Utility Regulation FAQ

Q How are electric rates regulated in Texas?

A. In a city served by a municipally owned utility or an electric coop, the rates are set by the governing bodies of either the city or the coop. In a deregulated market, the practice is much more complex.

Cities have a long history of participation in the ratemaking process for electric utilities. Prior to the enactment of the Public Utility Regulatory Act (PURA) in 1975, electric rates were set exclusively at the city level, with appeals going to the courts. Cities were originally granted the authority to regulate electric rates, because most utilities operated within cities. Later, the state began regulating electric rates outside of cities, and ultimately took over appeals from city jurisdiction as well.

Currently, cities have original jurisdiction over the electric rates of transmission and distribution investor owned utilities (IOUs) within their city limits. The Public Utility Commission of Texas has original jurisdiction over electric rates outside city limits and appellate jurisdiction over the actions of cities. (In addition, some cities have ceded their original jurisdiction inside the city limits to the PUC.)

A transmission and distribution utility that is within a city and wishes to increase its rates is now subject to the original jurisdiction of that city. In practice, however, most cases are now appealed, consolidated, and heard and decided by the PUC. The rate-setting process is a complex one. Essentially, a utility submits reams of information to the city relating to investments in infrastructure and operational costs. The goal of the city, and ultimately the PUC on appeal, is to ensure that the proposed rates are fair, just, and reasonable.

Q What is a city’s role in setting IOU electric rates?

A. When a rate increase is submitted to a city, the city council in practice usually denies the increase or suspends its implementation. Because the case will eventually wind up at the PUC, those actions give the city time to work with lawyers and consultants to review whether the increase is justified.

As a matter of course, cities that seek to participate in the rate-setting process join coalitions. The pooling of resources with a coalition avoids duplication of effort. And when the case ultimately ends up before the PUC, the cities present a unified front and reduce costs. Under state law, the utility seeking the increase pays for the legal and consulting fees of the cities. Those costs can easily reach into the millions of dollars, and they are added to the rate increase to be paid for by customers.

For a number of years, many city officials have believed that they are the only thing standing between utility companies and their constituents. That is because the PUC, understaffed and underfunded, does not have the resources to ferret out unnecessary increases in the reams of paperwork provided by the utility as justification. It is a fact that municipal intervention has saved money for customers. In one 2010 case, municipal intervention reduced a transmission and distribution company’s rate increase from $253 million to $130 million. If cities are denied original jurisdiction, or the ability to intervene (and to be reimbursed for that intervention), electric rates would undoubtedly go up. ★

Excerpted from “Legal Q&A: How do Texas cities get electricity?” published in Texas Town & City, April 2011.