Texas Law
Texas Public Utilities Law
- Public Utilities Law
Public Utilities Law
Although most businesses in the United States are subject to many government regulations, public utilities are perhaps the most heavily regulated. This chapter gives a brief overview of the reasons and procedures for regulation of public utilities in the United States and in Texas.
Public Utilities Defined
Public utilities are companies that provide services commonly considered so essential and important to the public welfare as to be subject to substantial government regulation. Examples include common carrier transportation (buses, airlines, railroads, motor freight carriers, pipelines, etc.); radio, television, telegraph and local and long-distance telephone companies, including cable and fiber optics; electricity and natural gas; and water and sanitation treatment facilities. In Canada and most European countries public utilities are state-owned and state-operated. Government ownership and operation of utilities in the United States exists primarily at the local level. For example, cities, towns, and counties often own and operate their own sewage disposal and water supply systems. Two of the largest publicly owned utilities are the Tennessee Valley Authority headquartered on the Tennessee River, and the Bonneville Power Administration in Oregon. The largest public utility until its breakup in the 1980s was the American Telephone and Telegraph Corporation (AT&T). In the United States today most public utilities are privately owned and are operated under close government regulation.
Justification for Regulation
The traditional justification for substantial government regulation of a private business providing public utility services is two-fold. Public utilities frequently are monopolistic, and they provide services that are in the public interest.
Monopolistic Tendencies of Public Utilities
Public utilities often are referred to as "natural monopolies", meaning that due to the nature of the service provided, economic and other considerations dictate that the larger the business and the less competition, the more efficiently the service can be provided. In effect, the market provides room for only one supplier, or at most a relatively small number of suppliers, to provide the service efficiently.
One of the economic conditions at play is that public utilities require tremendous capital investment. On average, a public utility will require six times the investment per dollar of sales than the average manufacturing firm. This is due to a variety of factors, including the extensive distribution network required; the inability to store the product (in the case of electricity) and the resulting need to have both substantial generating capacity to meet peak demands and the ability to absorb the costs of excess capacity during off-peak times; the need to build to anticipate future demands without including the costs of construction in rates; and the additional costs of meeting safety and environmental laws. It would be inordinately expensive and inefficient for several smaller companies to each invest the necessary capital to start a public utility that would only serve a small number of customers.
Another economic consideration is the wide diversity of markets for the types of services commonly provided, and the potential for price discrimination. For example, some large industries can produce their own electricity while most residential customers cannot. Thus, absent regulation, an electrical company could charge the large industry less than the residential customer despite the fact that costs to produce the electricity are the same for both. Also, the operation of a utility has wide-reaching effects, beyond those typical of traditional business concerns. A significant power outage can cause millions of dollars of damage; pollution from a coal burning plant, a natural gas leak, or a nuclear melt-down have potentially life-threatening effects.
In addition to these economic considerations, there are also physical and technological considerations that may limit the number of providers of services. For example, there are only a certain number of electrical conduits the city streets can accommodate. Because of these conditions, the provision of utilities creates a natural tendency for monopolies, and monopolistic pricing practices. The monopolistic nature of utilities becomes a public policy concern calling for government intervention due to the nature of the services provided.
Nature of Services Provided
Public utilities by definition provide goods or services deemed essential to the public welfare. The legal concept of public utilities can be traced to early English common law. In the late 1600s, Sir Matthew Hale, an English judge, successfully argued that certain businesses such as ferryboats, docks, and warehouses were public necessities, and therefore were required to charge reasonable rates and to maintain adequate service for all customers. These types of businesses were said to be "affected with a public interest." Because of the inherent danger to the public welfare of potentially monopolistic control over essential public services, government regulation has for more than a century been applied to public utilities.
Unique Rights and Responsibilities
Public utilities fall between free enterprise and government enterprise. Because they provide essential services, public utilities must meet certain requirements and are subject to government regulation. Whereas a wholly private business can let the market determine its customer base, a public utility is obligated to provide service to all potential customers in its jurisdiction who apply for and are willing and able to pay for the service. The public utility also must operate in a safe and adequate manner. The public utility must serve all customers on equal terms. Finally, the public utility must charge rates that are just and reasonable.
In exchange for these considerations, the public utility enjoys certain rights not otherwise available to the general business community. The public utility has full or partial protection from competition within a designated geographic area; in essence the company has a government-enforced monopoly within the specified area. In addition, the public utility is assured that it can charge rates that cover its operating costs and yield the company a reasonable profit. Finally, the public utility has the power of eminent domain, that is, it can force the sale of private property needed to carry out utility operations.
History and Development of Regulation in the United States
The idea of businesses with a public interest was incorporated from the English common law into American law. At first, utility regulation in the United States was handled by the courts on a case-by-case basis, with early attempts to regulate public utilities directed at the railroads. Abuses were particularly widespread following the Civil War when Eastern business owners were able to exploit Midwestern farmers due to monopoly of the railroads. In the landmark case,
State regulatory commissions began to develop in the 1830s and increased in number and power during the Granger movement of the 1870s. Like the courts and legislatures, the earliest commissions attempted to regulate railroads. The first modern state public utility commissions were established in Wisconsin, New York, and Georgia in 1907. These commissions combined legislative, judicial and administrative authorities and made possible more comprehensive and flexible regulation of public utilities. The number of state commissions grew rapidly after 1907 and by 1920 more than two-thirds of the states had created regulatory commissions.
The first federal commission with regulatory powers was the Interstate Commerce Commission, established in 1887. Federal regulation was expanded again in the 1930s when much of the regulatory responsibility shifted from the states to the federal government. In 1935 the Federal Power Commission, now the Federal Energy Regulatory Commission, was empowered to regulate interstate sales of electricity, and in 1938 was expanded to govern the regulation of interstate natural gas sales. The Federal Communications Commission was established in 1934 with broad powers to regulate interstate radio and television broadcasting, and telephone and telegraph services. During this time Congress gave the Interstate Commerce Commission broader powers, first adding regulation of the motor carrier industry and later regulation of inland waterways. The Securities and Exchange Commission was created in 1935 to deal with abuses by holding companies, particularly in the electrical industry.
The Railroad Commission of Texas (RCT) is the oldest regulatory agency in the state and one of the oldest in the country. It was established in 1891 to regulate the rail industry. Aside from the early regulation of the railroads, however, the State of Texas for many years was not involved in any other utility regulation. Until the mid-1970s, most privately-owned utilities were entirely self-regulated. Incorporated cities monitored the utilities they owned, as well as any other utilities serving within their limits. In the early 1970s, however, it became apparent that some utilities were abusing their monopoly status. At the same time, rising costs and rapid utility growth made further regulation by cities very difficult. Responding to public pressure to curb abuses, the Texas Legislature passed the Public Utility Regulatory Act (PURA) and created the Public Utility Commission (PUC) of Texas in 1975. Texas was the last state to enact this type of broad utility regulation. With the passage of the Public Utility Regulatory Act and subsequent laws Texas now has a comprehensive utility regulatory system, vesting regulatory powers in three primary agencies. The RCT regulates transportation; surface mining; and oil, gas and alternative fuel utilities. The Texas Natural Resource Conservation Commission (TNRCC) oversees water and sewer utilities and air quality through the Texas Water Commission and the Texas Air Control Board. The Public Utility Commission oversees regulation of electric and telephone utilities. These three state agencies oversee regulation of only certain types of utility companies within the state.
The Railroad Commission of Texas was established in 1891 to regulate the growing railroad industry. Over time, the RCT has been given regulatory responsibility over private and municipal gas utilities; railroad safety; compressed natural gas, liquefied petroleum gas and liquefied natural gas safety; oil and gas production; alternative fuels research and marketing; and surface mining of coal, uranium, iron ore, and gravel.
Through its Transportation Division the RCT has jurisdiction over 48 railroads within the state, all moving company transportation, as well as air terminal buses and some hotel buses. The RCT also regulates safety and service, but not the rates, of emergency tow trucks. School buses, ambulances, and taxicabs do not fall within the jurisdiction of the RCT. In September, 1995, regulation of intrastate regular route passenger carriers, charter passenger carriers, garbage collection carriers, and motor freight carriers was transferred from the RCT to the Texas Department of Transportation. In June, 1995, federal legislation eliminated RCT's previous responsibility for economic regulation of motor carriers.
Through its Gas Utilities and LP-Gas Divisions the RCT oversees 222 private natural gas utilities and 364 natural gas pipelines. The RCT also oversees safety and has appellate jurisdiction over rates set by 84 public and municipally-owned gas utilities. For municipally-owned utilities, the municipality has primary jurisdiction over gas utility operations within municipal boundaries, while the RCT has jurisdiction over operations outside the municipal limits.
The largest of the RCT's divisions is the Oil and Gas Division. Petroleum production in Texas has been regulated almost as long as the railroads. Through the Oil and Gas Division, the RCT monitors petroleum industries in an effort to prevent waste, protect natural resources from pollution, collect data, ensure public safety, and provide for fair production among operators. The Oil and Gas Division oversees operations of approximately 241,000 active oil and gas wells in Texas.
The Texas Natural Resource Conservation Commission was created in September, 1993, to consolidate environmental programs covering air, water and waste disposal. The majority of Texans receive their water and sewer services from investor-owned utilities, also known as public utilities. Publicly-owned utilities (i.e. nonprofit water supply corporations, cities and water districts) are governed by boards of directors or city councils elected by the voters. Some utilities, however, are owned by individuals, associations, or corporations. The governing boards of these utilities are not answerable to the electorate, and are regulated by the TNRCC. The TNRCC oversees waste treatment programs, and regulates the rates and services of investor-owned water and sewer utilities. In addition, the TNRCC has appellate jurisdiction over sales of wholesale water and wastewater services between all types of utilities. Customers of these utilities may participate in TNRCC's regulation of these utilities by advising the TNRCC of objections to rate changes, by reporting and requesting investigation by TNRCC of service rule violations, and by participating in public hearings on proposed rate or service changes.
There are many types of water and sewer utilities in Texas. Utility rate decisions of the following types of utilities are subject to review by the TNRCC: water supply corporations (governed by a board of directors), water districts (governed by a board of directors), river authorities (governed by the river authority), private- or investor-owned utilities operating inside a city (governed by the city council), county-owned utilities (governed by the commissioner's court), and city-owned utilities serving customers outside the city (governed by the city council). The rate change decisions of these agencies may be reviewed by the TNRCC when a petition of appeal is timely filed and is signed by at least ten percent of the affected ratepayers eligible to appeal. The TNRCC will review the petition and may request additional information. Once the petition is complete, it is accepted for filing, forwarded to the State Office of Administrative Hearings, and a public hearing is scheduled. At the hearing, an administrative law judge will provide an opportunity for settling the case. If the case cannot be settled, additional hearings are scheduled and additional information may be requested. Once the hearings are completed, a "Proposal for Decision" is submitted to three TNRCC Commissioners, who make the final decision on the appeal. Rate changes may be put into effect even while the appeal is pending . If the Commissioners lower the rates, refunds may be ordered.
Although leading the nation in consumption and generation of electricity, Texas was the last state in the union to have a state-wide public utilities commission. The Public Utility Commission, created in 1975, is one of the newest state agencies in Texas. The PUC has undergone significant changes since its inception, with responsibilities transferred into and out of agency authority, as well as a two-year sunset review of the agency. Recent legislation has authorized the continuation of the PUC through August, 2001. The PUC now is mandated to increase competition in the local telecommunication and electric utility industries.
The PUC provides standards and sets rates for about 100 electric utilities, including eight large investor-owned systems, 87 electric cooperatives, and four public river authorities that generate electricity. In addition, the PUC has limited jurisdiction over operator service providers. The PUC does not, however, have jurisdiction over city-owned or municipal electric utilities. Texas spends the fewest dollars in the nation on electric utility regulation, per dollar of electric utility revenue.
Incorporated cities regulate city-owned utilities and have original jurisdiction over any other electric utilities operating within the city limits. This is why cities with original jurisdiction must approve or deny rate changes proposed by investor-owned utilities and cooperatives operating within their boundaries. Electric utilities, except the city-owned utilities, may appeal those city rate decisions to the PUC. The PUC then sets the same rates for those cities as it sets for unincorporated areas. Before the PUC considers a proposed rate change, the utility company must publish notice of the change requested. This notice appears once a week for four consecutive weeks in a newspaper that is circulated widely in each county where persons will be affected by the proposed change. This notice gives consumers an opportunity to record complaints with the PUC Consumer Affairs Office, to request to participate in the rate case as an intervenor, to appear in person at the hearing, or to join one of the consumer organizations that participates in the hearing.
Within the telecommunications industry, the PUC regulates approximately 60 local telephone exchange systems in Texas. In addition, the PUC oversees cable access television companies seeking to provide local exchange service. The PUC also regulates paging services provided by wireline telephone companies. There are many areas of the telecommunications industry, however, that the PUC does not regulate. For example, the PUC has no jurisdiction over long-distance telephone service providers, and there is no regulation of cellular phone services in Texas. Standard and premium cable television services are regulated not by the PUC, but through the local communities with which cable providers contract. Radio transmissions were deregulated in 1981.
Utilities are governed by federal, state, and/or local regulatory agencies. In most instances, the federal government regulates the transmission of goods and services between states or regions, while the state and/or local agencies regulate the flow of goods and services within the state. In some instances, however, the distinction also is made between retail and wholesale pricing. For example, the Federal Energy Regulatory Commission regulates wholesale rates of electricity, while the state and local agencies regulate retail rates.
Although monitoring different types of utilities, all of the Texas utility commissions operate in much the same manner. Each has four basic responsibilities. The first is certification. Before any utility can operate or build new facilities in the state, it must obtain a Certificate of Convenience and Necessity from the appropriate commission and demonstrate that its plans are in the public's best interest. The second function of the utility commissions is rate setting. Each commission must set rates that are reasonable and fair for both the public, the investors and the involved utility. The commissions hold public hearings to determine the propriety of proposed utility rate and service changes. The third function of the various commissions is to ensure utility compliance with statutory requirements, as well as with commission policies, rules, orders, and service standards. The commissions also monitor earnings and management practices of the utilities under their jurisdiction. Finally, the commissions provide assistance to consumers to resolve complaints against utilities under their jurisdiction, and develop rules to carry out the intent of the Texas Legislature through a public rule-making process.
The primary involvement at the state or local level is the setting of rates for the sale of utility service within the agency's jurisdiction. Rate setting involves complex analysis. If the rate is set too high it will be injurious to the public interest, whereas if it is too low the utility will not be able to attract the capital investment necessary to operate efficiently. The regulatory agency must devise a formula that permits the utility to earn a fair rate of return on capital while ensuring reasonable prices to consumers. There are typically two steps in setting public utility rates, setting revenue requirements, and allocating costs and determining prices.
First the regulatory agency determines the total revenue requirements of the utility--the amount of revenue necessary to meet costs and provide a fair profit. In determining the revenue requirements, the agency considers the operating expenses, depreciation of the physical plant, and taxes, plus a fair return on the investment. Simply establishing the revenue requirements, however, is no guarantee that the utility actually will receive this amount of revenue. Rather, the revenue requirement represents the total revenue that the utility will have the opportunity to earn. If usage is lower than anticipated, revenues naturally will be less.
The agency's next step is to allocate the revenue requirements among the various services provided and among the various classes of customers, and to set the price or rate structure for each class of service. In addition to setting prices that will generate sufficient revenue, the agency must ensure that the pricing structure is non-discriminatory. That is, customers who are similarly situated should be charged the same for the same service. Any variance in the pricing structure must be justified by some rationale other than the personal identity of the consumer. For example, one method of pricing, typically used by electrical and gas companies, is to base fees in part on peak versus off-peak usage, charging higher fees for service provided during peak use times. An alternative method of pricing electrical charges is the "declining block" method, in which prices decrease for subsequent blocks of service. This method results in lower prices for greater use of the service. Another method, typically used by telephone companies, is to charge a fixed monthly fee for basic services and additional fees for extra services (i.e. directory assistance, special features). A fourth method of pricing, typically used by railroad companies, is the "value-of-service" method. With this method the price reflects the degree of the monopoly in the particular market. In effect, the consumer is charged what the market will bear. Although there will be some discrimination in each of these pricing methods, each relies on factors other than the identity of the consumer for the variance in price.
The process for administrative review in each of the three state-wide utility commissions in Texas is similar. Any consumer, water or waste water company may request relief from the Texas Natural Resource Conservation Commission, and any party who can show a justifiable interest may intervene in a proceeding before the TNRCC. Similarly, any consumer, electric or telephone company may request relief from the Public Utility Commission, and any party who can show a justifiable interest may intervene in a proceeding before the PUC. Anyone with a complaint concerning any organization under the jurisdiction of the Railroad Commission of Texas, for which a penalty is provided, may seek relief from the RCT. Any person, public official, state agency or department of any civic or trade organization may intervene in a proceeding before the RCT. For proceedings before any of the three commissions, a party of interest may appear for himself or may be represented by a full-time employee of the commission or by an attorney. The same rules apply to individuals, corporations, partnerships and associations. In hearings before these three commissions, Texas statutes and non-jury rules of evidence determine the admissibility of evidence in proceedings and the limitations placed on the cross-examination of witnesses. Oral argument to a hearing officer generally is allowed only at the discretion of the commission.
The three commissions typically utilize administrative law judges for adjudicatory proceedings. The administrative law judge will hear testimony and make findings of fact and conclusions of law. The decision of the judge is advisory, and will be reviewed by the appropriate commission. The reviewing commission may approve, reject, or modify the decision. Decisions of the three state-wide utility commissions in Texas may be reviewed by the district court in the jurisdiction, the court of appeals and the Texas Supreme Court.
By the mid-1970s, public opinion in the United States shifted toward the belief that public utilities could operate more efficiently if they were subject to less regulation. The result was a gradual rollback of many regulations. In 1976 and 1980 Congress passed legislation granting railroad companies greater freedom in pricing and greater flexibility in abandoning unprofitable routes. With the Airline Deregulation Act of 1978 Congress phased out federal control of fares and service routes in the passenger airline industry. The Motor Carrier Act of 1980 allowed trucking firms greater freedom in setting rates, thereby increasing competition. By 1990, deregulation in the natural gas industry led to the elimination of price controls on all natural gas sold in the United States.
The United States regulatory system has been the subject of much debate in recent years. There are those who contend that the present forms of regulation represent good practice and good economic sense. Others argue that regulators have become captives of the utilities they are supposed to regulate and that the public interest is not being properly protected. This has at times led to greater participation in the rate-making process by public interest groups and to proposals for other reforms. There is also a growing group calling for even greater rollback of regulation. These critics charge that due to changes in market forces the need for extensive government regulation has passed. Although much regulation has been rolled back in recent years, it appears that some form of administrative regulation of public utilities will remain part of the American economic landscape for many years. With the continued debate and ever-changing economic conditions, however, the regulation of public utilities remains a fluid and ever-changing area of law.
Information on proposed rule changes for utilities is printed in the Texas Register, a legal newspaper for the state. For information about obtaining a subscription, contact the Texas Register at P.O. Box 13824, Austin, TX 78711-3824, (512) 463-5561.
For information about regulation of these utilities, contact the Railroad Commission of Texas, 1701 North Congress Avenue, P.O. Box 12967, Austin, TX 78711-2967, (512) 463-7288, fax (512) 463-7161. For general information about the RCT, contact Information Services at (512) 463-6710. For information about particular utilities, contact the appropriate division: Liquid Petroleum and Gas Division, (512) 463-6931; Oil and Gas Division, (512) 463-6893; Gas Services Division, (512) 463-7124.
For information on utility and public drinking water system regulations, procedures, hearings, water districts, etc., contact: Texas Natural Resource Conservation Commission (TNRCC), 12100 Park 35 Circle, Building F, P.O. Box 13087, Austin, TX 78711-3087,
(512) 239-5500, fax (512) 239-5533, TDD (800) RELAY-TX. For information about creating a water district contact the District Administration Section in the Water Utilities Division at (512) 239-6100. For information regarding public participation in hearings before the TNRCC contact the Office of Public Interest Council at (512) 239-6363. For information on organizing a consumer group to participate in water or sewer utility proceedings, locating sources of financing, management guidance, and evaluating options for new water or sewer utility systems, small rural communities may contact: Community Resources Group, Inc., 7701 North Lamar, Suite 503, Austin, TX 78752, (512) 454-1033. For pamphlets about the rules, hearing process, and other topics regarding TNRCC, contact the Office of Publications at (512) 239-0028. For assistance with general consumer information, contact the Consumer Assistance Team at (512) 239-6100, fax (512) 239-6145. For more information on appeals to the TNRCC contact: Consumer Assistance Team, Water Utilities Division, MC 153, P.O. Box 13087, Austin, TX 78711-3087, (512) 239-6100.
For information on operating procedures and organization of water supply corporations contact the Texas Rural Water Association, 1616 Rio Grande Street, Austin, TX 78701-1122, (512) 472-8591.
For information on funding sources or water and sewer utilities contact the Texas Water Development Board, P.O. Box 13231, Austin, TX 78711-3231, (512) 463-7847.
For information about electric and telecommunications utilities, contact the Texas Public Utility Commission, 7800 Shoal Creek Boulevard, Austin, TX 78757, (512) 458-0100, fax (512) 458-8271, e-mail address: Romines@puc.texas.gov.
In the United States, a number of federal commissions regulate utilities that provide services across state boundaries. For example, the Interstate Commerce Commission regulates trade practices of companies that transport goods and passengers by train, motor vehicle, or boat. The Federal Energy Regulatory Commission regulates natural gas and petroleum pipelines, hydroelectric power plants, and wholesale prices for electric power and natural gas. The Federal Communications Commission controls radio and television broadcasting as well as telephone and telegraph services. The Securities and Exchange Commission regulates the finance and corporate structures of utility companies.
Federal Communications Commission
Federal Energy Regulatory Commission
Interstate Commerce Commission
Securities and Exchange Commission
Other federal regulatory commissions include the Federal Aviation Administration, which makes regulations concerning safety in the airline industry; and the Nuclear Regulatory Commission, which regulates the production of nuclear energy for civilian use. All 50 states, plus the District of Columbia, also have their own regulatory commissions.
Public Utilities Regulation in Texas
Transportation, Oil, Gas, and Alternative Fuel Utilities
Water and Sewer Utilities
Electric and telephone utilities
Regulatory Scheme
Federal Versus State or Local Regulation
Rate Setting
Setting Revenue Requirements
Allocating Costs and Determining Prices
Administrative Review
Deregulation
Resources
State Resources
Transportation, Oil, Gas, and Alternative Fuel Utilities Resources
Water and Sewer Resources
Electric and Telephone Utilities Resources
Federal Resources
1919 M Street N.W.
Washington, DC 20554
(202) 418-0260
Fax: (202) 418-2812
825 North Capitol Street N.E.
Washington, DC 20426
(202) 208-1088
Fax: (202) 208-2106
Interstate Commerce Commission Building
12th Street and Constitution Avenue
Washington, DC 20423
(202) 927-6050
Fax: (202) 927-6107
450 Fifth Street N.W. #31024
Washington, DC 20549
(202) 942-8088
Fax: (202) 272-7050