The 15th Court of Appeals has affirmed a Travis County district court ruling that the PUC violated its own rules when it made a significant change in its Rate Filing Package for municipal transmission facilities without giving public notice and holding a public hearing as required by law.
Appellant Public Utility Commission of Texas//Cross-Appellant, City of Denton Operating as Denton Municipal Electric v. Appellee City of Denton Operating as Denton Municipal Electric//Cross-Appellee Public Utility Commission of Texas (No. 15-25-00018-CV; June 4, 2026) arose from a dispute over a PUC order setting wholesale transmission rates for Denton Electric. Under the PUC’s policy at the time Denton Electric filed an application for a rate increase (in 2021), a municipal utility could calculate its rate of return based on its “debt service coverage levels stated in [its] most recently issued bond and debt covenants plus an additional coverage of 0.25” in order for the rate to be “presumed reasonable.” While Denton Electric’s application for an increase in wholesale rates was pending, however, the PUC changed its policy to eliminate the additional 0.25 coverage. Denton subsequently amended its application, but didn’t alter its initial request for a 1.75x debt service coverage ratio. Denton further requested to include in its transmission revenue requirement an 11% general fund transfer to the city.
After a hearing at SOAH, the ALJs issued a proposal for decision, which the PUC adopted and issued as an order. The order stated that Denton (1) had not substantiated a 6% return on investment component of the general fund transfer, (2) should have set its debt service coverage ratio at 1.25x, not 1.75x, and (3) must file an interim transmission cost of service proceeding within 90 days of the final order. After its motion for rehearing was overruled by operation of law, Denton filed a petition for judicial review in Travis County district court. The trial court ruled that the PUC’s decision to set Denton Electric’s debt service coverage ratio at 1.25x was “arbitrary and capricious and was improperly based on a Rate Filing Package that was modified in violation of state law (the Texas Open Meetings Act) and commission rule.” The court denied all other relief. Both parties appealed.
In an opinion by Justice Farris, the court of appeals affirmed. First, the court found that the trial court properly reversed the PUC’s order as to the 1.25x debt service coverage ratio. The question was whether Denton Electric’s request for 1.75x, which reflected the City’s decision to direct the utility to seek to maintain a 1.50x debt service coverage on future bond indentures, plus the PUC’s former 0.25x additional coverage. Denton Electric argued that the PUC’s changes to the RP were not properly noticed under commission rules and the Open Meetings Act, were erroneously applied retroactively, and contradicted the record, which demonstrated that the request was reasonable. The court determined that the PUC made a “significant change” in the RFP in violation of its own rules, which require it to publish notice in the Texas Register prior to implementing the change. The court didn’t buy the PUC’s argument that the change was not “significant” and didn’t have to be noticed. Indeed, the PUC contradicted its own position in the hearing in which the change was made, as evidenced by one of the commissioner’s concern that the presumption of reasonableness could lead to “tens if not hundreds of millions of dollars of transmission that can just be presumed to be reasonable and that money disappears out of ratepayers’ pockets with no explanation of where it goes.” Since the PUC didn’t follow the required procedure for amending the RFP, the PUC’s decision to set the rate based on the amended RFP was arbitrary and capricious.
In addition to that, the PUC’s decision wasn’t supported by substantial evidence. Denton Electric claimed that since the PUC didn’t rebut the presumption that the 0.25 “adder” was reasonable at the hearing, it gave up the opportunity to do so later. The court agreed, holding that “under the applicable RFP, because the reasonableness of the 0.25x adder was not rebutted, a debt service coverage ratio that did not include the adder was not supported.” Furthermore, Denton Electric’s substantial rights were prejudiced by the PUC’s action. This was a no-brainer for the court, since the PUC’s reliance on its arbitrary change to the RFP reduced Denton Electric’s requested debt service by tens of millions of dollars.
As to the PUC’s exclusion of Denton Electric’s 6% return on investment component of the general fund transfer, the court found that substantial evidence supported it. The PUC ruled that Denton could “only recover expenses through its transmission rates that are reasonable and necessary for providing transmission service, and the 6% return on investment component is not a reasonable and necessary cost.” Although a municipally owned utility has statutory authorization to transfer funds to the city’s general fund, the statute doesn’t say anything about whether “those general fund transfers are recoverable expenses” under PURA. And since the PUC has discretion to disallow unrecoverable expenses, there was nothing improper about it in this case. To the contrary, “in its findings of fact regarding the general fund transfers in the Commission’s Order, the Commission stated that ‘[r]equiring a utility to substantiate all its transfers to the general fund that are included in transmission rates falls within the Commission’s discretion to ascertain the reasonableness of such costs.’” Denton Electric failed to meet its burden.
