In a 63-page opinion authored by Justice Gisela Triana and joined by Chief Justice Darlene Byrne and Justice Chari Kelly, the Austin Court of Appeals has held that the Public Utility Commission acted without legal authority when it underfunded the Texas Universal Service Fund (TUSF) and cut payments to rural telecom providers by 70%. The case,Texas Telephone Association and Texas Statewide Telephone Cooperative, Inc. and Their Participating Members, et al. v. Public Utility Commission of Texas; Peter Lake, Chairman; Will McAdams, Commissioner; Lori Cobos, Commissioner; and Jimmy Glotfelty, Commissioner, Each in His or Her Official Capacity at the Public Utility Commission of Texas(No. 03-21-00294-CV), is the latest event in the long-running saga of the financial decline of the Universal Service Fund.
The Legislature established the TUSF in 1997 in response to the deregulation of the local telephone exchange market. It directed the PUC to create the fund and finance it by an assessment on every telecom provider in the state. The provider would then recover the amount of the assessment through the Universal Service Surcharge on customer bills. The purpose of the TUSF is to enable high-cost (i.e., low income and disability assistance, schools, libraries) and rural telecom services to be delivered at rates reasonably comparable to those in densely populated urban and suburban areas. The legislation required the PUC to establish eligibility criteria and determine the monthly support payment amounts, largely through contested case proceedings but also by rule. Upon determination of eligibility and entitlement to a specific monthly support payment amount, the PUC became obligated to pay.
The problem began in 2015, when the PUC lowered the assessment rate from 3.7% to 3.3% (which is where it stands today). At that time the TUSF held a balance of $190 million. By 2Q 2020, however, the balance had shrunk to $96 million, $75 million of which occurred in 2019. Subsequently, the PUC staff recommended an increase in the assessment to at least 6.4% to maintain the solvency of the fund until August 2021. The staff likewise presented options for rule changes shifting the basis of the assessment from a provider’s revenue to its number of connections and to expand the assessment to include Voice over Internet Protocol service (a growing part of providers’ business). The commissioners declined to act on the staff recommendations at its public meeting in June 2020. Instead, they instructed the staff to confer with the third-party contractor (Solix) that administered the fund on ways to “triage” the dwindling funds. A large group of rural telecom providers asked the commissioners to reconsider the decision and filed a petition for rulemaking, which the commissioners denied. In December 2020 the PUC executive director executed a contract amendment with Solix to cut payments by 60-70%. The rural telecom providers filed suit in Travis County district court in January 2021. Nothing happened during the 2021 session to address the shortfall, so the litigation proceeded.
The providers sued the PUC on several theories: (1) a Uniform Declaratory Judgment Act claim that the commissioners acted ultra vires when they failed to fully fund the TUSF and short paid the support payments in violation of their own orders and rules; (2) a claim that the PUC violated the APA’s rulemaking process by changing its rules by fiat; (3) a claim for violation of the Open Meetings Act; and (4) a regulatory takings claim. They sought declaratory, injunctive, and mandamus relief and attorney’s fees, as well as damages on the regulatory takings claim. Both parties made summary judgment motions. The PUC also filed a plea to the jurisdiction, asserting that the providers did not plead a valid claim for which a waiver of governmental immunity exists. The trial court granted the PUC’s plea to the jurisdiction and summary judgment motion. The providers appealed.
The court of appeals reversed in part and affirmed in part. For purposes of brevity, we will only summarize the court’s holding on each issue:
- Based on the undisputed evidence presented during the summary judgment hearing, the providers established their ultra vires claim and were entitled to declaratory relief and attorney’s fees. The commissioners acted without legal authority by violating pertinent provisions of the Public Utility Regulatory Act (PURA) and the agency’s own rules requiring them to fund the TUSF and to set the assessment rate at a level sufficient to cover the cost of TUSF programs. Although the commissioners had some statutory discretion “to implement various means of funding TUSF—it did not provide them with discretion to abdicate responsibility for funding it.” Further, the commissioners violated “PURA’s directive that when the Commission establishes the uniform charge and the services to which the charge will apply, the Commission ‘may not . . . grant an unreasonable preference or advantage to a telecommunications provider . . . or subject a telecommunications provider to unreasonable prejudice or disadvantage.’ (citing §56.022, Utlities Code) The commissioners did just that when they instructed the staff to cut a deal with Solix prioritizing some services in TUSF while allow others to go underfunded, thus penalizing high-cost rural providers at the expense of others. Finally, PURA prohibits the commissioners from changing the fixed monthly support payments without notice and hearing. In short, the PUC does not have discretion to violate its own rules and orders but does have a “ministerial duty to ensure that the Commission paid monies owed when they directed Solix to pay less than the full monthly amounts.” The court reversed the trial court, awarded UDJA prospective relief requiring the PUC to comply, voided the Solix contract amendment, and remanded to the trial court for determination of attorney’s fees.
- The providers proved their entitled to permanent injunctive relief enjoining the PUC from deviating from its existing orders regarding TUSF payments and its rules regarding funding TUSF. Having proved that the commissioners acted ultra vires, the providers established an illegal act. The second element, imminent harm, was shown by the dramatic reductions in provider payments. They demonstrated the third element, irreparable injury, by showing that the PUC’s illegal acts threatened providers with insolvency and the maintenance of services to high cost and rural areas. Finally, the providers lacked an adequate remedy at law because monetary damages would not fully compensate the providers for disruption of services or losses of customer goodwill. The court of appeals reversed the trial court and issued a permanent injunction against the PUC’s continuation of its underfunding and underpayments to providers and the enforcement of the Solix contract amendment.
- The court of appeals declined to award retrospective monetary relief for the PUC’s violations of PURA and its own rules and orders. This remedy is best left to the Legislature.
- The trial court erred by denying mandamus relief requiring the PUC to enforce its orders, fund TUSF, and make the required payments to providers. It further erred when it dismissed the providers’ claim that the agency changed its rules without following the rulemaking procedure in the APA. The court of appeals held “as a matter of law that the June 2020 decision and the Contract Amendment are rules under the APA, meaning that the Rural Providers’ Section 2001.038 both invoke the trial court’s subject-matter jurisdiction and establish their entitlement to summary judgment.” The court rejected the PUC’s argument that the decision not to increase the assessment and instead to reduce payments did not constitute a “rule,” holding that because these actions have “legal effect or significance independent of what is already contained” in the existing rules, they “constitute an amendment or repeal of these rules” (citation omitted).
- Finally, the court of appeals concluded that the PUC’s actions constituted to a regulatory taking because: (1) they had a substantial adverse financial and economic impact on the providers and their customers; (2) the failure to fund TUSF and make the support payments “interfered with distinct investment-backed expectations,” i.e., that TUSF would make it financially feasible to provide services in high-cost and rural areas; and (3) the character of the PUC’s actions, which undermined the Legislature’s mandate and targeted the very entities the Legislature created the TUSF to support, weigh in favor of finding “that the PUC Parties’ regulatory actions have gone ‘so far in imposing public burdens on private interests as to require compensation. . . .’” (citation omitted). The court reversed the dismissal of the providers’ regulatory takings claim and remanded for determination of the amount of damages incurred by the providers as a result of the taking.
In a related proceeding, Public Utility Commission of Texas; Peter Lake, Chairman; Will McAdams, Commissioner; Lori Cobos, Commissioner; and Jimmy Glotfelty, Commissioner; each in his or her Official Capacity at the Public Utility Commission of Texas v. AMA Communications, LLC d/b/a AMA TechTel Communications (No. 03-21-00597-CV) the court issued a temporary injunction ordering the PUC to pay AMA the full amount it is owed from TUSF based on a showing that the PUC cut AMA’s payment to about 15% of its monthly support, which has caused AMA to default on its loan agreement. AMA argues that without relief, it will be forced to terminate service in its rural service area before the appeal in the larger case is resolved. We suspect there could be others with similar claims waiting in the wings.
Rarely have we seen an opinion take down a state agency like this. We should note that nearly 80 members of the Legislature (of both parties) protested the agency’s actions at the time, though they were unable to do anything about it in the 2021 session. The decision has undoubtedly left the agency, which already has a full basket of hornets’ nests on its hands, with a set of bad options. It can make the politically sensitive and unpopular decision to increase assessments (and thus customers’ bills). Or it can initiate rulemaking to memorialize its equally unpopular decision not to increase assessments and to virtually bankrupt the TUSF (and probably some providers along with it). Or it can appeal to SCOTX in hopes of a bailout. The latter is probably most likely, but given some of the Court’s recent decisions (which we’ve reported here) we wouldn’t presume a favorable outcome for the agency—although it would kick the can down the road for a little longer, maybe long enough for the Legislature to respond in 2023.