues

Stranded investments issues have developed because electric utilities,under the direction and approval of PUC, have made significant investments in plants and equipment to serve their customers, in exchange for rates that guaranteed recovery of their cost of providing service. These "cost of service"rates, however, are in many cases higher than the rates that would prevail in an open, competitive market because rate regulation, acting as a surrogate for competition, is not as effective as actual competition. This issue has divided shareholders and consumers, however, the more important issue at hand is how to calculate stranded costs. According to PUC's own estimates, stranded costs can be as low as $3 million and as high as $21 billion.[ 31 ]

One argument is that if retail competition is allowed in electric markets, utilities will be unlikely to recover their investment if they lowered their rates to market levels, or did not lower rates, but their customers switched to lower cost electric suppliers. On the other side of the argument is the issue of who should bear the regulatory risk of this investment--the shareholders or ratepayers?

State legislatures are beginning to approach this thorny issue as pressures for competition in the electric industry increase. Rhode Island's legislature has allowed each utility company to apply a surcharge to individual electric bills to retire debt associated with facilities that will be devaluated (or "stranded") when retail competition is allowed.[ 32 ]

The 1995 revision to PURA required PUC to develop a report to the Legislature on methods or procedures for quantifying the magnitude of stranded investment, procedures for allocating costs, and acceptable methods for recovering costs.[ 33 ] PUC's report, The Potential for Stranded Investment in the Electric Utility Industry in Texas, promises this issue will continue to be a high priority asits resolution is critical to increased competition in the electric industry.The report was adopted by the commissioners in January 1997.

END OF SIDEBAR


Endnotes

[ 1 ] Gibson Gayle Jr., president, State Bar of Texas, "Statement of the Issue," Baylor Law Review, Fall 1976, p. 771.

[ 2 ] Don Adams, "Utility Regulation: A Public Demand," Baylor Law Review, Fall 1976, p. 774.

[ 3 ] Public Regulation in Texas Policy Research Project, Lyndon B. Johnson School of Public Affairs, Policy Research Report Number 76, Regulation in Texas, Volume II, Austin, Texas, 1986, p. 86.

[ 4 ] Jack Hopper, A Consumer's Guide to Utility Regulation: The Texas Public Utility Regulatory Act of 1975, Texas Public Utility Commission, undated, p. 1.

[ 5 ] Texas Sunset Advisory Commission, Joint Interim Committee on Telecommunications and the Public Utility Commission, A Report to the 74th Texas Legislature (Austin, Texas, December 21, 1994), p. Appendix 1-1. (Final draft.)

[ 6 ] Texas Sunset Advisory Commission, Joint Interim Committee on Telecommunications and the Public Utility Commission, A Report to the 74th Texas Legislature, p. Appendix 1-1.

[ 7 ] Texas Sunset Advisory Commission, Joint Interim Committee on Telecommunications and the Public Utility Commission, A Report to the 74th Texas Legislature , p. Appendix 1-19.

[ 8 ] Public Utility Commission of Texas, 1995 Annual Report (Austin, Texas, June 1996), p. 2.

[ 9 ] Public Utility Commission of Texas, Scope of Competition in Telecommunications Markets (Austin, Texas, October 14, 1996), p. C-1. (Draft report.)

[ 10 ] Public Utility Commission of Texas, Scope of Competition in Telecommunications Markets, pp. C-2 and C-3.

[ 11 ] Public Utility Commission of Texas, The Scope of Competition in the Electric Industry in Texas and an Investigation into Electric Industry Restructuring (Austin, Texas, November 25, 1996), p. II-21. (Final staff draft.)

[ 12 ] Tex. Rev. Civ. Stat. art. 1446c-0, SS2.003.

[ 13 ] Tex. Rev. Civ. Stat. art. 1446c-0, SS2.057.

[ 14 ] Public Utility Commission of Texas, 1995 Annual Report (Austin, Texas, June, 1995), p. 1.

[ 15 ] Public Utility Commission of Texas, Agency Strategic Plan for the 1997-2001 Period, p. 12.

[ 16 ] Public Utility Commission of Texas, Agency Strategic Plan for the 1997-2001 Period, p. 21.

[ 17 ] Public Utility Commission of Texas, Agency Strategic Plan for the 1997-2001 Period, p. 11.

[ 18 ] Vernon's Ann. Civ. St. art. 1446c-0, SS1.025.

[ 19 ] Public Utility Commission of Texas, Legislative Appropriations Request for Fiscal Years 1998 and 1999, p. 15.

[ 20 ] Texas Comptroller of Public Accounts, "Budget Worksheet for the Public Utility Commission of Texas," (Austin, Texas, November 1, 1996). (Computer printout.) (Draft.)

[ 21 ] Texas Comptroller of Public Accounts, "Budget Worksheet for the Public Utility Commission of Texas."

[ 22 ] Texas Comptroller of Public Accounts, "Budget Worksheet for the Public Utility Commission of Texas."

[ 23 ] Public Utility Commission of Texas, Legislative Appropriations Request for Fiscal Years 1998 and 1999 (Austin, Texas, August 1996), pp. 14-15.

[ 24 ] Vernon's Ann.Civ. St. art. 1446c-O, Title I, Subtitle J. Commission Financing, SS1.351 (a).

[ 25 ] Texas Comptroller of Public Accounts, September 1995 Certification Revenue Estimate (Austin, Texas, September 1995), Table 3; and Texas Comptroller of Public Accounts, 1998-1999 Biennial Revenue Estimate (Austin, Texas, January, 1997), Schedule I.

[ 26 ] Public Utility Commission of Texas, Agency Strategic Plan for the 1997-2001 Period (Austin, Texas, June 12, 1996), p. 30.

[ 27 ] Public Utility Commission of Texas, Agency Strategic Plan for the 1997-2001 Period, p. 8.

[ 28 ] Vernon's Ann. Civ. St. art. 1446c-O SS2.252.

[ 29 ] 16 T.A.C. SS23.31.

[ 30 ] 16 T.A.C. SS23.21(c).

[ 31 ] Public Utility Commission of Texas, The Potential for Stranded Investment in the Electric Utility in Texas (Austin, Texas, November 25, 1996), p. ES-16.

[ 32 ] Interview with Doug Hartley, Rhode Island Public Utility Commission, Providence, Rhode Island, November 13, 1996.

[ 33 ] Vernon's Ann. Civ. St. art. 1446c-O, SS2.057(e).

[ Continued ]


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