LYNDON B. JOHNSON SCHOOL OF PUBUC AFFAIRS POLICY RESEARCH PROJECT 
• 

A Report by The Utility Regulation Polley ReS«JrCh Project 
·Lyndon B. Johnson School ofPublic A/fain The Unlvenlty ofTeXIU flt Austbl 1975 
©1975 The Board of ltepnts ·The \l'nivenity of Tau 
Price: $3.$0 # 
PREFACE 
Due to greater consumer demands and the rising cost of capital, utility industries in Texas have been forced. to seek rate increases to improve and ex­pand needed facilities. In some cases requests for rate adjustments have led to public controversies and court battles that have greatly prolonged the rate­making process. In others, regulatory bodies have seemingly yielded to the utility companies without an adequate study of their requests. 
Both the need for prompt attention to rate increases and the desire to protect the consuming public led to an examination of utility regulation in Texas. Conducted within the framework of an LBJ School Policy Research Project during the academic year 1974-75, this study seeks to explore the issues raised by all parties at interest and to recommend courses of action that affect the immediate and long-range future of the utility industry. 
Marlan Blissett, Project Director 
ii 

POLICY RESEARCH PROJECT PARTICIPANTS 

Chet 	Allerhand, B.A., (Political Science), Franklin and Marshall College 
Bruce B. Byron, B.A., (Government), The University of Texas at Austin 
Mary 	Ann Coursey, B.A., (Political Science), Southern Methodist University 
Daniel c. Frederick, B.A., (Political Science), Southern Methodist University 
Alfred Giles, IV, B.A., (Zoology), The University of Texas at Austin 
Jane 	Ann Hart, B.A., (Antropology), The University of California at Santa Barbara 
Traci Harte, B.A., (Art History), Stanford University 
R. 	Keith Hopson, B.A., (Political Science), Austin College 
Linda Look, B.A., (Government), The University of Texas at Austin 
Malcolm C. MacDonald, B.A., (Economics), University of Notre Dame 
Richard C. Rue, B.A., (Political Science), University of Wisconsin-Madison 
Herman M. Schwartz, B.A., (Sociology), University of Arkansas 
Cindy L. Sesler, B.A., (History), The University of Texas at Austin 
Peter C. Weingarten, B.A., (Political Science), University of Wisconsin-Milwaukee 
David West, B.A., (Political Science), Austin College 
Julius E. Whittier, B.A., (Philosophy), The University of Texas at Austin 
iii 

Marlan Blissett, Project Director, Associate Professor of Public Affairs, Lyndon 
B. Johnson School of Public Affairs; B.A., (Government), Texas Technological University; M.A., (Political Science), University of California (Berkeley); Ph.D., (Government), The University of Texas at Austin 
Dagmar Strandberg Hamilton, Assistant Professor of Public Affairs, Lyndon B. Johnson School of Public Affairs; A.B., Swarthmore College; J.D., Univer­sity of Chicago and American University Law Schools 
G.~. Williams, Jr., Assistant Professor of Public Affairs, Lyndon B. Johnson School of Public Affairs; A.B., (Politics), Princeton University; Masters of Public Policy, University of Michigan; Ph.D., (Urban and Regional Plan­ning), University of Michigan 
iv 

TABLE OF CONTENTS 

PREFACE 	ii 
POLICY RESEARCH PROJECT PARTICIPANTS 	iii 
SUMMARY OF RECOMMENDATIONS 	vi 
PART 	I: RATE REGULATION 1 Introduction 2 Chapter I: Introduction to Utility Rate Regulation 9 Chapter II: Utility Finance 21 Chapter III: Legal Framework for Local Regulation in Texas 54 Chapter IV: Utility Rate Structure 70 Chapter V: Uniform Systems of Accounting 86 Chapter VI: The Test Year in Utility Rate-Making 97 Chapter VII: Purchases Gas Adjustment Clauses 106 Chapter VIII: Reconunendations 112 
PART II: PUBLIC UTILITY SERVICE QUALITY: THE NEED FOR REGULATORY REFORM IN TEXAS 115 Chapter IX: Introduction, Methodology, and Summary of Findings 116 Chapter X: Resource Allocation for Texas Utilities 130 Chapter XI: Quality of the Consumed Product 143 Chapter XII: Government Intervention in Utility Service Extension 153 Chapter XIII: Protection of Consumer Rights 159 Chapter XIV: Social Costs in Public Utility Service 174 
PART 	III: A Model Bill for Utilities Conunission 184 
v 

SUMMARY OF RECOMMENDATIONS 
RATE REGULATION 
UTILITY FINANCE 
Regulatory bodies should allow rate levels that are sufficient (1) to pay higher interest costs on additional debt and equity capital, (2) to strengthen credit ratings to minimize interest charges, and (3) to create an equity ratio sufficient to protect bond marketability. 
Under present conditions, a return on equity of at least 15 percent per annum may be required to meet these objectives. 
UTILITY RATE STRUCTURES 
Utility rate structures should be redesigned (1) to insure a level of utility service adequate to meet basic residential consumption needs and (2) to discourage wasteful and inefficient use of energy resources. 
Under the present declining block structure, the average price per unit of energy decreases as consumption increases; such a system is neither economically justifiable nor compatible with stated policy objectives. Each alternative rate structure discussed in this report--inverted rates, flat rates, peak-load pricing, and life-line rates--is an improvement over the present system in terms of both equity and conservation. The unpredictable element in each is its ability to meet utility revenue requirements. Since utilities have both expertise and a vested interest in maintaining the financial viability of the industry, they should assume the initiative in reforming rates to achieve these goals. 
vi 

UTILITY ACCOUNTING SYSTEMS 
All Texas utilities of comparable size and type should be required to adopt the same uniform system of accounting. 
In designing the accounting system an effort should be made to balance the benefits of using updated methods (e.g., the future test year and price­level accounting) with the costs of varying from the current accounting re­quirements of the Federal Power Commission, the Securities and Exchange Com­mission, and other regulatory authorities. 
THE TEST YEAR IN UTILITY RATE REGULATION 
Regulatory bodies possessing substantial staff and budget capabilities should use a future test year which coincides as closely as possible with the period in which prospective rates will be in effect. 
Regulatory bodies possessing only moderate staff and budget resources should use a mixed test year in setting prospective rates for utilities. 
Regulatory bodies possessing little or no staff and budget capabilities should use the historical test year. 
., 
Utility regulation in Texas should incorporate a system of reporting and mni­toring procedures to facilitate checking the accuracy and reliability of test year data. 
PURCHASED GAS ADJUSTMENT CLAUSES 
Gas utilities should be allowed to adjust their rates quarterly through the use of mandatory purchased gas adjustment clauses. 
Rate increases effected through purchased gas adjustment clauses should be subject to refund if found to be unwarranted upon review by the proper regulatory authority. 
vii 

GENERAL RECOMMENDATIONS 
The state government should: 
(1) 	
encourage energy conservation to decreas~ demand for natural gas and electricity; 

(2) 	
pay increased attention to the relation of costs to benefits in regu­lation, particularly in areas of environmental pollution; and 

(3) 	
conduct independent studies to confirm utility forecasts of future utility demand, construction costs, and the effect of price and rate structures upon demand. 


Consumers in Texas should be made more aware of the costs of individual energy consumption. 
State and local government should (1) encourage the owners of private buildings, especially apartment buildings, to require lessees to be responsible for their own utility bills and (2) enact statutes requiring all public office buildings to have electricity meters for each tenant. 
QUALITY OF SERVICE 
RESOURCE ALLOCATION FOR TEXAS UTILITIES 
1. 
To assist long-range planning decisions, we urge that the State of Texas 
examine information generated and disseminated by the Federal Government that 
may deal with resource supplies, consumption and possible shortages~ To the 
extent that Federal information does not meet Texas' needs, state government 
should act to provide that information. 


2. 
To insure that utilities will have the ability to develop new inputs and 
technology to meet society's needs, we feel that utility rates should be suf; 



'ficiently 	flexible to allow funds for research and development to be included in the rate structure. To the extent feasible, government should assist and encourage utility research. 
3. 
In recognition that land is a vital resource input in production and trap~­
mission of utility services, we urge state policies encouraging efficient and 
~roper use of land including joint rights-of-way and planning for future plant­
sites•. 


4. 
we .are content with neither pure market allocation of utility resources, 
nor are we content with present government controls. We recognize that utili­
ties must compete in resource markets with other industries. To insure that 
resource prices give proper signals, we feel that governmental price controls 
and olicies such as subsidies, which may result in over consumption of re­
sources, shou d be reviewe an correcte • By ma ing necessary corrections, 
prices will more accurately reflect true scarcity of these resources. 


5. 
To insure that utilities have adequate technical personnel, we reconnnend that state-wide vocational education programs bQ sensitive to manpower needs of the utility industry, particularly in the state's rural areas. The state should assist in the flow of information concerning available personnel and the various Texas utilities. 

6. 
In:view of the fact that the unavailability of an input for utility service has the potential of creating a crisis situation, we feel that the state of Texas should establish an authority to allocate resources if severe scarcities arise. This already exists for land resources through the power of eminent domain. In the event of a utility crisis, the state should use all such powers to correct that situation. 


viii 

QUALITY OF THE CONSUMED PRODUCT 
(1) 	
The state should design service performance standards for the natural gas, electricity, te·tephone 1 water, and cable televisfon utilities, and also any other services . which are considered ·to ·be <essential public utilities, 

(2) 	
The state should monitor and evaluate service performance by means of regu­lar tes·ting and inspection. 

(3) 	
Monitoring results should be made available to rate-making bodies for use in calculation of future rate schedules. 

(4) 	
The state should require, when reasonable, performance by utilities to standards. 

(5) 	
The state should prescribe and enforce emergency regulations governing pro­vision and allocation of utility service to customers during outages, cur­tailments, shortages, and any other emergency situations, such as hurricanes, natural disasters, acts of God, etc. 


GOVERNMENT INTERVENTION IN UTILITY SERVICE EXTENSION 
(1) 	
Government should define the obligation of utilities to anticipate future demand for services. 

(2) 	
Government should define the obligation of utilities to make extensions of service in unincorporated areas where there is a reasonable need. 

(3) 	
An independent mechanism should be established to make a fair determination of service need and to allocate among consumers the costs of the extension. 

(4) 	
Government should undertake to establish priorities for allocating services among existing users and between current and future users in the event that resources cannot be secured to meet the needs of both. 

(5) 	
Government should specify the obligation of utilities to coordinate planning of extensions of service with the growth policies of government. 

(6) 	
We further recommend that additional research evaluate formal utility ser­vice districts in which utilities would be legally obligated to provide applicants in that district with service and uport which other utility com­panies would not encroach. 


ix 

PROTECTION OF CONSUMER RIGHTS 
1. 	The Legislature should pass comprehensive legislation designed to define and enforce consumer rights artd utility responsibilities related to the consumer relations. At a minimum, such legislation should include pro­visions which: 
a. 	
Require utilities to provide reasonably prompt repair service to all consumers; 

b. 	
Require utilities to establish and pursue equitable, reasonable, and clear guidelirtes for deposit requirements and service discontinuance; 

c. 	
Require utilities to provide reasonably adequate information to appli­cants for service, including information concerning: 1) alternative service and rates available to each consumer~ 2) conditions under which service will be provided, and 3) service discontinuance procedures; 

d. 	
Require utility companies to provide information to present consumers regarding rate increases going into effect; and 


2. 	A study should be conducted into the gross-net billing practices of utili­ties to determine their reasonableness, their necessity, and their effect upon service costs, availability, and quality. 
SOCIAL COSTS IN PUBLIC UTILITY SERVICE 
We 	recommend: 
1) 	The establishment of rules and regulations requiring the undergrounding of lines arid encouraging joint use of uridergrouriding, where reasonable. 
2) 	The establishment of authority to determine the price of social cost abatement, to enable this cost to be inclUded in the rate-making base and thus, allow that cost to be paid by the consumers and the stock­holders of the utilities. 
3) 	The establishment of authority to coordinate all state agencies who have responsibilities impacting on public utilities. 
x 

4) 	Establishment of responsibility for approval and coordination of rights­of-way in rural areas and similarly encourage municipalities to coor­dinate rights-of-way. 
5) 	Establishment of authority for coordinating joint use of facilities, and authority to compel irttercortrtectiorts between utility companies, where possible. 
xi 

PART I: RATE REGULATION 

INTRODUCTION 
This report deals with three aspects of public utility regulation. Part I examines critical issues in the practice of utility rate regulation, with special emphasis on regulation at the local level. Part II addresses the obligations of the public utility industry to its clientele and to society in a discussion of quality of service regulation. Part III highlights key issues in the structure of the regulatory process and includes model legislation to establish statewide utility regulation in Texas. 
Two concepts are fundamental to understanding the issues developed in this report. One is the idea that public utilities are set apart from other types of corporations by three characterist:'.cs. First, they exist as monopolies in an economic system that has traditionally viewed monopolies with abhorrence! Second, because of the nature of their service, utilities are said to be "affected with a public interest." Third, they are subject to stringent government regulation of their rates, service standards, and financial procedures. 
Utility companies are generally granted exclusive operating franchises by some level of government because the economics of the utility industry are such that utility services can be provided more efficiently, and therefore at lower rates, by single rather than multiple suppliers. Efficiency is essential in the provision of utility services because these services are deemed by society, through its elected government officials, to be essential to the maintenance of a desired standard of living. 
The price society pays for the efficient provision of utility services is the loss of pressures which ordinarily regulate prices and service quality in a competitive market. In a market with multiple suppliers of similar goods or services, constant competition among the suppliers for a larger portion of the 
2 
market regulates the level of prices and quality of the product. Because utility companies are monopolies, however, there is virtually no competition in the utility service market and there must be a substitute for market pres­sures to protect the consumer from excessive rates and inadequate service. That substitute has traditionally been government regulation. 
The-second fundamental concept is the notion that government regulation of public utilities involves a delicate balancing of the interests of the public on one hand and of the utility industry on the other. In achieving a proper balance, the regulator must resolve a wide variety of conflicts --conflicts between consumers and the industry, conflicts among different classes of con­sumers, and conflicts among the suppliers of various utility services. Effec­tive regulation requires not a single decision or series of decisions, but an on-going process for the adjudication of conflicting demands. 
CONSUMER INTERESTS 
On the consumer side of the regulatory balance are interests related pri­marily to the pricing and quality of utility services. Determining the con­sumer's preferences regarding the level of rates presents few problems, but the regulator faces a number of difficulties in determining what level of quality the public desires and in reconciling the desired quality of service with consumer demands for low rates. 
Concern with product quality generally involves the following product char­acteristics: 1) the product's ability to perform the functions for which it is intended, 2) the product's uniformity to all consumers in similar circumstances, 3) the product's availability upon demand, and 4) safety to the consumer of the product. 
3 

Service availability is of further interest to utility consumers. This concern usually focuses upon the following: 1) provision of the product to all present consumers regardless of increases in their demands for service, 2) prompt restoration of service after service breakdowns as a result of equip­ment failure or damage, or other interventions in service flow, and 3) provision of services to new consumers as population growth within an area increases. 
Consumer Relations 
Although conswner interests regarding the consumer relations of utility companies also involve service availability, particularly as it pertains to the impact of utility consumer relations decisions upon service availability to the individual consumer, they primarily focus upon the "fairness" of a utility company's consumer relations policies and practices. The two areas of primary concern to conswners are deposit practices and service discontin­uance. Generally, consumers demand the following: 1:, that utility companies do not act arbitrarily or capriciously in their decisions regarding these matters, 2) that consumers in similar circumstances be treated similarly, 3) that deposit requirements and service discontinuance policies be designed in a manner which will protect the company from losses incurred by \Dlpaid bills, and 4) that deposits be required and service discontinued only if such practices actually serve to protect the company from losses. 
INTERESTS OF THE INDUSTRY 
On the industry side of the balance, the predominant interest is in main­taining a level of rates which is at least sufficient to attract the investor capital sought by the industry and to provide desired levels of service. Like 
4 

the consumer's demand for low rates, the industry's rate preferences are easy to determine but difficult to evaluate. 
Utilities are regulated monopolies whose primary interest is to maximize return to investors while providing reliable service to customers at prices that are regulated to be both "reasonable" to the consumer and to provide a "fair" rate of return to investors. Under this system, prices fixed by regulation be­come the dominant constraint to profits. The utility which best illustrates the historical and future reaction to price regulation is the investor-owned electric utility. 
Historically, electric utilities have taken the factors inherent in the in­dustry (economies of scale, regulated prices, increasing demand) and combined them with favorable external !factors (low interest rates, inexpensive fuel, reasonable construction costs) to produce a continually growing sales base. Until the late 1960s, the costs of production and expansion decreased per unit of service while prices, due to the lag time required for regulatory approval, were constant or slightly decreasing. Thus growth brought greater returns and spurred more growth, and a cycle developed which quite adequately served a growing nation's need for power. 
The use of production and sales growth to increase return on investment had one major drawback--it required borrowing substantial amounts of capital. Utilities, especially electric utilities, are capital intensive and require large sums of investment to generate revenues. A utility requires more than four times as many assets to generate the same revenues as does an industrial firm. Such large investments can be funded only partially by revenues. The remainder must be raised thro~gh the sale of stocks and bonds. Having a large debt and needing to increase that debt makes utilities especially vulnerable to inflation and tight money markets. 
5 

With the advent of high inflation and the energy crisis, utility finances has become a major problem. The growth cycle no longer produces greater returns to attract more capital. The rising costs of energy have increased the costs of production and construction faster than economies of scale can decrease them. 
Inflation has driven up interest rates and the cost of maintaining or ex­panding investment capital. The decreasing supplies of fossil fuels have forced costly plant conversions and construction projects to shift ~lectric generation from natural gas to coal and nuclear energy. Pollution standards have further increased costs for low emission fuels and for anti-pollution devices. 
The primary interest of utilities is finance, and attracting capital re­quires prices which exceed costs sufficiently to allow the utility to compete for capital at current interest rates. A Federal Power Commission study pre­dicts that, even with a moderation of demand, private electric utilities will need to invest an additional $320 billion by 1990--four times the present total investment. In the future, as utility bills rise and consumer resentment climbs, regulators will be placed in the difficult position of increasing prices to pro­duce a "fair rate of return" on investment sufficient .to attract an ever growing percentage of the total private investment capital available to the nation. 
Government aid will be necessary in the transition from cheap to expensive energy to insure equitable distribution of the product and its costs. But whether the government assists in determining allocation or not, the costs of electricity must still be paid. Regulated prices and rate structures will de­termine how much each group of consumers pays, how much they will use, and how much will be produced in the future. 
The keystone to bridging future supply and demand will be finance. Although government regulation and effective management will be large factors in attracting future capital investments, the basic problem is whether the consumer will pay the 
6 

added costs. With long lead times required to plan and to construct future 
generating facilities, many of the costs of construction and finance must be borne now for sources to be received a decade or more into the future. Attempt­
ing to determine what electric demand will be ten years hence at higher costs will be the predominate interest of regulators, utilities, and consuners alike. The only true mode of quantifying this demand will be the market place. The limits to future electrical demand will be decided new by how much return regu­
lators will allow utilities to finance tomorrow's electrical supply. 
STRUCTURE AND SCOPE OF THE REGULATORY PROCESS 
In addition to the interests to be balanced by the regulatory process, a number of issues related to structure and scope of utility regulation are covered in this report. These are presented in Part III in the context of model legisla­tion for establishment of a state utility regulatory commission in Texas. 
The purpose of a regulatory co1ID11ission is not to punish or to reward those regulated, but to assure the accountability to the public of all parties to the regulatory process. A regulatory commission fulfills three quite different func­tions. One is judicial in character: the adjudication of disputes. A second is legislative: formulation of public policy. The third is executive: in some cases, a co1ID11ission is required to perform purely administrative tasks; in every case, the co11D11issioners must manage the operations of their own agency. As a means of settling disputes, the multi-membered commission has the advantage of protecting participants against the possibility of arbitrary decisions. As a means of formulating policy, it may have the advantage of assuring that consid­eration is given to conflictidg points of view. 
The aim of regulation is to provide a rate of return that is not confisca­tory and which allows the utility to attract capital, while at the same time 
7 

providing the best possible service at the least possible cost to the consumer. No method developed to date performs this function perfectly. Beverly Moore Jr., in The Monopoly Makers, states that regulation relying on a rate base and a rate of return causes companies to look for profit opportunities in various accounting strategies such as expansion of the rate base, cross-subsidization of other firms, retarded or distorted innovation, and internal inefficiency. These problems can only be dealt with by a standardized, strictly enforced program of regulation with a minimum amount of regulatory lag. The basics, such as the regulatory formula, the way to arrive at the rate base, the parameters of a fair rate of return, the allowable costs and depreciation method, and the reporting and accounting proce­dures, should all be set forth and enforced by the state regulatory agency. The specifics, such as the exact rate 0f return allowed or a specific accounting for­mat should also be left to the commission to determine through the hearings pro­cess. It is desirable to have maximum flexibility for these different situations, but abuse is rampant without standardized procedures and strong penalties. 
8 

CHAPTER I: INTRODUCTION TO UTILITY RATE REGULATION 
Public utility companies, like most other types of companies, rely heavily on investor capital to build the facilities they need to maintain and expand their operations. To obtain investor capital, the utilities must offer investment op­portWlities on capital markets in competition with alternative opportunities. Thus utility companies must be able to offer investment opportunities which, in comparison with other opporttmities, are sufficiently promising to the investor to attract desired amo\lllts of capital. 
The key factor for any business enterprise in attracting investor capital is the profitability of the enterprise. Since the rates, and therefore the profits, of utility companies are subject to government regulation, the regulator wields life-or-death power over the utility company's ability to attract capital. The task of the rate regulator is to allow the utility the most reasonable level of rates which will generate the profits required to attract all needed investor capital. 
THE NATURE OF RATE REGULATION 
The two basic elements of utility rate regulation are (1) determination 'Of the utility's rate base and (2) determination of the utility's rate of return. These two elements are of paramomt importance because together they determine the return to the utility on invested capital, and it is this return which deter­mines whether the utility will be able to attract additional investor capital as it is needed. 
The rate base is the dollar value of those utility properties which are directly used or useful in the provision of utility services for a given clientele. 
9 
.The rate of return is the percentage of the total rate base invested which the 
. utility is allowed to recover annually. The return (to the utility) is the utility's income from operations, made possible by the capital investment re­flected in the rate base, after payment of operating expenses and before payment of monetary obligations to stockholders. The relationship between the rate base, the rate of return, and the return is explained by the equation: return = rate base X rate of return. 
The uti!ity's income from the rates it charges its customers must cover both 
the utility's return and its operating expenses. Ideally, rates are established 
on the basis of estimated operating expenses plus a return sufficient to attract 
the capital required to maintain and, when appropriate, to expand utility opera­
tions. 

The primary reason for regulatory adjustment of utility rates is to regulate the utility's overall rate of return. The rate of return determines the utility'3 return on its rate bas.e investment. Since income from the rates charged utility customers constitutes that return, manipulation of utility rates effects cor­responding changes in the utility's rate of return. As Chapter IV of this report explains, the structure of utility rates determines how the burden of the utility's return is distributed among the various classes of utility customers. 
Differences in systems of utility regulation arise in part from the different methods employed by utility regulators in determining the rate base and a fair rate of return. In general, the rate base may be established on the basis of orig­inal cost, reproduction cost new (RCN), or some administratively determined "fair value". The rate of return is usually determined on the basis of two factors: 
(1) what the utility requires to meet its operating expenses, and (2) what the ir.­vestor requires in future returns on his investment. Here, care must be taken to avoid confusing the rate of return which the regulator allows the utility and thP 
10 

rate of return which the utility offers the investor. The ,rate of re~urn· to the · 
utility is regulated, whereas the rate of return to the investor is not. 
RATE BASE DETERMINATIONS 
"Original cost", for rate making purposes, refers to the original cost of constructing utility facilities. It is often phrased as the "original cost to the original owner" of utility properties and includes the cost of acquiring _the lands upon which the utility facilities are c9nstructed. 
To further clarify what original cost is, it may be helpfui to mention what original cost is not. In the case of Harrisburg Steel Corp. v. Pennsylvania Public Utilities Connnission,1 the Court held that the term "original cost" cannot be con­strued to mean the amount which a utility company may have paid another company for purchase of facilities previously devoted to public service. The decision rendered in National Water Works Co. v. Kansas City,2 held that the terms "original cost" 
• 
and "present value" are not equivalent. Thus, as stated in Scranton-Spring Brook Water Service Co. v. Pennsylvania Public Utilities Commission,3 the term "original cost" is equivalent to the phrase "original cost when first devoted to the public service" and does not mean the cost to the present owner, or the book cost of the property, or the present value of the property which may reflect increases in market value occuring subsequent to construction. 
"Reproduction cost new" refers to the cost of reproducing at present prices the facilities of a public utility in their original location and surroundings and subject to whatever local conditions might reasonably be expected to affect costs. West Virginia Natural Gas Co. v. Public Service Connnission4 recognized that RCN 
represents the cost which would actually be required to build a plant identical in all respects to an existing plant, as distinguished from the cost of building an ideal plant to supply the same service now being supplied by an existing plant. 
11 

Thus RCN is a theoretical rather than a practical concept, since no utility company 
~ould be likely to literally replicate an existing facility if it were somehow 
destroyed in the future. 
"Fair value" represents a middle ground between original cost and reproduction 
cost new (RCN). It is an administrative determination rather than a matter of 
record or a quantity which lends itself to accurate estimation. It is, therefore, 
a less precise measure of the rate base than either original cost or reproduction 
cost neW. 
In states which determine the rate bases of public utilities on the basis of fair value, determining the fair value figure begins with deciding what percentage of that figure original cost and RCN will each represent. The original cost and RCN estimates of the utility's rate base are then multiplied by their corresponding 
percentages. The resulting products are added together to arrive at the fair value determination. 
For example, assume that a utility has an original cost of $1 million and an RCN of $2 million. Assume further that the public utility regulator has decided that the fair value rate base figure should reflect a 40 percent weighting of the 
original cost figure and a 60 percent weighting of the RCN figure. In this case, the fair value figure would be 40 percent of $1 million plus 60 percent of $2 mil­lion or .40($1 million) + .60($2 million). The end result of this calculation is $400,000 plus si.2 million, or $1.6 million. 
As will be detailed in Chapter III of this report, the relationship between original cost, reproduction cost new, and fair value has been largely determined by two landmark United States Supreme Court cases. In the 1898 case of Smyth v. 
5
~' the Court ruled that utility rates must be high enough to afford the utility a fair return on the fair value of invested capital. Although it defined 
neither fair return nor fair value, the Court ruled that "just and right" weight 
12 

TABLE 1 
A COMPARISON OF STATE METHODS FOR RATE BASE DETERMINATION 

STATE 
FPC Fee• 
ALABAMA ALASKA ARIZONA 
ARKANSAS CALIFORNIA 
COLORADO CONNECTICUT DELAWARE5 DISTRICT OF COLUMBIA FLORIDA 
GEORGIA 
HAWAII 
IDAHO ILLINOIS INDIANA 
IOWA 
KANSAS KENTUCKY 
.. 
LOUISIANA MAINE 
MARYLAND 
MASSACHUSETTS MICHIGAN 
MINNESOTA1 MISSISSIPPI 
The method of determining rate base specifically prescribed by 
c:: 
i .!a 
~ 
~ 
~ :§
...=' 
:I 
. rn 
8 c!
1¥ 
x 
x 
x 
x 
x x 
x 
x 
x x x x x 
x x 
x 
x 
x 
x x x x
x4 
x 
x 
x x 
Section Number or Case Citation 
As 4205.441 80 Ariz. 145 
366.06 Electric and Gas 
364.03 Telephone 
D. 1167 Hawaii Electric Co. 
U-138 Davenport Water Company 
M.S. 237.08 Telei>hone only Method Prescribed 
Original Cost 
Original Cost 

Original Cost  Modified '  
Original Cost  
Fair Value  RCN determined by either trending or pricing.  
Depreciation determined by age, life ratio  
or percent condition of original cost.  
Original Cost  Depreciated original cost.  
Original Cost  
Original Cost  
Original Cost  
Fair Value  I  
Other  Any method of valuation so long as the end  
result is not unjust nor unreuonable.  
Prudent Investment  Prudent investment for electric and gas, for  
Other  telephone statute requires only that the  
rates be fair, just, reasonable and suffi­ 
cient. For all practical purposes, the  
Commission employs original cost.  

Original Cost Prudent Investment Original Cost 
Original Cost Original Cost Fair Value 
Original Cost 
Original Cost Original Cost Reproduction Cost Prudent Investment Other Original Cost 
Original Cost 
Fair Value 
Original Cost Original Cost Prudent Investment 
Other Fair Value 
Brief Explanation of Method 
'. 
Capital structure and other element of value recognized by law. 
Original cost or reappraised value or other factors if relevant. Original cost plus prudent acquisition•cost, other also if relevant. 
Evidence of current value based upon TOC, CPI, IPI, reproduction cost, or appraisal accepted. 
If plant carried is imprudent investment, we do not include that investment in original cost rate base. Electric statute specifies fair value, cost, etc., to be considered. Gas and telephone statutes do not specify. 
Method prescribed, by statute, Current Value. Used CPI and Bell TPI, trended plant and reserve. 
In arriving at fair value, original cost, reproduction cost, and prudent investment would all be considered. 
13 

Table I (continued) 
The method of determining rate base specifically prescribed by 
STATE 
.. 
; 
Oi
v; 
MISSOURI MONTANA 
NEBRASKA 1 NEVADA NEW HAMPSHIRE 
NEW JERSEY 
NEW MEXICO 
x 
NEW YORK NORTH CAROLINA 
x 
x
NORTH DAKOTA 
x
OHIO 
OKLAHOMA5 OREGON PENNSYLVANIA 
x 
x
PUERTO RICO 
i:: 
0 
'= 
.!! &,
.. 

ii: 
x 
x 
x 

i:: 
0 
~:a 
0 .. 
uo 
x 
x 
x 
x x x 
x 
x 
x 
Section Number or Case Citation 
308SW 2nd 704 
Tobacco River Power vs. MRRC 
75-609 
5 NJ 196, 57 NJ Super 158 
68-S-l 4 NMS.' 1953 
49-02-03, NDCC 
4909.05 R.C. 
Method 
Prescribed 
Fair Value 
Fair Value 
Other 
Original Cost Original Cost 
Other 
Fair Value 
Original Cost Fair Value 
Prudent Investment 
Reproduction Cost 
Original Cost Original Cost Fair Value 
Original Cost 
Brief Explanation of Method 
Consider original cost and trended original cost and other relevant factors. Determined by trending Handy Whitman Index used by most companies. Depreciation reserve has been trended. Must consider current value. Most use trended investment. 
No particular method or combination of methods. Board must consider all evidence submitted. 
No State Supreme Court decision except with general statement of "Fair Value." Several district court decisions. Must consider history and development of the property and business, original cost, reproduction cost as going con­cem and other elements recognized by laws of land. 
In addition to the use of trending and various indices, the Commission may and does combine any and all other factors it deems relevant to the final fair value determination. The statute provides this wide discretion by the Commission. The book depreciation ratio is maintained in the final fair value determination. 
Amount invested by utility, any excess over original cost allowed in rate basis if approved by the Commission. 
By appraisal in some cases and by trending in others. Always RCN less actual (as estimated by engineers) depreciation. 
The fair value approach utilized by this Commission gives weight to original cost, trended original cost and/or depreciation reserve requirement is utilized for rate making. 
14 

Table I (continued) 
The method of  
determining  
rate base  
specifically  
prescribed by  
=  
.g  
=  
STATE  ~ a :! Cl)  -3 "°.. Cl'.  ~.2;; .:. o<> u~  Section Number or Case Citation  Method Prescribed  Brief Explanation of Method  
RHODE ISLAND  x  Original Cost  
SOUTH CAROLINA SOUTH DAKQT A 1  x x  Original Cost  
TENNESSEE TEXAS2  x  x  x  Alvin Case  Original Cost Adjusted "Y_a!ue  Adjusted value determined by combining  
Vernon's Ann.  original cost less depreciation and cunent  
Civ. St. ut. 1446 C  cost less adjustment for both present age  
sections 1 to 91.  and condition. The Commission has dis­ 
cretion to weight original cost between 60%  
and 75% and current cost between 25% and  
40%.  
UTAH  Original Cost  
VERMONT  x  x  Original Cost  Original Cost and Prudent Investment.  
Prudent Investment  Judgement of the Commission under its  
Other  general authority to determine just  
and reasonable rates.  
VIRGINIA VIRGIN ISLANDS3•5  x  '  Original Cost  
WASHINGTON  19Wn. (2nd)  Other  Any method or combination of methods  
200,244  warranted by law.  
WEST VIRGINIA  Original Cost  
WISCONSIN  x  Other  Original cost of utility plant used and  
useful in providing service.  
WYOMING  x  x  Original Cost  
JAMAICA  Other  As appears in the books of the company.  

Source: 
Reprinted from: Federal and State Comminion Jurisdiction and Regulation ofElectric, Gas, and Telephone Utilities -1973. 
(Washington, D.C.: Federal Power Commission) p. 24. The State of Texas has been amended to reflect 
~of the Public Utility Regulatory Act, 197 5. 

1 No Commission regulation of electric or gas utilities. 
2 Amended to reflect passage of the Public Utility Regulatory Act, 1975. . 
3Etectric facilities are Government owned and operated and are not regulated by the Commission. No natural 

gas service in the Virgin Islands other than "bottled gas" which is not regulated by the Commission. 
4 Etectric statute specifies fair value, cost, etc., to be considered. Gas and telephone statutes do not specify. 5 1967 data -no reply to 1972 survey. 
15 

should be given in rate making to the original cost of construction and to the present cost of replacement. The "fair return on fair value" criterion was mod­ified in 1944 with the Court decision in Federal Power Commission v. Hope Natural Gas Company.6 In this case, the Court ruled that the regulatory commission shouli be permitted to establish rates in any manner which produces reasonable end results. 
Since the Hope decision there has evolved a wide range of rate making processes The method used by each state to determine utility rate bases is indicated by Table 
1. 
RATE OF RETURN DETERMINATIONS 
As mentioned previously, the utility's rate of return is the percentage of the total investment represented by the rate base which the utility is allowed tc recover on a yearly basis. Out of its return (total income from rates le~s oper­ating expenses), the utility must be able to offer investors a rate of return ade­quate to attract the additional capital required by the utility. Thus, a "fair rate of return" is a rate of return to the utility which will allow the utility t ,) meet its operating expenses and to attract the amount of additional capital neede~ to provide adequate continuing service at reasonable rates. As explained in Chapter VI, a utility's operating expenses can be estimated on the basis of future, histori­cal, or mixed test years. 
Since the Hope decision, regulatory commissions have attempted to base their rate of return findings as much as possible on directly ascertainable revenues and costs. As Chapter V of this section explains, the lack of uniform accountin~ systems among utility companies can complicate rate of return determinations. Also, not all costs of capital are directly ascertainable, since there are no contractual returns on equity (as there are on preferred stocks and bonds). Furthermore, future costs of bonds, as well as connnon and preferred stocks are subject to daily mark£'t fluctuations. Thus, the rate of return determination must always be made at least partially on the basis of estimates. 
16 
There are essentially four major considerations in estimating the utility's cost of capital: (1) the capital structure of utility financing, (2) the cost of debt, (3) the cost of return on preferred stock, and (4) the cost of return on coumon stocks. 
CAPITAL STRUCTURE 
A utility uses several types of capital to maintain its operations, with each type having its own cost. The cost of capital to the utility is the weighted average of all these capital costs. The weight ascribed to each capital cost is the proportion of the total capital cost which each cost constitutes. 
For example, a typical utility might have a capital structure consisting of 50 percent debt, 15 percent preferred stock, and 35 percent common stock. If the capital costs associated with each of these types of capital are 4 percent, 5 per­cent, and 9 percent respectively, the cost of capital would be 5.9 percent. (Total capital costs = (50% X .04) + 35% X .09) + (15% X .05) = 5.9%.) Thus, a utility's capital structure is an important consideration in setting the utility's fair rate of return because it determines the total cost of capital which the utility must pay from the return on investment. 
Cost of Debt 
The cost of debt is the price which a utility must pay for the use of borrowed capital. The cost of outstanding debt is readily discernable from contractual records. The cost of additional (future) debt, however, must be estimated on the basis of economic projections. Thus, in figuring the fair rate of return the cost of debt is, at least in ~art, an estimate. 
17 
Cost of Preferred Stock 
The cost of preferred stock can be determined from the records of stock transactions. It should be noted that utilities are relying increasingly on bonds rather than preferred stock because investors find utility bonds are more attractive due to their tax exempt status. 
Cost of Common Equity 
In determining the cost of common equity, or the return on common stock which investors expect to receive, the problem is to establish what determines the market price of common stock. Regulators must rely on estimates for the cost of common equity since there are no contracts specifying the return to be paid on common stock. 
18 

REFERENCES 
1. 109 A.2d 719, 723; 176 Pa. Super. 550 
2. 62 F. 853, 865, 10 c.c.A. 653; 27 L.R.A. 827 
3. 67 A.2d 735, 739; 165 Pa. Super. 286 
4. 121 S.E. 716, 95 w. Va. 557 
5. 121 S.E. 716, 95 w. Va. 557 
6. 320 U.S. 591 
19 

BIBLIOGRAPHY 
David A. Kosh, "The Determination of the Fair Rate of Return in Principle and Practice." Practical Lawyer, vol. 12, no. 7, p. 9. 
Alfred L. Parker, "The Regulation of Public Utilities." Natural Resources Journal, vol. 10, no. 4, p. 827. 
U.S. 	Federal Power Commission. Federal and S.tate Commission Jurisdiction and Regulation of Electric, Gas, and Telephone Utilities, 1973. (Washington, D.C.: 1973) 
20 

CHAPTER II: UTILITY FINANCE 
INTRODUCTION 
As utility bills rise, there is much talk about utility companies earning "excess profits", being underregulated, and having inept management. Whatever the merit of these arguments, the most pressing question in the future will be whether projected utility needs can be financed. Although all utilities will have difficulties in raising the investment capital needed to meet the growth in demand predicted under even the most favorable scenarios, the investor­owned electric companies face a particularly difficult situation. This dis­cussion of utility finance is focused primarily on the investor-owned elec­tric utilities; however, the majority of this material is equally applicable to the other major utilities: natural gas, telephone, and water. 
THE UTILITY INDUSTRY'S CAPITAL PICTURE 
THE NEED FOR CAPITAL 
Utilities are "capital intensive" industries. Unlike industries that rely predominately on manpower for production, utilities rely heavily on capital expenditures for physical equipment--dams, generators, transmission lines--in short, the means for capturing, harnessing, and transmitting energy. Although most companies require less than $1 in assets to produce each $100 of revenue, utilities require assets of $3 to $4 per $100 of revenue. (See 
FIGURE 1 

A CAPITAL INTENSIVE INDUSTRY 
Assets Required to Generate One 
Dollar of Sales Revenue 

$3.95 $3.85 
$3.35 
$2.85 
$0.83 
LJ
D
All Mfg. Power AT&T GTE TEL Other Companies Companies (Exel. Independents 
W. Elec.) (USITA) 
(Fortune 500 (Fortune 30 May '74) . Largest July '74 
Source: Public Utilities Fortnightly, January 30, 1975. 
22 

FIGURE 2 

THE UTILITY INDUSTRY'S INCREASING NEED FOR CAPITAL 

120 

Billions 1968 1970 1972 1974 

% IncreaseTotal expenditures for sinceplant & equipment 
1966 161% 
14% 

61% 

52% 

of  
Dollars  
Data : Department of Commerce  
Source: Business Week, Sept. 14, 1974.  

23 

Figure 1) In 1974 the expenditures for plant and equipment by gas and elec­
tric power and telephone utilities were approximately $35 billion or 28 per­
cent of the national expenditure for plant and equipment. (See Figure 2) 
Like other companies, money for these expenditures is only partially funded 
internally by company revenues and the remainder is obtained externally, 
primarily from the sale of stocks and bonds. Due to the high ratio of assets 
to revenues, utilities finance only a tenth of their total capital investment 
from internally generated monies. Most corporations finance more than 
half internally. To raise money, utilities must compete for investment 
capital with corporations that have more revenues to secure their debts and 
are not restricted in raising prices by government regulation. 
SOURCES OF CAPITAL 
Electric, gas, and telephone utilities have traditionally been able to raise the large amounts of money necessary to pay for continued expansion of their services as well as to refinance the debt acquired from past expansion. Utilities have obt~ined this money from four sources: debt capital (primarily bonds), preferred stock, common stock, and earned surplus (accumulated or undivided profits of past periods reinvested in the firm). 
Earned surplus constitutes only a tenth of total capitalization. The re­mainder is raised from debt and stock. The comparison of all four money sources is called the capitalization ratio. A typical utility is capitalized at 54 percent debt, 12 percent preferred stock, 24 percent common stock and 11 percent retained earnings.l This capitalization ratio was derived through cumulative actions of various courts and regulatory bodies. These actions were influenced by the frequently expressed belief that for any given utility company at any given time there exists an ideal capital ratio. The ideal 
24 

capital ratio maximizes the use of lower interest sources of capital--debt 
(primarily bonds)--while not being so "leveraged" as to discourage prudent 
2
investors. Leverage is the use of senior capital (borrowed funds, bonds, and preferred stock) to control the return to common stockholders. If the total capital structure is highly leveraged, there is a high percentage of senior capital and low percentage of common stock. Since the return to senior capital is fixed, any profits over that fixed return can be distri­buted to common stockholders. The fewer the common stockholders, the higher the individual return. For example, with a highly leveraged total capitali­zation of $100,000 composed of 90 percent ($90,000) senior capital and 10 percent ($10,000) common stock, a 5 percent ($5,000) return on total capital must be distributed first to the lower interest, lower risk senior capital 
investors and then to the remainder to the common stockholders. If the rate of return to senior capital were three percent ($3,000), then the remaining 
revenues ($2,000) would be available for distribution to the common stock­holder making a rate of return of 20 percent on their original $10,000 in­vestment. Thus, if earnings are in excess of the fixed interest requirements of senior capital, it is to the advantage of common stockholders to hold as small a percentage of total investment as possible. However, if earnings on total investment fell to 2.5 percent ($2,500), the fixed payments could not be met, the company would default on interest payments, and its credit rating would be seriously damaged. Therefore, it is important to the senior capital 
owners that enough capitaliz~tion is provided through common stock and earned 
surplus that sufficient revenues are available to cover fixed interest charges on bonds, loans, and preferred stock. There are several ways in which risk is minimized to attract capital at low interest rates. The Securities and Exchange Commission (SEC), which regu­
lates all utility holding companies, generally insists upon a capitalization 
ratio of at least 30 percent equity (common stock).3 This prevents past abuses of leverage whereby holding companies would amass large debt to equity ratios and, by investing only a small amount in common stock, could drain off all revenues above the fixed interest charges of senior capital, while risking very little if the company failed to earn more than fixed charges. In addi­tion, most bonds are marketed with protective restrictions limiting additional bonds to a ratio (usually 60 to 75 percent) of net new property added and requiring the total fixed charges on present and additional bonds be covered by earnings of at least twice as much.4 
Thus the capitalization ratio is an important indicator of the risk and earnings potential of a company. With utilities' stability of earnings and the regulatory efforts to prevent abuses, leverage has become an effective tool for building a modest return on total investment into a return attractive enough to compete in the common stock market. 
THE REQUIREMENTS OF INVESTORS 
To sell their stocks and bonds, utilities must offer an investor an equal or greater return on his money at an equal or lesser risk than other industries in the money market. 
The return investors receive from a utility is determined by how a company's management decides to distribute profits. Unlike most other companies, a utility's profits are controlled through government regula­tion. Regulators attempt to allow a "fair rate of return" just sufficient to attract the necessary capital for providing adequate service. There is 
26 

substantial disagreement among regulators, utilities, and consumers as to the definitions and judgments used in determining "fair", "sufficient", "necessary", and "adequate". Consumers want the lowest possible utility bills and, therefore, urge minimal prices; utilities tend to want the largest possible profit to retain stockholders, increase capital develop­ment, and provide the best long-range services. The regulators are caught in the middle attempting to maintain the lowest possible prices while allowing sufficient capital to the utility to maintain borrowing capacity for future growth and development. 
Risk is the second factor affecting investment. The higher the risk factor, the greater the chances of losing an investment. Thus, the return must be proportiona~e to the investor's chance of losing his earnings from an investment or losing the principle investment itself. 
HOW UTILITIES DIFFER FROM OTHER INVESTMENTS 
Utilities share a group of interrelated characteristics which set them 
apart from other business enterprises.  First, utility rates  are regulated  
by government.  Second, utilities are almost always monopoli es.  Third,  
utilities provide vital public services.  

Government Regulation 
Regulation attempts to accomplish many goals: the prevention of abuse of monopoly privilege, protection of consumers, allocation of products be­tween competing consumer groups, and preservation of ecological standards. 
5
In addition, the courts in the Hope case have required regulatory bodies to ensure a "fair rate of return" to the investor. These goals are inter­
27 

related and sometimes conflicting. The basic tool in achieving these diverse goals has been the control of product prices. Regulators attempt to determine prices that will generate sufficient revenues to compensate past investors, as well as to encourage additional investment at a level capable of refi­nancing old debt and financing future needs. Most important to the investor is the realization that, although companies work to maximize profits, utility management is constrained by regulatory bodies which must meet numerous and frequently contradictory demands. 
Monopoly Status 
Utilities are natural monopolies. They are businesses in which a single firm can produce and deliver electricity, natural gas or telephone service to a given number of customers at a lower per unit cost (per KWH, cubic foot, or telephone call) than several smaller firms prcviding the same total service. This is due to decreasing unit costs afforded by economies of scale. Natural monopolies are also created by physical limitations such as a dam or a bridge site where there is room for only one firm. 
Utilities are also artificial monopolies. Artificial monopolies are created by legal barriers such as exclusive franchises or economic barriers such as discriminatory pricing. In the first case, a city can decide it wants only one firm to have the right to plant telephone or electric poles through­out the city and prohibit all others. In the second case, an established firm that has achieved low unit costs through economies of scale can contin­ually underprice a new firm and drive it out of business before it grows large enough to achieve those same economies of scale. 
Because of the redistributive effect of pricing the costs of utilities, monopoly status is frequently guaranteed by an exclusive franchise. If the 
28 

utility's market were not protected from the entry of competing firms, another 
telephone company could offer service only to the densely populated urban area. 
Because it would not have to subsidize the rural customers, the new telephone 
company could charge lower rates to attract urban customers and thereby erode 
the revenue base of the original firm. 
Thus the franchise places a legal obligation upon a firm to provide ser­vices to a particular area. This legal obligation forces utilities to meet new demand whether or not it is profitable. Utilities must serve rural resi­dents even though it is less profitable than serving urban areas. Thus, while 
the auto industry has the option of not establishing a dealership in an area where demand is insufficient to meet overhead costs, an electric utility must 
often string miles of line to serve a customer whose electric bill does not 
approach the costs of serving him. In addition, utilities are tied to a 
particular service area, both legally and by their vast physical plant. They 
cannot move to areas of more favorable labor or material costs such as many 
industrial firms can do. 
Utilities and the Public Interest 
Utility services are vital to the community. Consumer demand for telephone, electricity, and gas tends to be very stable in the short run, despite fluctuations in the economic cycle. Economic growth cannot continue 
6
long without the support of "social overhead capital11 : (1) effective trans­
portation, (2) good communications, and (3) flexible and reliable power 
sources. The first in the broadest sense and the last two in the narrowest sense are public utilities. In short, these services are so crucial to our life style that if private industry did not provide them, the government 
would have to provide them. If the government could not provide them, then 
lifestyles would change considerably. 
29 

FINANCING INVESTOR-OWNED ELECTRIC UTILITIES 

PAST FINANCING 

Prior to the late 1960s, the utility industry's unique combination of characteristics was generally advantageous. Its monopoly status gave the utilities sole access to a growing demand for its services. Growth was relatively inexpensive to finance in a money market where bond interest was three to five percent (See Figure 3) and the expanding physical plant (See Figure 4) provided a larger rate base to which the regulated prices could be applied. Since the industry was still approaching increasingly large econo­mies of scale, greater product output decreased unit price. Regulatory lag (the time between the request for and the implementation of a rate change) occurred while companies were requesting rate decreases. Thus during the lag periods the utilities were charging higher prices than even they thought neces­sary and the lag helped increase profits. 
The chief financial incentive for continued growth of production of services, whether it was kilowatt hours of electricity or cubic feet of gas, was price regulation. Since prices were fixed, the only avenue for increasing profits was to increase revenues by increasing service at decreasing costs. This was possible as long as expenses incurred in operation and finance did not outweigh the revenues of increased sales--in other words, as long as economies of scale predominated. Statistics from the Federal Power Commis­sion (FPC) illustrate this growth environment in the investor-owned electrical utilities. 7 From 1950 to 1970 electric consumption increased 360 percent for residential users. To meet this demand, physical plant investment increased 390 percent. This enlargement of utilities' physical plants was financed by an increase in the investment in common stock of 166 percent, retained earnings 
30 

FIGURE 3 
UTILITY BOND AND STOCK INTEREST 

% 
2.0 
3.0 
4.0 
5.0 
6.0 
7.0 
8.0 
9 .0 
10.0 % 

2.0 
3.0 
4.0 
5.0 
6.0 
7.0 
8 .0 
9.0 
10.0 
1946 '47 '48 '49 '50 '51 '52 '53 '54 '55 '56 '57 '58 '59 '60 '61 '62 '63 '64 '65 '66 '67 '68 '69 '70 '71 '72 '73 '74 
Source: Moody's Public Utility Manual, 1974, p. a8. 
FIGURE 4 
TOTAL PLANT INVESTMENT IN PRIVATELY-OWNED ELECTRIC UTILITIES 


YEAR 50 55 60 65 70 Source: See Reference 7 
of 620 percent, and long-term debt of 357 percent. During the same time period, 
bills for the average residential user increased by only 185 percent and the commercial use by 260 percent. From 1950 to 1960 all operating costs were either stable or decreasing as a percentage of operating revenues. In 1964 the 'percentage of production costs (more than half of which are fuel costs) began a steady increase as a percentage of operating revenues until in 1972 it had nearly regained its 1950 level of 51.3 percent. (See Figures 5 through 8). 
In general, continued economies of scale and low expansion costs permitted electric utilities to expand their output of electrical service while main­taining or decreasing unit costs. Low electric prices (allowed by low costs) became r~latively cheaper as indiv5dual income rose due to a general increase in economic productivity and price inflation, encouraging greater demand for electricity. This additional demand in turn brough greater production, greater economies of scale, lower costs, lower prices, and increased demand. This cycle of events facilitated a continuous growth consumption of electricity while allowing the regulators to simultaneously satisfy the utilities with handsome returns on total investment and the customer with constant or decreasing prices. 
Investment Posture of Utilities in Texas 
Texas utilities have developed a reputation for being among the best utility investments in the country. Three factors have been cited for the success of Texas utilities in attracting capital. First, Texas had a radidly expanding market with steadily growing utilities, and this growth allowed realization of greater economies of scale. Second, Te~as had a cheap and abundant supply of natural gas which it burned as boiler fuel. Third, Texas had no state regulatory commission and rates were "established by 
2000 1800 1600 1400 
1200 1000 800 600 400 200 
0 
0 E 52 
p 
x 
p
E 50
R E A N T s 48 
I E N s 46 
G 44
(PERCENT) 
42 
160 
140 
ANNUAL 
BILL 

120
(DJLLARS) 
100 
75 
50 
FIGURE 5 

TOTAL CONSUMPTION OF ELECTRICITY (billions KWH) 


50 55 60 65 70 Source: Div. of Fossil Fuels, Bureau of Mines, Dept. Interior 
· FIGURE 6 
34 
50 55 60 65 
Source: See Reference 7. FIGURE 7 AVERAGE REVENUE PER KWH (CENTS) 
300
AND 
\. AVERAGE ANNUAL RESIDENTIAL 

' ,_ BILL (DOLLARS) 

280 
'-PRICE 
"" 
'-... --260
........... 

........_ 


"" 240 ............
' " 
.......... -./ 220 50 55 60 65 70 
Source: See Reference 7. 
33 
P E 
°R X pD E 
U N 
c s 
T E I S 
0 
N 
(PERCENT) 
PRICE (CENTS) 
FIGURE 8 
CAPITALIZATION OF GROWING INVESTMENT 
(Classes A & B privately owned electric utilities) 

Billions $ 48 
40 

~ 
36 
1950 54 56 58 60 62 64 66 68 70 
Source: FPC, Statistics of Privately-owned Electric Utilities in the U.S., 1960, 1970. 
34 
regulation with municipal governments which had historically condoned above­
average rates of retum. 118 
Using the FPC eight-year averages, it is relatively easy to see the preferred position of Texas utilities compared to the national average (the most extreme values reported by any one company are shown to add perspective to the comparison). (See Table 2.) From these statistics it is apparent. that, because of lower than average fuel costs, total production expenses, and plant investment, a lower than average rate brought higher than average returns to equity holders. 
To get some idea of the effect of regulation upon costs and profits, it is helpful to compare Texas to states which have experienced similar regional growth and have adequate fuel supplies, but which are also regulated by a state agency: Arkansas, Louisiana, Oklahoma and New Mexico (See Table 3). 
The table of comparative statistics shows that fuel costs are about equal and that all other cost factors do not significantly differ when compared with the national average, except for New Mexico's high investment costs. In general, Louisiana seems to duplicate Texas, although it charges a lower selling price with nearly as great a return on equity. Arkansas seems to off­set its slightly higher production costs with slightly lower investment and operating costs, yet chooses a lower selling price and provides the lowest re­turn on adjusted investment. New Mexico, by offsetting its higher investment costs with a higher selling price, provides the highest return on adjusted in­vestment and a return on equity midway between the extremes. 
The comparison with other states shows that the costs of producing and selling one kilowatt hour of electricity only sets a floor for the selling price. The actual selling price varies with what a state commission deter­mines to be a reasonable return on investment. All selling prices are well 
35 

TABLE 2 

Performance Criteria  Nationwide  Extremes  
Aver.  Tex.  High  Low  
I. Fuel cost per.million BTU (cents)  .... .. ... ...... .......... .  27.3  20.4  46.2  8.7  
2. Production expenses/KWH generated (mills)  ....... . ...... . .. .  3.6  2.7  41.6  0.3  
3. Plant investment/KWH sold (mills) . ... . ...... . .... . .. . . . . .. .  52.2  44.9  143.6  1.0  
4. Expense per KWH sold (mills)  .. .. . .. .. . .. . ..... ... . ... . .. .  11.9  10.4  3Ll  2.4  
(measure of operating cost per unit of sale)  
5. Operating expenses as a % of revenue . . ... . ............... . . .  77.9  74.7  133.4  65.l  
6. Administrative and general expenses as  
a % of operating and management expenses  
(general measure of overhead)  .. . ....... . ... . ... . ... . ..... .  15.0  16.5  51.3  1.6  
7. Sales expense per customer($)  
(advertising and merchandising) . . ... . . . .. .... ... : ... .. .. .. .  4.99  7.3  578.5  0.03  
8. Revenue per KWH sold (mills)  
(selling price)  ..... -... ... ... ... . . . . ..... . .............. .  15.2  14:0  37.9  2.7  
9. Return per KWH sold (mills)  . .. : .... . ... .. . . . ......... . .. .  3.5  3.7  7.9  0.0  
l 0. Return on adjusted investment (%)* ... . .................... .  7.26  8.91  11.81  0.35  
11. Return on common equity (%)** ... . ......... . ............ .  II 25  15.48  17.8-P­ 4.07  

*Adjusted investment represents electric utility operating income as a percentage of net plant inves~ent in service plus a provision for working capital. **Return on common equit}r represents the net income earned on average common stock ex­pressed as a %. 
+ Texas Power and light 
Source: 	Performance Profiles: Pril'ate Electric Utilities in the U.S. 1963-'70. Federal Power CommisDon. Washington, D.C., April 1973. 
36 

TABLE 3 

Performance Criteria  Tex.  Ark.  La.  Okla.  N.Mex.  
I. Fuel cost per million BTU {cents)  .. .. ..... ........  20.4  23.3  20.2  18.3  22.9  
2. Production expen5es/KWH generated {mills)  .. .... . ..  2.7  3.0  2.6  2.5  3.2  
3. Plant investment/KWH sold (mills)  ... .... ... .... ..  44.9  42.0  45.8  48.5  61.1  
4. Expense per KWH sold (mills)  ..... . . .. . .. .. .... . .  10.4  9.6  9.3  11.2  13.2  
(measure of operating cost per unit of sale)  
5. Operating expenses as a% of revenue  .... .. ........  74.7  79.2  75.l  76.7  75.4  
6. Administrative and general expenses as a %of operating  
and management expenses (general measure of  
overhead)  ......:... _. , . ... . ... .... . . ... . . . .... . ..  16.5  19.l  15.2  15.7  23.1  
7. Sales expense per customer ($)  
{advertising and merchandising) .... .. . .. . .. . ..... .  7.3  6.57  7.08  7.5  4.74  
8. Revenue per KWH sold {mills) {selling price) ..... . .. .  14.0  12.l  12.4  14.6  17.5  
9. Return per KWH sold (rr•ills)  . . .... . .... . .... ... ..  3.7  2.6  3.2  3.5  4.6  
l 0. Return on adjusted investment (%)  ................  8.91  7.41  8.87  8.18  9.62  
11. Return on common equity (%)  .. ... .. ....... .... .  1_5.48  12.89  11.85  15.06  13.50  
Source: As per Table l .  

37 
above what costs alone would indicate. It is the rate of return that sets 
the selling price and some states like New Mexico are willing to allow a 
return on adjusted investment higher than Texas even at the expense of 
setting higher than national average prices. The other states have been 
able to post higher than national average returns on adjusted investment 
while maintaining a below average selling price. This was possible because 
of lower than average costs especially in fuel. 
There is no disputing that Texas utilities provided the highest return on equity in the nation and did so while charging its customers less than 
.. 
national average prices. Certainly lower fuel costs, continued growth, and good management played a large part. Whether such returns were brou~fit about by conscious policy decisions or were the result of regulatory inattention is a matter of considerable debate. 
Comparing Utilities in Texas 
In discussing a state utility commission for Texas, comparisons are frequently made between rates of return on equity of different utility firms. Comparing utilities that must do business under varying conditions is diffi­cult even when using several different production and finance performance factors. Using just one can be misleading. 
A comparison can be made between Dallas Power and Light (DP&L) and Texas Power and Light (TP&L), both of whom are members of Texas Utilities. Since they are both part of the same holding company, their management is assumed common enough so as not to be a variable in financial performance. If rate of return on equity alone is viewed, DP&L, which is regulated pri­marily by the City of Dallas, has a significantly lower rate of return on 
38 

equity than TP&L, which is regulated by 248 cities throughout East and 
Central Texas. Since Dallas is one of the few cities generally considered 
able to effectively regulate utilities, the lower rate of return on equity 
could be pointed to as a result of effective regulation. 
However, a review of Table 4 provides a different picture when more factors are compared. DP&L may serve a much more compact area, but in over­all size of sales and number of customers, it is only three-fourths the size of TP&L. TP&L production costs are less than DP&L's and, therefore, its operating costs are a smaller percentage of revenues and its selling price is actually less than DP&L. It seems plausible that economies of scale allow TP&L to sell at lower prices and still make an identical return per kilowatt hour sold. The return for TP&L is applied to a larger sales base and hence return is greater both on adjusted investment as well as on equity. 
The accuracy of this latter interpretation may be almost as questionable as the first assumption, which was based solely on return on equity. Com­paring performance of utilities is a complicated process requiring judgment and experience. It is difficult even for professional regulators. 
PRESENT-DAY FINANCING 
Since the late 1960s, the financial position of utilities has steadily declined. The combination of rapidly increasing production, construction, and capital costs has overcome the savings incurred through economies of scale. Inflation and the energy crisis have greatly increased the already large need for utility finance. Because of the utilities' dependence on energy and capital, it is inescapably entangled in the current adjustment to new energy sources, higher costs, and changing levels of electrical demand. 
39 

TABLE 4 

Nationwide Performance Criteria Aver. Tex. DP&L TP&L 
I. Fuel cost per million BTU (cents) .... ........ ..... 27.3 20.4 20.9 19.6 

2. 
Production expenses/KWH generated {mills) .. . ...... 3.6 2.7 3.0 2.4 

3. 
Plant investment/KWH sold {mills) ............ .... 52.2 44.9 51.2 52.6 


4. 
Expense per KWH sold {mills) 
(measure of operating cost per unit of sale) .. .. ... . . . 11.9 10.4 12.0 10.8 


5. 
Operating expenses as a% of revenue ....... ...... . 77.9 74.7 77.2 70.7 


6. 
Administrative and general expenses as a 
% of operating and management expenses 
(general measure of overhead) . .. . ......... ..... .. 15.0 16.5 13.6 17.3 


7. 
Sales expense per customer ($) (advertising and merchandising) ... . ....... . ... . .. . · 4.99 7.3 8.02 10.43 

8. 
Revenue per KWH sold (mills) (selling price) ..... . ... 15.2 14.0 15.5 14.5 

9. 
Return per KWH sold (mills) ... .... ... ...... . .... 3.5 3.7 3.8 3.8 

10. 
Return on adjusted investment (%) ..... . . . .... . ... 7.26 8.91 8.07 8.94 

11. 
Return on common equity (%) .......... ......... 11.25 15.48 13.98 16.69 


12. 
Average annual KWH sales {millions) ............... na na 5756 7936 


13. 
#ofcustomers .... .. ..... ... ... .. . . .. . . . . .. ... na na 281,000 452,000 


Source: As per Table l. 
40 

Historically, utilities have based their financial plans on a continuous growth model that utilized the advantages of economies of scale inherent in the industry. Utilities were good investments because of their stable growth, regulated earnings, and declining costs. Utilities are now forced to deal with a new set of circumstances which are seemingly beyond their control. 
The growth model was based on decreasing costs; those costs are now rising. Energy costs are now soaring (See Figure 9), especially as a per­centage of total revenues. The dwindling supplies of natural gas and petro­leum products and the environmental difficulties in utilizing coal and nuclear energy have forced utilities to make major and costly physical plant investments. Utilities must build now to meet future demand which must not only accommodate increases in population and per capita demand, but the switch to electricity from other sources. Customers, seeing conversion, continue to rely on elec­tricity as the most viable form of energy, regardless of whether it is gener­ated from nuclear, coal, solar, or geothermal energy resources. 
Further costs are incurred due to the necessity of financing pollution control projects. Smoke scrubbers, low-emission fuels, and other means of reducing environmental pollution are costly. (See Figure 10) 
Thus market monopoly, which was beneficial to profits by preventing waste­ful competition, now requires electric utilities to meet consumer demand whether or not capital expansion is profitable. Growth, which had been an excellent method for expanding a company's rate base and gaining new economics of scale, now means increasing costs in the form of more fuel, expanded physical plant, and additional capital. 
To cover these greater costs, utilities have filed repeated requests for price increases. (See Figure 11.) The regulatory bodies have been inundated by the ever-increasing number of requests, and administrative delay in process 
41 

FIGURE 9 
THE DECLINE AND RISE OF FUEL COSTS 

I\ ILLS 'ER <WH  4.5 4.0  
3.5  
3.0  
2.5  


Total production costs 
Fuel costs 

61 62 63 64 65 66 67 68 69 70 71 Year 
Source: Compiled from Statistics of Privately Owned Electric Utilities in the U.S., 1972, FPC. 
42 

FIGURE 10 

COST OF POLLUTION CONTROL TO 
THE ELECTRIC UTILITY INDUSTRY 

(Ml LLIONS OF DOLLARS) 
1,225 1,249
1, 198 
I 1 1471 144 
I 
565 
1971 '72 '73 '74 '75 '76 
Source: Public Utilities Fortnightly, 28 Feb. 1974, p. 41 . 
FIGURE 11 
ELECTRIC COMPANIES' RATE ACTIONS 
1,713 
Ml LLIONS OF DOLLARS 
INCREASES 
~ 

43 
28 3 21 
'64 

'66 '68 
9 
14
19 
57 119 DECREASES *Sept. 30 
SOURCE: Public Utilities Fortnightly, 	Feb. 28, 1974, p. 40 and Feb. 13, 1975,p. 28. 

44 

ing the requests (regulatory lag) forces the utility to file new requests for even higher prices to make up for a growing backlog of costs which are not being covered under existing prices. Thus regulatory lag, which in the past enhanced profits while costs were decreasing, has become, in most cases, a bottleneck. Regulatory bodies are slow in approving price increases because of the large number of requests and the growing public demand that each price increase be throughly scrutinized. Regulatory bodies are pressured by utilities, who claim that their prices are not high enough to cover costs, and by con­sumers, who claim that they cannot sustain the continued rate increases, which for electric utilities alone rose an average of 22 percent in 1974.9 While awaiting requested price increases, utilities are consuming the earned surplus 
I 
that they would normally reinvest in plant construction. 
With their once stable profits undermined by rising costs, the utilities find it increasingly difficult to attract the capital they need to refinance old debt and finance new construction. Inflation and intense competition has driven rates up. Not only new debt issues but old debt, once financed at 2.5 percent, must be refinanced at 9 to 10 percent. This significantly increases fixed interest charges. In the private securities market, the interest cover­age (revenue divided by total interest) has dropped steadily over the past five years, which means that more utility bonds may be downgraded by the rating services. Also, when interest coverage drops below a certain level (usually two) a utility's bond indenture prohibits raising any further capital via debt. Common stock is becoming equally difficult to sell. Because of poor earnings, the average utility stock is selling at between 50 and 80 percent of book value. The sale of new stock at below book value dilutes the equity ownership interest of existing stockholders. Potential stock­holders realize that this situation can occur in the future and further dis­
45 

counts the amount they are willing to pay for the stock. This leads to a 
downward spiral driving prices further and further below book value. 
As a result of these financial difficulties, Consolidated Edison of New York shocked the investment world by cutting their common stock dividends (high and reliable dividends are a primary factor in selling utility stock). More serious in the long run is that utilities are delaying or cancelling expansion programs. Utilities around the country, unable to raise money through either bonds or stocks, have cut construction budgets through 1978 by nearly a fourth or about $21 billion.10 Additionally, utilities are cutting corners in maintenance and requesting exemption from many of the current costly ' environment standards. 
FUTURE FINANCING 
The future of the electric utilities is difficult to forecast in these times of changing energy sources. A recent study on this matter was prepared for the Federal Power Commission by its Technical Advisory Committee on Finance, headed by Gordon R. Corey, vice chairman of Commonwealth Edison. The study suggested eight possible scenarios reflecting growth in electric demand ranging from a low of one percent for the "no growth" scenario to a high of nine percent for an "all electric" scenario. The majority of the committee identified the most likely situation as a "moderate" growth situation of about six percent. 
The Corey report predicts that between 1975 and 1990, the electric power industry will need $650 billion (reflecting future inflation) to ex­pand and to maintain present reliability of service. This amount is four times the industry's present net investment in plant facilities. Of this 
46 

figure, approximately $250 billion could be internally generated by revenues. 
Since $80 billion of the remainder would be raised for publicly-owned utilities through tax exempt bonds, that leaves $320 billion to be raised externally by privately-owned utilities. The ability of the industry to raise this capital is not assured, but the fact that it represents a leveling-off of the utilities' financial requirements from the private capital market at its present level of one percent of gross national product (GNP), makes the present methods of finance a feasible avenue for meeting future demand. 
Financial Problems 
To the extent that inflation can be decreased, the ability of the electric industry to obtain necessary capital is increased. The financial problems of the industry can be related to the effect of inflation on .construction and finance costs, the insufficiency of capital resources, the regulatory lag in converting higher costs into higher electricity prices, and the resulting disillusionment of the investment community. 
The Corey report makes these recommendations to improve the financing capability of utilities: 
1. 	
Cost control. Utilities must maintain strict cost controls. Expendi­tures must be held to the minimum required to provide reliable service and conduct farsighted research programs to provide technology to meet future demands. Rate increases must be held to a minimum consistent with the principle that ~nly cost determined prices will result in the most efficient allocation of scarce energy resources. 

2. 	
Adequate revenue levels. In order to pay higher interest on additional debt capital and to maintain its credit ratings, utilities must raise sufficient connnon stock and to maintain coverage of increasing debt levels. Failure to provide sufficient revenues would eventually mean financial disaster. 

3. 	
Public awareness. The public must be made aware that higher prices are necessary to procure the money for physical plant construction necessary to meet future demand. The public must understand the new financial constraints that make their electricity more costly. 

4. 	
Modified rate structures. Prices must be changed to reflect the increas­ing costs of electricity. Rate structures must be redesigned to en­courage·more efficient use generating capacity by shifting demand from peak use periods. 

5. 	
Minimizing regulatory lag. Regulatory processes must be streamlined to allow a quicker response of prices to changing costs. 

6. 	
Tax reform. The government must stimulate and reward savings and in­vestment. For example, tax exemption of dividends reinvested in new­issue utility stock could provide up to a third of the utility industry's total common stock needs. Tax policies and laws discriminating against the industry or discouraging investments must be reformed. 

7. 	
Accounting practices to maximize internal cash generation. Full utili­zation by 1980 of five recommended tax and accounting reforms could in­crease internal cash generation by 50 percent and decrease the need for external financing. 

8. 	
Increased attention to conservation of energy and capital resources. Increased attention must be paid to the relation of costs to benefits, particularly in areas of environmental protection. 

9. 	
Higlier equity ratios. To continue the industry's ability to attract capital, a higher equity ratio will be needed to maintain the coverage of debt capital. 

10. 	
Institutional changes. Federal and state aid may be necessary for shortrun adjustments, but are not a satisfactory substitute for prices which cover the full costs of supplying electricity. 

11. 	
Joint financing. Statutes or regulations which prevent companies and agencies from combining to achieve economies of scale must be reformed. Unreasonable governmental restrictions on the ability of electric power companies and public agencies to finance joint capital expansion should be eliminated. 

12. 	
Allowance for funds used during construction. Presently, large amounts of money being devoted to construction costs as well as physical plants under construction are not being counted as part of the rate base. Con­sideration should be given to allowing a fair return on capital. 


47 

Alternatives to Adequate Capital Formation 
If adequate financing is not available through price increases or new 
investments from the private securities market, there are several alternative 
methods of equating electrical supply and demand: 
1. 	Conservation. A significant reduction can be made in future electrical 
48 

demand without radical changes in present life styles. Conservation can be induced through at least three means: (1) voluntary means, such as education of the public on the benefits of insulation; (2) indirect means, such as pricing electricity to encourage off-peak usage; or 
(3) setting mandatory standards for building construction, insulation, heating, lighting, and cooling. 
2. 	
Rationing. A realignment of demand could be mandated by set priorities. The costs of rationing include a large administrative staff, ineffici­encies of determining demand, and a level of control not usually com­patible with a democracy. It might become a necessity during periods of rapid adjustment or a massive failure of the pricing system. 

3. 	
Government aid. Due to the social disruption that bankruptcy of a major utility would cause, the government is considering several forms of aid: 


a. 	
Lender of the last resort --similar to Depression-era Reconstruc­tion Finance Corporation idea --would make direct loans or even buy utility stock issues with U.S. Treasury money. 

b. 	
Loan guarantees for utility bond issues that would reassure in­vestors and lower interest rates. 

c. 	
Government financing of new construction that would ease the capital requirements of the electric industry. 


The major problem with government aid is that to be truly effective it either would have to place utility bond issues in direct competition with government bond issues for the same capital, or would reduce the effectiveness of the price system by paying for part of electric costs through tax revenues. 
4. 	Government ownership. Government takeover of the utilities would not lessen the costs of financing them. As in government aid, using govern­ment credit or tax revenues would merely distort the price system and make electricity appear cheaper than it actually is. It would also remove government from the role of regulator. Consumers would no longer have alternative sources upon which to focus their complaints about utility actions. Governments as well as any other organizations are more hesitant to find fault with themselves. 
CONCLUSION 
Growing electric utility bills have made consumers distrustful of Texas 
utilities' high return to investors. Consumers have become aware that Texas 
electric companies have a good reputation for providing high returns to in­
49 

vestors. In hopes of controlling prices, many Texas consumers are demanding state utility regulation. Unfortunately, the time when electric rates could have been reduced has long passed. Future utility regulation must take into account the growing scarcity of material resources as well as the increased costs of capital. 
Still, the high profits of the 1960s is a solid borrowing position for Texas investor-owned electrical utilities. Four of the six major Texas elec­tric companies are listed ·by bond rating firms as "Aa," the ratings given to the best investments in the bond market. This preferred financial position will assist in the future battle to maintain the electric utilities' ability to obtain the capital that will be needed to meet future demand. 
Demand for electricity will rise even with stringent conservation mea­sures because of switch-overs to electricity from other types of energy and population growth. Electrical production to meet future demand will require large amounts of energy and investment capital. Energy is getting more scarce and, therefore, more expensive. The private savings that compose the capital market have historically been a constant percentage of gross national product (GNP). The capital needs for the electric industry have been and are projected to continue to be a growing percentage of GNP. This increasing pressure by the electric industry on the capital market will drive interest rates and costs up. The best method for determining actual demand for electricity is to ensure that its price reflects all the costs. These facts add up to one conclusion: electricity is going to get more expensive and therefore con­sumers are going to have to pay the higher price or change their levels of demand. 
Considering the difficulty of utility firms to explain this fact to the satisfaction of consumers, regulators or other government agencies may have 
50 

to push this point home to the consumer. If consumers believe that prices are unjustifiably high, and if they pressure regulators into allowing in­sufficient price increases, future consumers could find themselves literally "in the dark" trying to figure out what went wrong. 
The ultimate solution to the electric utilities' financial problems will require the efforts of government, the utilities, and the consumer. Government must reduce inflation. Regulators must increase prices to meet increasing costs. Consumers must minimze demand through conservation and must understand that prices are going to be constantly increasing in the foreseeable future. Rate structures must be reformed to reduce demand and to redistribute the costs of electricity to those most capable of paying them. Government financial aid should be an option of last resort and should be used only to help the utility industries and consumers adjust to a new equilibrium of energy production and consumption. 
51 

REFERENCES 
1. 	
Calculated from: Statistics of Electric Utilities in the U.S. -1972. (Washington, D.C.: Federal Power Commission). 

2. 	
Charles F. Phillips, Jr., Economics of Regulation. (Homewood, Ill: Richard D. Irwin, Inc., 1965), p. 280. 

3. 	
Carol J. Loom.is, "For the utilities, it's a fight for survival." Fortune, Vol. 91 (March 1975), p. 100. 

4. 	
F.L. Garcia, Encyclopedia of Banking and Finance. (Boston: The Bankers Publishing Co. 6th Ed., 1962), p. 611. 

5. 	
F.P.C. v. Hope Natural Gas Co., 320 U.S. 591, 603 (1944). 

6. 	
W.W. Rostow, The Stages of Economic Growth. (London: Cambridge Uni­versity, 1960) as cited by M.T. Faris and R.J. Sampson, Public Utilities: Regulation, Management and Owr.ership. (Dallas: Houghton Mifflin Co., 1973)' p. 3. 

7. 	
Calculated from: Statistics of Electric Utilities in the U.S. -1960 and 1972. (Washington, D.C.: Federal Power Commission). 

8. 	
Douglas A. Haynes, Investments: Analysis and Management. (N.Y.: Macmillan Co., 1966), p. 278. 

9. 	
James P. Gannon, "A Friend in Need? Utilities' Financial Ills Stir White House Talk of Going to the Rescue." Wall Street Journal, (Feb. 18, 1975), p. 1. 

10. 	
Loomis, p. 186. 


52 

BIBLIOGRAPHY 
Brophy, T.F., "The Utility Problem of Regulatory Lag." Public Utilities Fortnightly (Jan. 30, 1975), pp. 21-27. Corey, Gorden R. (chr.), "Technical Advisory Connnittee on Finance-advisory report" (prepublished draft prepared for the Federal Power Connnission). Farris, M.T. and R.J. Sampson, Public Utilities: -Regulation, Management, and Ownership. (Dallas: Houghton Mifflin Co., 1973). Garvin, D.G., "Electricity: A Vital Force for Vigorous Growth." Public Utilities Fortnightly (Feb. 28, 1974), pp. 29-41. Graham and Dodd, Security Analysis. (N.Y.: McGraw-Hill, 1951). Haynes, Douglas A., Investments: Analysis and Management. (N.Y.: Macmillan Co., 1966). Loomis, Carol J., "For the Utilities It's a Fight for Survival." Fortune, 91 (March 1975), pp. 97-100, 184-189. Moody's Public Utility Manual, 1974 (N.Y.: Moody's Investors Service Inc.) Phillips, Charles F., Jr., Economics of Regulation. (Homewood, Ill: Richard 
D. Irwin, ~:nc., 1965). 
U.S. 	
Federal Power Commission. Performance Profiles: Private Electric Utilities in the United States, 1963-1970. (Washington, D.C.: 1973). 

U.S. 	
Federal Power Commission. Statistics of Privately Owned Electric Utilities in the United States, 1970. (Washington, D.C.: 1971). 

U.S. 	
Federal Power Commission. Statistics of Privately Owned Electric Utilities in the United States, 1972. (Washington, D.C.: 1973). 


"Will the Government Bail Out the Utilities?" Business Week (Sep. 14, 1974), 
p. 138. 
53 

CHAPTER III: LEGAL FRAMEWORK FOR LOCAL REGULATION IN TEXAS 

JUDICAL INTERPRETATION OF REGULATORY CONCEPTS: FEDERAL CASE LAW 
The federal courts have lent eloquence, if little substance, to utility rate controversies. Like most economic theory, there is always an "on the other hand'' which precludes consensus on the various possible components of rate base formulas. Recourse to the courts is a necessary avenue of relief for aggreived parties, but also suggests the inadequacy of regulation as a control mechanism for monopolies, as witnessed by the large number of utility cases that reach the Supreme Court. Aside from the various state statutes, only two standards guide utility rate reg­ulation: (1) the Fourteenth Amendment to the U.S. Constitution declares that no one shall be deprived of property without due process of law, or denied equal pro­tection of the laws; (2) the Natural Gas Act of 1935 prescribes that natural gas rates be "just and reasonable." Within these equivocal guidelines, the courts have attempted to resolve rate disputes by reviewing evidence and clarifying the law, avoiding where possible assuming the function of regulator. Therefore, while providing an introduction to the complexity of rate regulation, the courts do not substitute for the regulatory process of ratemaking. This section traces regulatory concepts as they have evolved through Supreme Court decisions. 
The concept of fair value first gained notoriety in Smyth v. Ames,l an 1898 case involving a Nebraska statute regulating railroads. The act established max­imum rates to be charged for the transportation of freights, and was subsequently declared to be in violation of the Fourteenth Amendment. The Court's decision asserted that the basis of all calculations as to the reasonableness of rates must 
54 

be the fair value of the property being used for the convenience of the public. 
Having established this connection between the Fourteenth Amendment, "just and 
reasonable", and fair value, the Court concluded that "in order to ascertain that value, the original cost of construction, the amount expended in permanent improve­ments, the amounts of market value of its bonds and stocks, the present as com­pared with the original cost of construction, the probable earning capacity of the property under particular rates prescribed by statute, and the sum required to meet operating expenses"2 merit inclusion. Adding that the weight assigned each element should be determined on a case by case basis, the Court disclaimed having pronounced the final word on the subject by acknowledging that other matters may warrant consideration in estimating the value of the property. Thus both original 
cost and reproduction cost new emerge as items worthy of consideration in the deter· mination of fair value, although not as the sum of that value. With respect to the 
rate of return, the Court announc~d that the company is entitled to ask a fair re­
turn upon the value of property employed in the public convenience. Smyth v. Ames 
is one of the landmark cases in utility regulation and continues to influence rate proceedings. 
A similar case reached the Supreme Court in 1909 regarding state laws setting maximum prices for natural gas sold to New York City (Wilcox v. Consolidated Gas Company).3 Again the Court declared the rates confiscatory, ruling that property value is to be determined when the inquiry is made regarding the rates. Recognizin:: a modified form of reproduction cost new, the Court stated that "if the property which legally enters into the consideration of the question of the rates has in­creased in value since it was acquired, the company is entitled to the benefit of such increase.114 However, the decision also appears to speak to present day in­flation when it acknowledges the possibility of an exception "where the property may have increased so enormously in value as to render a rate permitting a rea­sonable return upon such increased value unjust to the public. 11 5 
55 

In 1923, the Supreme Court affirmed the legality of an order issued by the Railroad Commission of Georgia fixing natural gas rates (Georgia Ry & Power Co. et al. v. Railroad Commission of Georgia).6 In determining that the order was enforceable, the Court stated that the Commission properly gave careful consider­ation to the cost of reproduction, but correctly refused to adopt reproduction cost as the measure of value. While endorsing the doctrine that "the exercise of a reasonable judgment as to the present 'fair value' required some consideration of the reproduction costs", the commission decided that " 'present fair value' is not synonymous with 'present replacement cost', particularly under abnormal conditions"7, a conclusion similar to that in the preceding case. Reaffirming Smyth v. Ames, the Court decreed that replacement cost less depreciation is only one of several relevant facts to ~e considered in arriving at a fair valuation of the property, and that no rule requires "slavish adherence" to this particular component. The Court also recognized that the public is not to be held liable for the improvident bargains of the utility, especially where it was obvious that the losses were not a part of development cost, but ''were due to insufficiency of previous rates.118 However, federal income tax was considered a legitimate deduction in computing net income for rate purposes. 
Reconstruction cost new was given another boost in a 1923 case regarding an order by the Public Service Commission of West Virginia fixing a water company's rates (Bluefield Waterworks & Improvement Co. v. Public Service Commission of West Virginia).9 The Supreme Court reversed a decision denying relief to the water company because the lower court "failed to consider the higher cost of construction in 1920 over that in 1915 and before the war, and failed to give weight to cost of reproduction, less depreciation • • • or to the testimony • based on present and past costs of construction.1110 Interpreting the Fourteenth Amendment, the Supreme Court held that rates which "are not sufficient to yield 
56 

:1 · 
a reasonable return on the value of the property at the time it is being used to render the service are unjust, unreasonable and confiscatory. 1111 The Court ac­knowledged that utilities are entitled to a rate of return made on investments 
in other businesses of corresponding risk, adding that a rate of return may be "reasonable at one time and become too high or too low by changes affecting op­portunities for investment, the money market and business conditions generally. 1112 
In 1930 a suit was brought against the Railroad Commission of California attacking the commission's findings as to both rate base and return (Los Angeles Gas and Electric Corp. v. Railroad Commission of California).13 The Supreme Court affirmed a lower court ruling that the commission's valuations were reasonable and that the prescribed rates permitted a reasonable return. Restating the fair value doctrine, the Court concluded that the actual cost of property and the cost of re­producing property are relevant facts in determining fair value but are not conclu­sive and the "weight to be giyen actual cost, to historical cost and to cost of re­
1114
production new is to be determined in light of the facts of the particular case.The Court also conceded "going value" as a component of the rate base, defining it as the "assembled and established plant doing business and earning money over one not thus advanced. 1115 Turning to more practical matters, the Court ruled that "de­duction must be made for the accrued depreciation1116 , and rejected as elements of reproduction cost the estimated cost of financing and promoter's remuneration as well as a gas manufacturing plant that had fallen into disuse. 
Cognizant of the diffic4lty of attempting to establish the value of utility 
I 
property, the Court acknowledged that "the property is not ordinarily the subject of barter and sale, and when rates themselves are in dispute, earnings produced 
by rates do not afford a standard for decision. The value of the property, or the rate base, must be determined under these inescapable limitations. 1117 Within these constraints, the Court suggests that the "return from rates fixed for public utilit Les 
57 
should be reasonably sufficient to assure confidence in the financial soundness 
of the utility, and adequate under efficient economic management to maintain its 
credit and enable it to raise money necessary for proper discharge of its public 
duties. 1118 
In a 1939 electric rate proceeding (Driscoll v. Edison Light and Power Co.,19 the Supreme Court upheld a temporary rate order issued by the Pennsylvania Public 
Utility Commission. Although the order did not itemize an allowance for going 
concern value, it was sustained by the Court because "it gave practical effect tc 
this consideration when it fixed fair value several hundred thousand dollars in excess of its average of original and reproduction costs, both depreciated. 1120 
In computing both original and reproduction costs, the Court included "the over­head expense of creating the aggregate of land, buildings, and equipment making up the utility.1121 To fix a rate of return, the Court held that it is insuffi­cient to consider only "average yields from seemingly comparable securities", or 
"deductions drawn from recent sales of issues authorized by the Public Utility 
Commission", but that "yields of preferred and common stocks must be considered 
22 
as well as those of refund debt." 
Fair value was dealt a debilitating blow in a 1942 case involving an interim rate order for the sale of natural gas (Federal Power Commission v. Natural Gas Pipeline Co. of America.)23 The Court of Appeals vacated the order on the sole 
1124
grounds that going concern value "should have been included in the rate base. The Supreme Court reversed the decision, declaring that "the Constitution does not bind the rate-making bodies to the service of any single formula or combina­tion of formulas, and agencies to whom legislative power has been delegated are free, within the ambit of their statutory authority, to make the pragmatic adjus~­
ments called for by particular circumstances. 1125 The burden of proof rests with the regulated company to demonstrate that going concern value "has neither been 
58 

adequately covered in the rate base nor recouped from prior earnings of the busi­
ness."26 Thus, while the Court does not preclude going concern value as an ele­ment of fair value, there is no requirement that it be isolated and separately 
appraised. Regarding items to be incorporated in the rate base, the Court up­held that it be isolated and separately appraised. Regarding items to be incorp­orated in the rate base, the Court upheld that the Federal Power Commission's re­
fusal to include: (1) capital expenditures of gas companies not yet made, (2) a 
fair return and amortization on the costs of maintenance of initial excess ca­pacity, (3) items for advertising and acquiring new business. The case also es­
tablishes two guidelines for rate-making by regulatory bodies: "The first is the adjustment of the general revenue level to the demands of a fair return. The 
second is the adjustment of a rate schedule conforming to that level so as to eliminate discriminations and unfairness from its details. 1127 
In perhaps the most important utility case since Smyth v. Ames, the Supreme Court in 1944 reversed an appellate court decision setting aside a rate order of the Federal Power Commission (Federal Power Commission v. Hope Natural Gas Co.)28 The Circuit Court of Appeals voided the order for the following reasons: (1) "that the rate base should reflect the 'present fair value of the property'", and should consider "reproduction cost and trended original cost, and that the 'actual legit­imate cost' (prudent investment) was not the proper measure of 'fair value' where price levels had changed since the investment", (2) "that the well-drilling costs and overhead items•••should have been included in the rate base", (3) "that ac­crued depletion and depreciation and the annual allowance for that expense should 
29
be computed on the basis of 'present fair value' of the property." The Supreme 
Court was of a different opinion: "Under the statutory standard of 'just and rea­sonable', it is the result reached and not the method employed which is control­ling.1130 The Court further declared that "rates cannot be made to depend upon 
59 
fair value when the value of the going enterprise depends on earnings under 
whatever rate may be anticipated.1131 The case clearly rejects any insinuation 
of court-established standards into the rate-making process. Instead, the Court turned to the final product, rates, ruling that "rates which enable the 
company to operate successfully, to maintain its financial integrity, to at­tract capital and to compensate its investors for the risks assumed cannot be 
condemned as invalid, even though they might produce only a meager return on the so-called 'fair value' rate base. 11 32 Conclud~ng its regulation of the fair 
value doctrine, the Court held that it is proper simply to base annual deprecia­tion on cost since "by such a procedure the utility is made whole and the in­tegrity of its investment is maintained", and "no more is required.1133 
THE EVOLUTION OF FAIR VALUE AND FAIR RATE OF RETURN IN TEXAS 
FAIR VALUE 
Overview Texas statutes do not provide cities with guidance as to how rates are to be set. Texas court cases that deal with the key rate-making concepts of fair 
value and fair return avoid giving a specific definition to either. Although the court opinions relating to these concepts are extremely vague, they do pro­vide some general guideposts for arriving at the meaning of fair value and how rates of return should be determined. 
34
The Alvin caseis the authoritative interpretation of fair value. The Court begins by stating that there are two specific law questions for decision in the Alvin case. The first question is: Does the term "fair value" mean the 
original cost of a utility company's property? Although the court discusses 
60 

company's property? Although the court discusses fair value at length, the 
question is never directly answered. The complexity of the concept is apparent 
from the tendency to obfuscate the issue. 
The court in the Alvin case states that the word "fair" is vague and am­biguous, but establishes that the words "fair value" mean present value. To substitute present value for fair value does not clarify the concept since the courts have provided no precise definition of present value. For instance, in the case of Georgia Railway v. Railroad Commission of Georgia35 the Supreme Court held that present fair value was not synonymous with present replacement cost, but was one of the elements which should be taken into consideration in the determination. And in 1923, Justice Brandeis wrote in a concurring opinion in the case of Missouri ex al S.W. Bell Telephone Co. v. Public Service Commis­sion36 that the task of finding the present value of the utility is laborious 
and baffling. 
Evolution of Fair Value 
Prior to the Hope case (1944) and the Alvin ,case (1956), there was one sig­nificant attempt by a Texas Court to put forth a working definition of fair value. In 1933, in United Gas Co. v. Texas,37 a Texas trial court, in submit­ting a special issue to the jury, provided it with definitions and instructions, 
including a definition of fair yalue~ By fair value was meant 
"the reasonable worth of the property at the time it is being used and useful in the public service. That by used and useful was meant that it embraces all the property as was reasonably necessary to per­mit continuous and efficient service. • • That in considering what is fair value of said property you will take into consideration all elements of value that have been introduced in evidence before you, including reproduction cost new of said property and the amount of going value (if any) that inheres in said property. 1138 
As a result of the Hope case,39 which stated that it is the end result, not the method used which is controlling, states were given the option of moving to 
61 

a method of valuation other than fair or present value. Texas did not exer­
cise this option. In the Alvin case, the Texas Supreme Court adhered to the 
imprecise and ambiguous fair value method, saying that greater specificity was up to the legislature. However, the court did attempt to give some guidance as 
to what the fair value method should and should not be. 
With respect to property valuation, the Alvin case specifically stated that utility rates must be based on a physical property valuation rate base, not a rate base on the prudent investment theory. (The prudent investment theory pre­eludes from inclusion in the rate base expenditures or portions of expenditures for properties which the regulators find to be "imprudent".) Thus, fair value, 
or present value, as applied in Texas is a method for determining a rate base which relies on actual physical property valuation and does not allow for the 
use of the prudent investment theory. 
The Court, in the Alvin case prefaced further explanation of the fair value method by stating that "the truth is that it is neither desirable or practical to use the same valuation formula for all types of property used by a gas util­ity. 1140 Consequently, the Court set down only very general guidelines: 
"For lack of any other criteria we bracket the problem of fixing 
a value. • • as a reasonable balance between original cost less 
depreciation and replacemenzcost new less an adjustment for
1
present age and condition." 
The key rate-making terms are therefore original cost and reproduction cost

. 
new. However, the Court does not give definitions of these terms but merely points out the problems inherent in both valuation methods. The original cost test deprives the equity ownership of any chance to fluctuate with changing market conditions and the test of reproduction cost new adjusted to actual age and condition could be unfair to the public or to utility investors depending 
upon whether the economy is in an inflationary or deflationary period. In ex­
62 

pl~ining how a reasonable balance between original cost and reproduction cost 
new :should be determined, the court emphasized the need for judgmen.t: "the burden of the cases is that the solution falls as a matter of judgment between those two brackets (original cost and reproduction cost new.)1142 
As the Alvin case makes clear, the fair value method cannot be described as a specific valuation method. The Court established broad parameters for the rate-making process, within which judgment should be the controlling factor. Subs~quent cases have demonstrated the importance of the judgment factor.. In 
43
1961, in the City of Weslaco v. General Telephone Co. of the Southwest, the city insisted .upon high straight line depreciation on a low original cost. and General .Telephone insisted upon a low appraisal depreciation on a high replace­ment value. The Court solved the dispute by fixing the fair value for the rate base at the exact arithmetic mean between the two contentions. 
The importance of discretion and judgment is obvious from decisions by the Texas Railroad Commission in setting gas rates appealed from city regula­tion. The Commission, in the case of Southern Union Gas Co. v. City of Port Arthur,44 said that in deciding gas rates the Railroad Commission must find a physical property valuation rate base, which balances original cost less depre­ciation and replacement cost new less an adjustment for present age and con­dition. In determining this rate base the conunission must use its own judg­ment and discretion. In the Pioneer Gas Case, the Texas Railroad Commission stated that, as a result of the Alvin case, the judgment factor of the Comnds­sion has become extremely important. 
Before the Commission can set a gate rate to be charge~ for natural gas, it must determine three essential factors involved in all rate cases: 
(1) 
reasonable operating expenses; 

(2) 
the present fair value of the property used and useful by the public utility; and 

(3) 
a reasonable net rate of return. 


The Railroad Commission's standard procedure for determining a fair value 
rate base has been to set a "reasonable balance" at 60 percent original cost 
and 40 percent RCN. However, the 60-40 balance is arbitrary, and is not used in all cases. Rate analysts for "the Texas Railroad Commission have stated that 
there have been some cases where the Commission has relied entirely on original cost. 
The lack of specificity in the fair value method of determining the rate base is not unique to Texas. Each of the ten states using this valuation method has a different means for determining what elements should be included in the 
rate base and how each should be weighted. In Texas the recently-passed Public Utility Regulatory Act (1975) provides that rates for utilities coming under 
commission jurisdic~ion be determined by a reasonable balance between original 
cost less depreciation and current cost less an adjustment for present age and 
condition. This balance must not be less than 60 percent or more than 75 percent original cost and not less than 25 percent or more than 40 percent current cost.4; 
RATE OF RETURN 
The second specific law question that the Court set out to answer in the Alvin case was how should the rate of return be determined? (The percentage rate of return is what determines the amount of net revenue a firm is entitled to earn 
and which consequently establishes the level of consumer prices.)46 Several previous cases had dealt with the question of fair rate of retu!n, but those cases were not specific as to how rate of return should be determined and one 
of the later cases emphasized the need for judgment. In 1933, a Texas trial court affixed a definition to fair return 
" ••• by fair return is meant •••a rate on the present fair value 
of the property employed for the convenience of the public and equal 
to that generally being made at the same time within the same gen­
64 
eral part of the country upon investments in other business under­
takings which are attended by like risks and uncertainties. That 
the rate of return should be reasonably sufficient to assure con­
fidence in the financial soundness of the utility and should be 
adequate llllder efficient and economical management to maintain and 
support its credit and enable it to raise money necessary for the 
proper discharge of its duties. 1147 
In Ft. Worth Gas Co. v. City of F.w.,48 the Court held that a public utility has the right to demand just compensation for the services it provides and that just compensation means a fair return on the reasonable value of the property 
49
at t he time it is in use for the public. In El Paso Natural Gas Co. v. F.P.C., 
the court stated that in order to be reasonable, a utility's return should be sufficient to attract capital to the venture." And in the case of Community Natural Gas Co. v. Royse City, 50 the Court held that a public utility is en­
titled to such rates as will permit it to earn a return on the value of the property employed for the convenience of the public equal to that generally being made on investments in :bus.iness undertaking with corresponding risks. 
In 1953, in the case of the City of Baytown et al v. General Telephone Co. of the Southwest,51 the element of judgment was emphasized with regard to fair return: the body fixing rates for a public utility has no right to fix rates arbitrarily and without investigation, or without exercising its judgment or discretion to determine what is fair and reasonable compensation. 
The landmark cases, Hope and Alvin, did not significantly alter the de­cisions which had been previously rendered. The effect of the Hope case was that regulatory Commissions were no longer bound by any specific valuation formula or by any percentage rate of return criteria. 
Hope established what was r~affirmed in the Alvin case: it is the economic end product, not specific valuation principles with which rate setting bodies should be ultimately concerned. The rate of return on the fair value of the property must fall within a zone of reasonableness that is not unduly high or unduly low: "high enough to attract ample capital but • • • not beyond that.n52 
65 

The Court in the Alvin case said that irrespective of how the rate-making body arrived at the rate, if in fact it meets the court's test of a fair return on fair value, then the rate is non-confiscatory. The decision also affirmed that, in the absence of legislation, the courts must resort to reason as a guide in fixing a rate of return. Clearly, it is not the method of deter­mining the rate but the end product that is of concern. 
In emphasizing the use of reason for determining rate of return the Court set down two very broad guidelines: 
(1) 	
Utility capital is secured through two activities: (a) borrowing and (b) sale of stock. In determining the percentage rate of return necessary to raise capital, attention should be given to a composite of the two on the current market. 

(2) 	
In rate proceedings, a rate of return necessary to induce the investmen~ of capital in utility stocks can be proved by expert testimony. 


Since the Alvin case, there has been one further significant Texas case dealing with a fair rate of return. The court in the Weslaco case53 stated that "To fix the rate of return one must determine: (1) the fair value of the plant, 
(2) the operating revenues, and (3) the operating expenses. The differences between the last two items is the net operating income. Those earnings must produce a fair return on the fair value of the plant." 
In summary, public service companies have a right to rate orders which will yield a fair profit or return, and the fair return to which a public utility is entitled is a return which if fair and reasonable in relation to value of pro­perty being used to render the public service. (City of Baytown et al v. General Telelphone Co. of the Southwest.54 These principles allow a public utility to charge rates the yield of which will cover 1) operating costs, 2) betterments 
and 	depreciation or depletion, as well as, 3) cost of replacements, 4) extensions, 
66 
S) and improvements, 6) but will also return a profit on the capital invested in 
the enterprise.SS 
As is the case with fair value, courts in Texas have provided a minimum of guidance as to how a rate of return should be determined. For both concepts, courts have emphasized the factors of judgment and discretion, establishing only a very loose structure within which the rate determinations should be made. 
67 

REFERENCES 

1. 169 u.s.466; 18 s.ct.418 
2. 169 u.s.466,547; 18 s.ct.418,434 
3. 212 u.s.19; 29 s.ct.192 
4. 212 u.s.19,52; 29 s.ct.192,200 
5. Id. 
6. 262 u.s.625; 43 s.ct.680 
7. 262 u.s.625,630; 43 s.ct.680,681 
8. 262 u.s.625,632; 43 s.ct. 680,682 
9. 262 u.s.679; 43 s.ct.675 
10. 	262 u.s.679,692; 43 s.ct.675,678 
11. 	262 u.s.679,690; 43 s.ct.675,678 
12. 	262 u.s.679,693; 43 s.ct.675,679 
13. 	289 u.s.287; 53 s.ct.637 
14. 	289 u.s.287,308; 53 s.ct.637,645 
15. 	289 u.s.287,313; 53 s.ct.637,647 
16. 	289 u.s.287,312; 53 s.ct.637,646 
17. 	289 u.s.287,305; 53 s.ct.637,644 
18. 	289 U.S.287,319; 53 S.Ct.637,649 
19. 	307 u.s.104; 59 s.ct.715 
20. 	307 u.s.104,117; 59 s.ct.715,721 
21. 	Id. 
22. 	307 u.s.104,120; 59 s.ct.715,723 
23. 	315 U.S.575; 62 S.Ct.736 
24. 	315 u.s.575,581; 62 s.ct.736,740 
25. 	3i5 u.s.575,586; 62 s.ct.736,743 
26. 	315 u.s.575,589; 62 s.ct.736,744 
27. 	315 u.s.575,584; 62 s.ct.736,742 
28. 	320 U.S.591; 64 S.Ct.281 
29. 	320 u.s.591,600; 64 s.ct.281,286 
30. 	320 u.s.591,602; 64 s.ct.281,287 
31. 	320 u.s.591,601; 64 s.ct.281,287 
32. 	320 U.S.591,605; 64 S.Ct.281,289 
33. 	320 U.S.591,606; 64 S.Ct.281,289,290 
34. 	289 S.W.2d 559. 
35. 	262 U.S.625. 
36. 262 u.s.276. 37~ 303 u;s.123. 
38. 	Marshall Newcombe, "Some Aspects of Regulation of Public Utilities Operating in the State of Texas", Baylor Law Review, vol. V, no. 4. 
39. 	F.P.C. v. Hope Natural Gas Company, 320 U.S. 591. 
40. 	289 S.W.2d 559, 571. 
41. 	289 S.W.2d 559, 572. 
42. 	289 S.W.2d 559, 573. 
43. 	359 S.W.2d 260. 
44. 	42 PUR3d 94, 1961. 
45. 	Vernon's Ann. Civ. St. art. 1446c, Sec. 41. 
46. 	Farris & Sampson, Public Utility Regulation Management and Ownership, 1973 pg. 118. 
68 

47. 
Ob Cit Baylor Law Review, pg. 349. 

48. 
35 F2d 743. 

49. 
281 F2d 567. SO. 7 F.Supp. 481. 


51. 
256 S.W.2d 187, 193. 

52. 
289 S.W.2d 559,572. 

53. 
359 S.W.2d 260,264. 

54. 
256 S.W.2d 187. 

55. 
47 Tex. Jur.2d 412. 


CHAPTER IV: UTILITY RATE STRUCTURES 
INTRODUCTION 
The rate structure is the method of distributing the burden of revenue allowed a utility under its regulated rate of return. Simply stated, the rate structure determines who pays how much. Rate design provided little interest or controversy when fossil fuels were both cheap and plentiful. Recently, however, the spectres of "energy crisis" and "runaway inflation" have added new dimensions and challenges to traditional metnods of struc­turing rates. Some generally uncontested goals to be achieved through the rate structure include: 
(1)  providing the necessary  revenue  requirements for the utility;  
(2)  distributing the burden of meeting those requirements fairly;  
(3)  promoting  an  efficient allocation of resources,  thus discouraging  

wasteful use of energy; 
(4) 
rate simplicity, understandability, public acceptability, and feasibility of application; 

(5) 
and stability of both rates and revenues. 


This chapter will discuss the present rate structure, arguments for and against rate reform, and alternatives to the status quo. 
LEGAL GUIDELINES 
The mandates of "non-discriminatory" and "just and reasonable" have a specialized application to rate structure. "Non-discriminatory" implies that rates for similar services to similar customers should be similar. 
70 

Every utility makes distinct charges to identifiable groups or consumer classes; similar customers fall into the broad classifications of resi­dential, commercial, and industrial, with subcategories such as all-electric residential, large-volume residential, etc. Another implication of "non­discriminatory" is that no customer or class of customer should be forced to subsidize the service to other customers or classes. "Just and reason~ able" means that reasonable differences in rates to classes of customers are reasonable when based on costs. "Reasonable discrimination" in utility rates among classes of customers is presently the norm, and Texas is no exception. 
PRESENT RATE STRUCTURE 
The rate structure for the ultimate consumer of either gas or elec­tricity is the same in Texas, although the price varies geographically with class of customer and type of fuel. Each rate schedule offers the individual customer within each class a graduated, descending scale of rates for incremental blocks of consumption. Commonly referred to as a declining block schedule, the unit price decreases as consumption increases. The following example demonstrates how this operates for a residential consumer of gas in Austin, Texas: 
o first mcf: $1.62 

o next 4: .93/mcf o next 20: .86/mcf o next 25: .63/mcf o next 250: .52/mcf o over 250: .40/mcf 


Large volume consumers are afforded additional discounts, paying an average rate that is two-thirds to one-half of what residential consumers pay. 
Most industrial gas consumers purchase gas directly from a gathering company 
by contract at a fixed price per unit, or flat rate; some large industries also generate their own electricity. 
Over the last decade, numerous Texas utilities have instituted a seasonal differential rate; rates are higher in the summer to reflect the additional capacity requirements which air conditioning places on the utility. This form of peak-load pricing is designed to bring the charges for supplying air con­ditioning, which creates a summer peak, in line with the cost of serving this load. 
COST OF SERVICE 
All gas and electric customers impose three types of costs on the utility: 
(1) customer costs, (2) commodity costs, and (3) demand costs. Customer costs include administrative costs such as meter reading and billing, main­tenance of consumer installations, and the depreciation and return on invest­ment in meters and service connections. 1 The commodity cost is the actual cost of producing gas or electricity and ' increases with the quantity of ser­vice, i.e., the number of killowatt hours or thousand cubic feet of gas (mcf) consumed. In the case of electricity, demand costs are associated with the generating, transmission, and distribution capacity which a utility customer requires; the maximum amount of service a customer needs determines the cost. The combined service requirements of all customers constituting the peak load is an important element in rate classification. 2 
Demand costs require an allocation to classes on the basis of more than 20 formulas available for this purpose. These formulas can be summarized as variations of one of three methods: The first divides system capacity costs among classes of customers in proportion to the peak demands imposed 
by classes at the time of the system peak. The second allocates system 
capacity costs in proportion to class maximum loads regardless of time of occurence, even though certain loads may not coincide with the company's peak load.3 The third assigns part of the total demand cost on the basis of class peak demands, and the remainder on the basis of total units of energy consumed by each class.4 
RATIONALE FOR THE DECLINING BLOCK STRUCTURE 
The purpose of a declining block structure is to stimulate consumption and is based on two assumptions: (1) the physical efficiency of large over small users, and (2) economies of scale. Theoretically, a customer's maximum rate of electric use during any service period fixes the amount of generating capacity a utility must provide. If a customer makes only sporadic use of his demand capacity, the cost per unit of energy should be higher than one who more efficiently uses his required capacity. For example, residential users typically have a low average use of their maximum demand because all household applicances, lights, and hot water are seldom used either simul­taneously or for extended periods of time. Industrial users have a high average use because their energy requirements remain relatively constant and much closer to their maximum demand. It is further argued that the peak . capacity of the utility is built to serve residential users whose similarity of consumption patterns creates system peaks during certain times of day and seasons of the year. Since the cost of the system maximum is attributable to residential consumers, their cost per unit of energy should be higher than other consumers whose consumption patterns are more flexible. 
The object of lowering 1·ates with increased consumption relates to economies 
73 

of scale. Utilities have traditionally been declining cost industries, meaning that increased output lowers average costs. Thus, charging lower rates where it would increase consumption has decreased costs for all con­sumers. Affording greater discounts to promote commercial and industrial consumption has been justified on the grounds that lower costs accrue to the residential consumer as a result. Also, since industrial consumers have greater competitive recourse to other sources of energy, the utility must offer industries rates that will enable them to maintain service to this class of customer; loss of industrial consumers would necessitate higher rates for all remaining customers who cannot readily convert to alternate fuel sources. 
ALTERNATIVE RATE STRUCTURES 
Nationally, utility rates rose 55 percent during the first half of 1974, atop a 20 percent increase in 1973. On balance, residential users provide around 37 percent of the revenues for large electric utilities, though they buy only about 26 percent of the power. Large industrials buy approximately 35 percent and pay 23 percent. Before he left the Federal Reserve Board, Andrew ·F. Brimmer said "while recognizing there are some physical efficiencies in delivering energy to large users, I believe these quantity discounts are not longer consistent with our long­run need to conserve energy resources. 
11 5 
Flat Rates Flat rates have two applications: (1) charging a uniform rate per unit of energy within a customer class irrespective of amount consumed; 
(2) equalizing rates among customer classes. Both are aimed at eliminating incentives associated with increased consumption, with the latter being a more comprehensive approach. Flattening rates within a particular customer class assures that the smallest consumer pays no more per unit of energy than the largest. Under the present system, small consumers fall within the first few blocks and consequently pay a higher average price per unit than those whose consumption covers several blocks in the declining schedule. To equalize rates among customer classes, the total cost of electricity or gas production and distribution would be divided by the number of kilowatt hours or cubic feet sold to determine the rate per unit. This option would pri­marily benefit residential and small commercial consumers by evenly distri­buting the revenue requirements of the utility according to consumption. Large consumers would either be compelled to meet the increased cost, ameliorate the impact of increased cost through conservation, or switch to an alternate fuel source if one is available at a lower cost. Inasmuch as price affects consumption, the lower cost of utility service to the small consumer achieved through flat rates would not promote conservation in that sector. 
Inverted Rates 
Inverted rates simply involve reversing the present schedule so charges· rise with increased use. The proposal is based on the premise that rates should incorporate the entire range of social and economic costs resulting from utility operations. The negative environmental impact of utility plants and the social cost of hastening fossil fuel shortages before substitutes can be brought on line increase with the size of the facility and the quantity of power consumed. To properly reflect these costs in the rate structure, rates should rise with increased use. Sufficient conservation efforts would moderate the need for capital expansion and alleviate shortages during the transition to alternate fuels. All consumers would have an incentive to conserve energy, 
but the greatest price increases would be borne by large volume consumers who 
create the need for new facilities and place the greatest drain on remaining 
fuel supplies. 
Lifeline Rates 
The lifeline rate is designed to provide a basic amount of gas or elec­tricity to all customers at a fixed rate not subject to increases. By guaran­teeing a minimum energy supply at a constant rate, frugal consumers are pro­tected from rate increases during inflationary periods. Under the proposal, utilities would be allowed to make up the difference needed to earn a reasonable profit by passing on higher costs to customers using greater than the base amount. Michigan, Wisconsin, North Carolina, and Vermont are all considering adopting some form of lifeline rate. For example, the Vermont reform would provide the first 400 kilowatt hours of electricity for a fixed rate of $10. 
' 
Today's rapid escalation of utility rates threatens to place an adequate energy supply beyond the financial reach of low and middle income families. The lifeline rate assumes that a minim~m amount of energy is critical to human welfare, and that this concern should be reflected in the rate structure. In addition, the rates gives tremendous incentive for residential conservation where consumption can be held below the base amount. 
As a response to this concern, the state of California recently passed the Miller-Warren Energy Lifeline Act. Under the statute, the California Public Utilities Commission is required to designate the amount of gas and electricity necessary to fulfil the minimum energy uses of the average residential customer. Having done this, the connnission is prevented from raising the rates on these quantities until the average system rate exceeds the lifeline rates by at least 25 percent. 
76 
Peak Load Pricing 
Peak-load rate differentials apply to both time of day and season ofiyear. As mentioned previously, seasonal rates are already employed by many Texas utilities. The winter/summer price differential reflects the costs of a seasonally peaking utility.more accurately than a year-round rate. Time-of­day differentials would allow the utility to charge more when the system is operating at its maximum capacity and less when it is not. The underlying principle of peak-load pricing is that customers who add to the system peak should be required to pay the cost associated with that demand. Depending on the particular company, the cost for on-peak production may be from 5 to 25 times higher.6 
If customers were charged the true cost of service through time-of-day metering, consumption patterns should shift from peak hours to when total demand is less, thus reducing capacity needs of the overall system. The peak demand determines plant size and the need for investment in additional capacity. The total fixed plant generally is used no more than 55 percent 
7
of the total hours available in a year. By eliminating system peaks and flattening out the .load curve, peak-load pricing allows new customers to be added to the system without necessarily expanding facilities. A Commissioner of the Wisconsin Public Service Commission has concluded that peak-load pricing "should also operate to stabilize the utility's earnings, and thus mitigate to some degree the s~rious earnings attrition that has plagued 
utilities••• ~ 118 
There is no concensus on the economic feasibility of full implementation of time-of-day pricing. Although it is already in use in some industrial electric rate classifications, it may be prohibitive for small users. One economist has compared power companies' reluctance to adopt some form of peak-hour pricing "to a supermarket operator, chafing at the costs of the 
77 

check-out process, and deciding to save money by simply weighing each cus­tomer's basket and charging a uniform price per pound".9 
THE PROS AND CONS OF ALTERNATIVE RATE STRUCTURES 
Argument Against Rate Changes 
The declining block structure is discrimination based on cost, and con­sequently treats all customers equally. This method of allocating costs is time-tested and has historically produced sufficient revenues to provide an adequate and reliable energy supply. Present hardships of increased cost to the consumer and utility difficulty in securing capital are symptoms, not causes of inflation. "Cure the basic ailment (inflation) and we shall find the need for tampering with the system dissipated. 1110 
Proposed rate changes have unknown consequences that could produce disastrous economic and social upheavals. Peak-load pricing in the form of time-of-day metering means enormously increased administrative and equipment costs to procure dubious benefits. Time-of-day metering may simply shift the peaks rather than distributing energy use evenly across present system peaks and valleys. Those industries which have adjusted consumption around the current peak period of 5 to 9 p.m. to take advantage of daytime off-peak hours may be forced to night shifts which involve higher labor costs and lower productivity. Similar social costs attend restricted air conditioning use. 
Flat, inverted, or lifeline schedules may force large consumers either to alternate fuels or generation of their own power. Assuming industry chooses to accept higher costs and passes them on to the consumer in the form of higher priced goods and services, the net effect is simply to shift the inflationary impact from one commodity to others. If higher costs to large consumers causes the aforementioned attrition, two problems arise: (1) higher prices to small consumers since the utility must continue to recover cost.s; 
(2) depressing demand for one source of energy results in increased demand in other areas, thus placing a drain on substitute fuels .and other raw materials. When faced with a choice among higher priced goods and services, higher utility costs for small consumers, and shifting energy shortages from one fossil fuel to another, the most reasonable course would appear to be to remain with the present system. 
Rebuttal 
The rate of return ailowed a utility is a percentage of the rate base; consequently, utllities have had a positive incentive to expand operations because a larger capital investment means a larger profit. It is not coin­cidence that the declining block structure rewards increased consumption with lower rates, thus advancing the need for additional equipment and facili­ties. Until regulators cut the tie that binds .profits to capital expansion, any method of growth-restraining rate structure changes will be opposed by utilities. 
Three goals are to be achieved through rate structure changes: (1) dis­couraging expansion of utility installations; (2) conservation of diminishing fossil fuel resources; (3) ameliorating the impact of inflation on utility prices for consumption to meet basic human needs. Small consumers have paid higher prices simply becuase they cannot readily convert to alternate sources; large consumers have benefited from their relative competitive advantage and subsequently lower rates. 
Utilities are asking for rate increases to finance growth and mainte­nance of the present schedule on the basis of historical arguments that are no longer valid. Power companies are assuming that the demand for gas and electricity will double in the next 10 years as it did during the past 20. 
However, the increased consumption during the past two decades is partially attributable to the fact that the price of gas and electricity fell relative to all prices; the growth projections of utilities ignore the impact of price increases on future demand. While the short-run elasticity of resi­dential users is between 0.1 and 0.2, meaning that a 10 percent price increase will cut consumption by only 1 or 2 percent, demand may be quite elastic over the long-run. A recent model indicates an elasticity for 
·residential users of about 1.0, meaning that a 10 percent price increase could produce a 10 percent decline in usage. A complementary study con­cluded elasticities for commercial and industrial users are in the 1.5 range. Should these postulated elasticities prove correct, much of the additional capacity being planned by utilities will not be needed if suf­ficient incentives are given to curb demand.11 
There is a general agreement that economies of scale have largely flattened out in recent years, the only point of contention being whether the condition is temporary or permanent. As antithetical as it may be to the American way of life, it appears that in the case of the utilities it is no longer cheaper to be bigger. Fuel economies have been eroded by rapid escalation in fuel costs, while inflation has eaten away any poten­tial saving to be derived from new construction.12 Consequently, promoting consumption via the declining block schedule is presently a drain on utility profits. If lower costs of service cannot be obtained through economies of scale, the declining block structure loses its prized "cost-based" rationale. 
The impact of the proposed changes is neither easily assessed nor dismissed. Although considerable latitude for conservation seems to be indicated by the study of elasticities, the depletion of substitute fuels 
80 

and higher priced goods and services are options that can be exercised in 
lieu of conservation. A careful investigation of the economic and social consequences of changing rate structures is certainly warranted. Just because the existing system worked in the past, does not mean it is the best system for the future. 
CONCLUSION 
Equity and conservation as applied to rate-making have only recently received attention as matters of public policy. Assuming that a minimum level of utility service is essential to public health, welfare, and safety, the task of the regulator is to reconcile this consideration with: (1) the need to conserve energy; and (2) the utility's revenue requirements. Since it appears probable that higher prices provide an incentive for con­servation irrespective of customer class, the problem becomes one of designing a rate structure that discourages consumption without pricing utility service beyond the reach of low-and middle-income families. To meet revenue requirements, the rate structure must provide the utility with stable earnings sufficient to attract additional capital. 
Any rate structure that equalizes rates among classes of customers and does not reward increased consumption with lower prices is an improve­ment over the present system in terms of both equity and conservation. 'llle flat rate structure accomplishes both of these objectives but to a lesser degree than the other three alternatives discussed in this section. A flat rate does not necessarily mean lower prices to small consumers, but simply that the average price per unit will be the same regardless of amount consumed. If rates are flattened among, as opposed to within, 
81 

customer classes, industrial energy prices will probably increase, thus providing an incentive for conservation in that sector. Since the flat rate structure is less disruptive of the status quo than the other alternatives, it should meet with less resistance from utilities, which are concerned that the risk attending innovation will discourage poten­
tial investors. 
Inverted rates, like flat rates, could be implemented either within present class schedules or across the board. An inverted rate schedule is easily comprehensible to the consumer and affords greater incentive for conservation than flat rates. However, an across-the-board inverted rate may result in a price too low to encourage conservation in the lower ranges of consumption, while forcing large consumers to abandon conventional utility service. On the other hand, an inverted rate within customer classes would make conservation equally attractive to all consuming groups, while providing energy at a lower average cost per unit to small consumers. 
The advantages of peak-load pricing are less obvious for residential consumers, than industrial users, but this method has two advantages not found in the other alternatives: (1) the individual consumer can materi­ally affect the price paid for energy to the extent that on-peak consump­tion can be restricted; and (2) shifting consumption patterns by offering lower prices for off-peak consumption will result in better utilization of existing facilities, thus reducing the need for additional plant capacity. As a form of long-run incremental cost pricing, peak-load pricing more accurately reflects the actual cost of providing utility service than the other alternatives. Utilities argue that the cost of implementing peak-load pricing for residential customers is prohibitive and the benefits uncertain. 
82 
Tiie uncertainty stems from the lack of extensive research on demand elasticity for residential consumers "and an inability to predict whether peak-load 
. . . . . -. . .. "" 
pricing 'will',indeed flatt~nJ:he ioad·· curve or silnply 'shift:SY!jtem ~e~ks· ·. 
The lifeline rate .is · th~ only altet'1lative :~h8:t has no ba~_is ip., ,the cost of providing utility service, yet it has advantages for both the utility and the res:l,.d811'£ta( consuJJU!r• ... J.\y establieh;l.ng a maximUm rat~ 'for, a, level Of 
' ·.·· •.: 
utility service designed to meet minimum residential needs, residential 
.. ' ~ 
It.: ·••• • ,, ' ' ' • 
consumers are protected in periods of' economic fluctuation; conservation is an equally s~gnificant aspect of th~ .rate.structure since the fixed ·-price is applied only to the base amount. Because the.utility has considerable latitude in the determination of rates above the base amount, the problem of meeting revenue requirements. should be minimized~ The .simplicity .of : application, .in addiU.on -to its potential for achieving equity and conser­vation, ,makes · the _lifelin~ i:ate a .compelling choice over the present ·system. 
83 

REFERENCES 

1. 	
J. Bauer, Transform.in Public Utilit Re ation: A Definite Adminis­trative Program, New York: Harper an Brothers, 1950, p. • 

2. 	
J. Bauer, Effective Regulation of Public Utilities, New York: The Macmillan COmpany, 1925, p. 284. 

3. 	
A.J.G. Priest, Principles of Public Unity Regulation, Theory and Application, vol. 1, Charlottesville, Virginia: The Michie Company, 1969, p. 338. 

4. 	
P. Garfield and W. Lovejoy, Public Utility Economics, New Jersey: Prentice-Hall, Inc., 1964, p. 162. 

5. 	
R. Dietsch, ''Utility Bills," New !q?ublic, vol. 171, (Nov. 9, 1974), 


p. 6. 
6. 	
'-· Karen, "Our Obsolete Utility Rates," Nation, vol. 218, (March 30, 1974) I P• 401. 

7. 	
See supra note 4 at 151. 

8. 	
Re Madison Gas and Electric Company, August 81 1974, 5 PUR 4th 48. 

9. 	
"Electric Utilities Face a Price Dilemma," Business Week, (Feb. 2, 1974) I P• 34. 

10. 	
See supra note 8 at 61. 

11. 	
See supra note 9. 

12. 	
See supra note 6. 


BIBLIOGRAPHY 

Bauer, J. (1925) Effective Regulation of Public Utilities, New York: The Macmillan Company. 
Bauer, J. (1950) Transforming Public Utility Regulation: A Definite Administrative Program, New York: Harper and Brothers. 
Congressional Record, "The Lifeline Electric Rate." (December 19, 1974): 922136-7. 
Cooke, M. (ed.) (1924) Public Utility Regulation, New York: The Ronald Press Company. · 
Dietsch, R. (1974) "Utility Bills." New Republic 171 (November 9): 6-7. 
"Electric Utilities Face a Price Dilemma." (1974) Business Week (February 2): 34-5. 
Garfield, P. and Lovejoy, W. (1964) Public Utility Economics, New Jersey: Prentice-Hall, Inc. ' 
Karen, R. (1974) "Our Obsolete Utility Rates." Nation 218 (March 30): 300-402. 
Priest, A.J.G. (1969) Principles of Public Utility Regulation, Theory and Application, vol. 1, Charlottesville, Virginia: The Michie Company. 
Treadway, H. (1974) "Electric Rates and the Energy Shortage." Public Utilities Fortnightly (December 5): 17-21. 
Wisconsin Public Service Cotmnission (1974) "Application of Madison Gas and 
Electric Company for Authority to Increase Its Electric and Gas Rates." 
(August 8): 2-U-7423, 5 PUR 4th 48. 
CHAPTER V: UNIFORM SYSTEMS OF ACCOUNTING 
Effective utility regulation must be based on factual and reliable accounting data consistently developed throughout an industry. Uniform systems of accounting have been designed to fulfill this need. 
HISTORY 
The major impetus for utility regulation came from the Federal Trade Conunission's 1928 investigation of blatant abuses in the electric utility industry. This investigation uncovered accounting and financial irregu­larities which involved the improper and fictional write-up of utility assets of more than $1.6 billion, or an overstatement of electric utility plants in utility company accounts of about 25 percent.1 These excesses precipitated an expansion of state regulatory commission authority and led to the initiation of federal utility regulation in the mid 1930s. 
Federal regulation of the utility industry was authorized under six acts: the Federal Water Power Act (1920); the Security Act (1933); the Federal Connnunications Act (1934); the Securities and Exchange Act (1934); the Public Utilities Act (1935), which included the Public Utility Holding Company Act and the Federal Power Act; and the Natural Gas Act (1938). Under these acts, the Federal Power Commission (FPC), the Securities and Exchange Conunission (SEC), and the Federal Communication Commission (FCC) were established and given regulatory powers designed to supplement state control over utilities. Among these regulatory powers was the power to require information reporting systems, and this power has led to the use of uniform systems of accounts. 
86 

Standardized accounting procedures had an earlier start at the state level 
when Massachusetts first required them for railroads in 1876. However, it was not until 1922, when the National Association of Railroad and Utility Commis­sioners (NARUC) prescribed a uniform classification of accounts, that many other states began to adopt prescribed systems. By 1925, 40 states had adopted 
some form of standardized utility accounting procedures.2 The FCC adopted a uniform system in 1935, and in 1937 NARUC adapted their original uniform system 
for the FPC's use. As recently as 1967, all but seven states had prescribed a uniform system of accounts for electric, gas, and telephone utilities, leaving Texas and Mississippi as the only states without uniform accounting systems for any type bf utility.3 
The imposition of these reporting requirements helped to highlight and thereby to eliminate the severe overcapitalization practiced by many utility companies to expand their rate bases. In addition, uniform accounting systems placed regulatory commissions in ~ position to determine accurately a fair rate of return rather than to accept blindly the utility firm's calculations. 
· COURT DECISIONS 
Legal support for regulatory commission authority to require uniform accounting systems has been consistent. In 1912, the United States Supreme Court held that in order to assure reasonable rates a regulatory commission could enforce a system of accounting designed to prevent concealment of for­bidden practices. The Court held, furthermore, that the requiring of infor­mation in itself could not be considered regulation.4 In 1932 the Court upheld a regulatory commission's exercise of discretion in promulgating accounting procedures, and ruled that a court should not substitute its own 
87 

discretion for that of a regulatory commission. 5 In a 1936 case involving 
the FCC's authority to utilize orginal cost valuations, the Court held that 
the Commission could adopt any lawful method of valuation.6 
In 1ts 1944 ruling in the Northwestern case,7 the Court reaffirmed previous decisions and established the limits of judicial intervention in commission rulings. This case involved the appeal of an FPC decision to require a particular accounting disposition which was not in accordance with the best accounting practices but which had been sustained by expert testi­mony. The Court reaffirmed the FPC's authority to prescribe uniform systems of accounting and to require utilities to maintain accounts accordingly. 8 This grant of authority to the FPC was found to be within the legislative power of the Congress,9 and as long as the Commission's actions were not obviously arbitrary, the Court would not interfere. Thus the Court affirmed the FPC's power to enforce its accounting preferences over those of company managements with regard to the accounts used for regulatory purposes, although it also maintained that the FPC order did not prohibit the maintenance of other records kept in a different manner. 
Federal Power Commission requirements for accounting systems are superior to state requirements. In the 1964 Appalachian Power Company case,10 the Court held that, if requirements conflict, the Commission's system of accounts is to be regarded as the basis for regulation. 
CHARACTERISTICS OF UNIFORM SYSTEMS 
Conflicting Demands · Among the difficulties of using a standardized system of accounts are the multiple, sometimes conflicting demands, that accounting must fulfill. Creditors, 
88 

stockholders, rate payers, labor wage negotiators, management, and regulatory bodies all desire accurate and reliable information. The most influential participants in controlling accounting procedures are the regulators, who set the format, and the utility management, who do the accounting. Although other interests have little direct influence in establishing accounting systems, they have benefited greatly from the consistent information that the regulatory agencies require to be published. For example, such consistency has allowed a degree of comparability that has eliminated a major problem in investment by enabling prospective utility investors to analyze the rela­
11
tive strength of different utility companies. 
The relative positions of regulator and management were expressed by the vice president of Cleveland Electric Illuminating Co. as. he presented the utility executive's point of view before the Fourth Annual Public Utilities Institute Convention. He argued that, although the uniform system of accounts is an adequate vehicle for compiling the information required by both utility management and regulatory bodies, it is less than ideal as a source of manage­ment-oriented information for ~orporate decisionmaking. He expressed doubt that a uniform accounting system would ever evolve which would fulfill both commission and management requirements equally well. Since regulatory account­ing is designed to aid the regulator, changes in the uniform system would un­doubtedly be more regulatory-oriented than management-oriented. Changes in this direction would widen the gap of irrelevance between the needs of the regulators and those who are regulated if the changes require accounting pro­cedures whose beneifts are far outweighed by the cost of compliance. The ; final consequence, he concluded, was for management to resist being fitted 
1 
with an "accounting strait jacket" which would result in an inaccurate por­trayal of past events.12 
89 
Uniformity and Comparability 
Uniform accounting systems are desirable because they provide reliability, uniformity, and comparability. Uniform systems ensure that th~ facts and figures needed for proper regulation are available and presented in an organized form. Uniformity is provided throughout each type of utility (i.e., electric, gas, telephone, etc.) for a specific size13 of gross annual revenue (the smaller the utility, the less intricate the reporting requirements). Uniformity in the industry allows regulators to compare the behavior of utilities which face simi­lar situations for indicators of effective management practices. Uniformity over time allows comparison of one annual period to another with regard to growth, long-run profits, investment, etc. Caution must be exercised in such comparisons, however, since it is difficult to find identical firms supplying the same type of ·utility service under the same operating conditions. Also, since different regulatory bodies often vary in their interpretation of the same uniform system of accounts, intra-company uniformity is probably the most reliable source for comparison. 
Interpretation 
Despite the control which uniform systems of accounting provide, there is always room for rational disagreement as to accounting definitions; and, therefore, various interpretations app-ear. Even detailed accounting require­ments do not bring about uniform systems without effort being expended on enforcing intended definitions and procedures. The publication of rules and regulations must be followed by a continued effort to create and to main­tain uniformity. Thus the FPC, as part of its regulatory role, constantly reviews utility records to ensure that they are being kept as the FPC in­tended them. If interpretations by the utilities are necessary within the 
90 

framework of a standardized system, well-established accounting techniques must not be violated. Tiiis principle was stated by the Nevada Public Service Commission when it ruled that accounting must be based on sound economic principles and that these principles must be duly considered when interpreting loosely-stated accounting procedures. 14 
The regulator must not be .limited in his regulatory efforts by the art of accounting, however.15 Rate-making is the end result of the total of the regulatory process not just a mathematical computation accomplished by "plugging in" appropriate data. Commissions must ensure the proper compilation of data for the uniform system, especially in the valuation and depreciation of capital assets. Thus, in the process of insuring service to the public and a fair re­turn to the investor, the regulatory commission must look beyond the informa­tion provided by uniform accounting systems. Although the uniform system is a vital part of the regulatory process, it must not be taken as the entire system. 
UNIFORM ACCOUNTING SYSTEMS AND MUNICIPAL REGULATION 
Municipal regulation of utilities in Texas is in a state of transition. With the passage of the Public Utility Regulatory Act (1975), municipalities have the option of permitting the state utility commission to exercise original jurisdiction over utilities within their incorporated limits. The statute also gives the commission authority to prescribe a system of uniform accounts. 
Most municipalities in Texas over 5,000 in population are home-rule cities16 and may write their own charters and franchises governing utility reporting. Unfortunately, the vast majority 9f franchises do not specify detailed re­
91 

porting formats. 17 With few reporting requirements, utilities may be able to present city councils with one-sided information that only substantiates the need for utility rate increases. 
To improve regulation at the local level, the Texas Municipal League, through the Texas Utilities Advisory Council (TUAC), has developed a four­page fact sheet complete with a fill-in-the-blank process for determining rates of return. This approach assumes that the figures provided the city council for filling in the blanks are accurate. Since few guidelines are required·by most municipalities, the choice of methods is left to the utility• . There are many ways to calculate rate bases, depreciation costs, expenses, and revenues. Additionally, there can be honest disagreement over what belongs within any given accdunt. Who decides what are justifi-. able advertising expenses? Theoretically, the city council makes the de­cision, but in reality do council members have the time and expertise to audit the company's books? The company's accounts should be spelled out in a specific manner so that both sides know what the figures actually say. In the place of uniform accounts, the companies explain, they have an annual independent audit. An independent audit, however, only verifies that the company's books accurately reflect the company's financial posi­tion in accordance with commonly accepted accounting standards. The inde­pendent audit looks at the company as a whole and has no influence on how the company that serves several towns will subdivide its records to dis­tribute costs to each area it serves. This uncertainty of information could be solved if every franchise included definite financial reporting require­ments; but even if this were accomplished, the lack of uniformity between municipalities in Texas would prevent ~!despread comparison. Varying stan­dards would also impose a heavy accounting burden on a firm such as Texas Power and Light, which serves 248 municipalities. 
The State of Texas could devise a recommended, if not mandatory, uniform accounting system which would provide city councils with pertinent, reliable information and a process for apportioning costs to each municipality. Since uniform systems would be ineffective without enforcement, the state would also have to institute a program whereby professionals could check utility accounts to insure proper interpretation and continuous compliance with stan­dards. For the utilities' benefit and ultimate minimization of costs, a uni­form accounting system should coincide as closely as possible with the account­ing requirements imposed by the FCC, FPC, and SEC. 
CONCLUSION 
Uniform systems of accounting are the basis upon which effective federal and state utility regulation has been built. The rationale for uniformity in accounting is based on the belief that all sides--utilities, regulators, and informed consumers--would benefit from an understanding of how the data upon which utilities are regulated are actually determined. Regulation of utilities must be based on facts and figures derived by a method understood by, all• . The argument that a uniform system is too costly is only valid if the system is not well designed or if each individual municipality were to require its own unique system of accounts. 
A good uniform system of accounting requires development based on a coopera­tive effort between the experts from regulatory commissions, utilities, and pro­fessional accounting and regulatory organizations. The first step in providing effective utility regulation in Texas should be the development of a modern, statewide uniform system of accounting for all regulated utilities. 
93 

REFERENCES 

1. 	
Arthur Litke, Public Utilities Fortnightly, Vol. 76, no. 12, Dec. 9, 1965, p. 36. . 

2. 
· Charles F. Phillips, Jr., The Economics of Regulation, rev. ed. (Homewood, Ill: Richard D. Irwin, 1969), p. 148. 

3. 	
Federal Power Commission, Federal and State Commission Jurisdiction 

and Regulation of Electric, Gas and Telephone Utilities. (Washington, . D.c., U.S. Government Printing Office, 1967), pp. 16-18. 

4. 	
Interstate Commerce .Comm. v. Goodrich Transit Co., 224US 194, 221 (1912). 

5. 	
N?rfolk and Western Ry Co. v. u.s., 2S7US 134, 141 (1932). 

6. 	
Am. Telephone and Te_legraph Co. v. U.S., 299US 232 (1936). 

7. 	
Northwestern Electric .Co. v. FPC, 321 US 119 (1944), p. 122 & 124. 

8. 	
Federal Power Act, Sect. 20l(a) imposes regulation upon interstate utilities; Sect. 205 gives the Commission authority to regulate rates; and Sect. 30l(a) requires the keeping of accounts by utilities and authorizes the Commission to make such rules and regulations necessary cir appropriate for the purposes of the administration of the Act. 

9. 	
Kansas Ci'ty Southern R. · Co. v. U.S., 231US 432; Norfolk and W.R. Co. 


v. U.S., 287US 134; Am 	T and T Co. v. U.S., 299US 232. 
10. 	
Appalachian Power Company V. Federal Power Commission, 328 F2d 237 Ceritiorari denied, October 12, 1964; 379US 829. 

11. 	
Alfred L. Burke, "The Investor Looks at Accounting Problems in the Utility Industry," Financial Analysts Journal, Sep-Oct, 19~5, as cited by Arthur Litke, p. 50. 

12. 	
Richard A. Miller, "A Public Utility Executive's Point of View" in Roland 

. F .• 	Salmonson (ed.) Public Utility Acc~mntin~: Models, Mergers, ~Informa­tion Systems, East Lansing, Michigan: Institute of Public .Utilities, Division of Research, Graduate School of Business Administration, Michigan State University, 1971. 

13. 	
For example, FPC governed electric utilities are divided by size of 

gross 	annual revenue: 
Class A-$2.5 million or more 
Class B-$1-2.5 million 
Class C-$150,000-1 million 
Class D-$25,000-150,000 


14. 	
Re Southwest Gas Corp. (1967) 69 PUR 3d 360 (Nevada). 

15. 	
Re Montana Power Co. (1962) 42 PUR 3d 254 (Montana). 

16. 	
Texas Almanac, 1974-75, pl. 89 (A. H. Belo Corp., 1973), 203 of 214 cities over 5,000 population as of '70 census were ''homerule." 

17. 	
Jack Hopper, Ph.D., Utility rate consultant, ''Municipal Regulation of Telephone, Electric and Gas Distributing Utilities in Texas" (mimeographed). 


95 

BIBLIOGRAPHY 

Farris, M.T. and R.J. Sampson, Public Utilities: Regulation, Management, and Ownership. (Dallas: Houghton Mifflin Co., 1973). 
Phillips, Charles F., Jr., Economics of Regulation. (Homewood, Ill: Richard D. Irwin, Inc.) 1969. 
Salmonson, R.F., Public Utility Accounting: Models, Mergers and Information Systems. (Michigan State University: Institute of Public Utilities, 1971). 
Suelflow, J.E., Public Utility Accounting. Michigan State University: Institute of Public Utilities, 1971). 
Walch, F.X., ed. Public Utility Regulation. Wash., D.C.: Public Utilities Reports, Inc., 1961. 
96 

CHAPTER VI: THE TEST YEAR IN trrlLITY RATE-MAKING 
· ·INTRODUCTION 
The "test year" in the utility rate-making process is usually used as a benchmark for known or expected changes in a utility's costs of operating. It provides operating results (or costs of operating) for that historical 12-month 
. 
period which best approximates a prospective period of operations for a utility. The information within a test year shows the rate structure and the operating revenues of the utility. The operating revenue is broken into two basic com­ponents: expenses and net reveneus. The expenses category is further subdivided 
into such varible costs categories as office supplies, equipment rental, adver­
tising, loan intere:;ts, wages, and taxes. The subcategories under net revenues 
include stock dividends, bond interest, and depreciation fund. Exactly what should be included in these two categories is in each case debatable. Thus, while not all of the items mentioned are necessarily included under operating revenues in all test years, they are illustrative of the kinds of cost-categories shown under operating revenues. There are two other types of information a test year is intended to provide. One is the rate base, or the value of the invest­ment in plant and facilities (values such as telephone lines, buildings, gene­rators, land, pipelines, fuel shortage tanks). For the test year this is the base upon which an appropriate rate of return to that capital investment is cal­culated. The other important piece of information provided by the test year is the rate of return --the percentage of investment that a utility is allowed to inake as a return or profit by the regulatory agency. 
97 
GHOOSING A TEST YEAR 
The objective in choosing the proper test year is to find that 12-month period that will serve as a basis for making the most accurate estimate of the utility's operations in the future:.-:_ the· major problems involved in making this 
selection were illustrated by the Connecticut Public Utilities Commission when it said in 1957 that: 
''We are cognizant of the difficulties encountered by an applicant in attempting to select a proper test period for use in portraying the company's need for rate relief. Actual figures, while unques­tionably accurate, reflect historic events, whereas rates 1111st be established prospectively. The ideal situation would be one wherein 
. results of future operations could be ascertained with unquestioned 
accuracy. 111 

Thus the task in selecting a test year is approximating the future f inan­cial situation of a utility for the period in which prospective rates will be in effect. The difficulty in approximating a utility's future financial sit­uation is closely connected with the problem of approximating the future of the economy. More specifically, it is a problem of predicting future price con­
diti~, since prices are what the utility seeks to adjust to in order to main­tain the appropriate rate of return or profit margin. In this context, selec­tion of a test year is concerned with which year best reflects or accounts for future price conditions, whether they are falling, stable, or climbing. 
The Historical Test Year 
The historical test year is an examination of the cost/revenue results of a utility for an actual 12-month period of operations. There are several advan­tages in using this kind of test year. One is that questions of the accuracy of the information are minimized. This is important when trying to document changes in, or an erosion of, a utility's revenue/cost or rate of return. This kind of test year indicates what, at a given level of operation, is the revenue/cost 
98 

situation of the utility. It facilitates the regulatory process during a period of stable prices. In other words, the historical test year is a reliable regula­tory tool to the extent that the costs of a utility's inputs in the future are similar to that of yesterday. A third advantage of the historical test year is that generating necessary information simply involves surveying revenue/cost ac­counts and other accounting records of the utility, if, of course, they exist. In most cases, if the economy is experiencing a period of falling prices, the utility will lobby for the use of an historical test year in order to maintain at least their present level of revenue. 
The Future or Hypothetical Test Year 
The impact of inflation on prices and the economy has created pressure for the adoption of a test year that coincides as closely as possible with the period in which prospective rates will be in effect. The kind of test year that does this is termed a future. test year. It is, a projection of rate base increases, expenses, net revenues, demand increases and so forth. Since World War II, it has been rather common to expect prices to be constantly on the rise. Thus with the maturing techniques in industry and price forecasting, it is becoming in­creasingly reliable to use projected data such as the future test year, which reflects anticipated operations. 
Two types of future test years tend to eliminate the problems of attrition and regulatory lag, and reduce the frequency of rate increase requests. One test year is future-oriented at the date of filing the rate increase request and the other is future-oriented not only at the date of filing but also at the date of the rate order. Filing date, as used in this report, refers to the date on which the utility gives official notice to the appropriate regulatory agency that it seeks rate relief. Rate order refers to the date on which the appropriate regulatory agency gives notice to the utility that its request has 
been acted upon. To eliminate regulatory lag, a future test year beyond the 
filing date is used. If a company wishes to eliminate regulatory lag as well 
as attrition, a future test year beyond the expected date of the rate order will be used. 
The Mixed Test Year 
Some regulatory bodies have found it useful to adopt what is called a mixed test year. The mixed test year is a combination of both historical and future operating results, where the test year falls six months before the date of filing for the rate increase and six months after the filing date. This type of test year takes partial advantage of the completely historical test year and of the completely future test year. Using six months of historical data saves time and provides accurate and reliable data on the actual operations and revenue needs of the utility. On the other hand, using six months of projected operating data partially offsets the problems of attrition and regulatory lag during infla­tionary periods. 
Rates are designed to generate revenues to cover operating expenses and a particular return on invested capital. Thus, if the operating expenses of the utility begin to increase, the return on invested capital decreases, or erodes, and the utility files for a rate increase. When the utility files for a rate increase, it must pay "out of pocket" all cost increases until the new rate order is issued by the regulatory agency. The mixed test year helps remedy reg­ulatory agency. The mixed test year helps remedy regulatory lag because rates would be set to bring revenues based partially on the operating cost increases that are expected to occur during the regulatory process. 
Since even routine rate proceedings are time consuming, the future portion of the mixed test year allows the regulatory body to observe during the rate 
100 

proceeding how accurately the utility can project its operations. When the utility knows that its projected operating results will be scrutinized during 
the course of the rate proceeding, there is an incentive for the utility to make the best and most accurate projections it can. 
PROBLEMS WITH TEST YEARS 
During inflationary periods the historical test year subjects rate orders to the problems of attrition and regulatory lag, while application of the future test year is always suspect in terms of reliability. 
Attrition 
Attrition results when the rate base is increasing faster than net revenues. Rates of return (net revenue ~ivided by the rate base) established on a historical test year in a period of rising costs are in effect set as though new and old equipment cost the same. To illustrate, suppose a utility is earning a 5 percent return on a historical rate base of $100; during the period in which the base is being used, equipment is replaced raising the value of the rate base to $130. 
With a rate of return of 5 percent on a rate base of $100, an increase in the rate base to $130, not offset by an increase in revenues sufficient to yield the 5 percent return (in dollar terms), results in attrition. Another cause of attrition is the problem of expenses increasing and leaving less and less net revenue for return to investment. When these problems arise, the utility makes a rate increase request which then raises the problem of regulatory lag. 
Regulatory Lag Regulatory lag is the loss of earnings, due to attrition, between the time of the rate increase request by the utility and the time an increase actually 
101 

becomes effective. This is due primarily to the lengthy nature of rate proceed­ings. In order to mitigate the effects of inflation on the historical test year, two techniques have been adopted• . One is to augment the rate of return. This is a stop-gap measure that increases investment, which requires an increase in rev­enue to maintain the proper return on that investment, which in turn necessitates 
increases in rates to the consumer. The other technique is to adjust the test year data to reflect known changes in the rate base or expenses. This is also problematic, because it essentially rejects the concept of the test year. By adjusting for selected changes in costs in the test year, the test year loses its effectiveness in giving a balanced approximation of the future. A practical 
solution to the problem is to move the test forward in time in order that it may capture the entire context in which changes are likely to take place. 
Reliability 
Perhaps the primary objection to the use of a future test year relates to the reliability of its projections. The accuracy of any projection can only be established with the passage of time. Another significant objection might be raised by the statutory phrase "used and useful." Property included in a pro­jected rate base and not in use at the present, it could be argued, is not "used and useful" and therefore cannot be applied to rate base calculations. Also, the term "present fair value," some contend, puts a temporal limitation on the selection of a proper test. 
CONCLUSION 

The test year in rate-making is the basis for testing the fairness and rea­sonableness of prospective rates. The choice of the proper test year depends on the facts and circumstances of each case and on the basis of informed administra­tive and regulatory judgment. The historical, mixed, and future test years all are attended by arguments pro and con, but this does not eliminate the grounds for informed choice, which is ultimately a regulatory function. Perhaps a rea­sonable approach is to tie application of a particular type of test year to the staff capabilities of the regulatory body. Since the future test year involves the greatest element of uncertainty, it should only be applied by a sophisticated regulatory agency capable of monitoring the accuracy of the utilities' project~o~. 
' 
The mixed test year seems appropriate where resources are moderate, while the historical test year is probably best suited to regulation at the nn.inicipal level. 
103 

REFERENCES 
1. Re Southern Connecticut Gas Co. 81 PUR 3d 289, 293 
104 

BIBLIOGRAPHY 

Clark Evans Downs, "The Use of the Future Test Year in Utility Rate-Making." Boston University Law Review, Volume 52, Number 4 
105 

CHAPTER VII: PURCHASES GAS ADJUSTMENT CLAUSES 
INTRODUCTION 
The purpose of a purchased gas adjustment (or fuel adjustment) clause is to allow a gas utility company's rate of return to stay at an adequate level by permitting the utility to pass on fluctuations in the price of pur­chased gas. A purchased gas adjustment clause in a utility's rate schedule is a mathematical formula whereby the rate paid by the consumer changes in accordance with changes in the wholesale cost of gas to the company. In effect, the clause says that if the cost that the utility has to pay for natural gas changes (up or down) from the base cost, there will be a corres­ponding change in the unit price of the consumed product. 
Particularly critical to the utility is that the cost adjustment clause maintains the utility's rate of return at an appropriate level while avoiding regulatory lag. Without a purchased gas adjustment clause during inflation­ary periods, the utility absorbs the increased purchased gas costs, thus eroding the utility company's rate of return. 
There are four types of purchased gas adjustment clauses: automatic, non-automatic, permissive, and mandatory. The automatic clause, which is contained in the rate schedule, specifies the method by which the cost of purcha:sed gas will be calculated. An adjustment clause is non-automatic when the regulatory authority views the change in cost of purchased gas as a temporary rate increase subject to refund. A permissive adjustment clause is one that gives discretion to alter existing rates to a utility's manage­ment. Mandatory adjustment clauses require that current rates must be charged in accordance with changes in the cost of purchased gas. 
106 

ADMINISTRATIVE CONSIDERATIONS 
Once regulatory bodies have decided to allow the use of purchased gas adjustment clauses, the clauses must be designed to include safeguards which protect the public. The design of a purchased gas adjustment clause should depend on two factors: the nature of the gas utility which is seeking the adjustment clause and the utility's source of fuel supply. 
In developing a purchased gas adjustment clause a major consideration must be the appropriateness of existing rates. If existing rates are inappro­priate, to the detrtment of eithe~ the utility or the consumer, the purchased gas adjustment clause will perpetuate the inequity. The regulatory authority should evaluate the utility's current cost of service to determine the ade­quacy of existing rates. 
Another consideration in devising a purchased gas adjustment clause is the determination of an appropriate base cost for purchased gas~ The estab­lishment of an appropriate base cost is crucial because it may stay constant for a considerable period of time. The determination of the base cost is complex when a utility has more than one source of supply. However, the base cost should be computed on the basis of total volume of gas obtained . from suppliers, not the total volume delivered to utility consumers. 
A third consideration in the design of a purchased gas adjustment clause is the determination of the pr~sent cost of purchased gas. The determination of the current cost of purchased gas should be consistent with base cost cal­culations. However, the current cost will reflect the additional costs of the supplemental supplies needed to meet peak day demand: these are costs which are omitted from the base cost calculations. As gas shortages become 
107 

more prevalent and demand for supplemental supplies increases, regulatory 
authorities will need to compute purchased gas adjustment clauses on a fre­quent basis to avoid wide variations in customers' monthly bills. 
Although many have pointed out that the adoption of purchased gas ad­justment clauses would help alleviate the current financial crisis which utilities face, others contend that adjustment clauses remove much of the incentive for utilities to operate more efficiently and to control costs. Where purchased gas adjustment clauses are allowed, regulatory authorities should insure that they are designed to protect the public from unjustified cost increases. 
LEGAL CONSIDERATIONS 
The statutory authority granting power and jurisdiction to Texas cities to regulate public utilities is broad and general. The Texas Railroad Commission also regulates rates under statutes which do not expressly au­thorize cost adjustment clauses. It should be noted that although the power to regulate is broad and general, there are no statutory limitations on that grant of power for municipalities or the Railroad Commission. 
Texas case law has not addressed the legal validity of cost adjustment 
clauses, but case law from other states has. The 1955 opinion of the Virginia Supreme Court of Appeals in City of Norfolk v. Virsinia Electric and Power, is often cited as a landmark decision.2 This opinion illustrates the reasoning of numerous state courts and regulatory bodies in addressing the legal considerations raised by the cost adjustment clause in utility rate schedules. 
108 

(1) 	Does a cost adjustment clause deny the consumer procedural due process in setting just and reasonable rates? 
This 	question is raised because there is usually no public notice or 
hearing before each rate change caused by the operation of the cost adjust­
ment 	clause. Faced with this question the Illinois Supreme Court quoted 
the opinion of the Virginia Supreme Court of Appeals: 
It is clear that notice is not required on each occasion 
when there is a change in the ratepayer's bill, but that 
notice is required for every change in the filed schedules 
which are the underlying basis for the computation of those 
bills. The requirement gives the rate payer ample oppor­
tunity to be heard as to the just and reasonable character 
of the rates charged or to be charged.3 

(2) 	Does a cost adjustment clause permit retroactive rate making? 
The Virginia Supreme Court of Appeals declared that this is not per­
mitted by a cost adjustment clause and found that: 
In approving the escalator clause the commission did not 
fix rates retroactively, but on the contrary it authorized 
and prescribed a fixed mathematical formula to be inserted 
in the schedules of the company which will serve as a 
'guide, direction, or rule of action' for determining future 

rates.~ 
(3) 	Does adopting the cost adjustment clause constitute an im­proper delegation of authority to regulate rates? 
The findings of the Virginia Supreme Court of Appeals were that the 
Commission did not delegate its autority to regulate rates in approving a 
gas cost adjustment clause, and noted that: 
.rate schedules consist not merely of lists of rates 
in dollars and cents, but that they include provisions that 
will in various ways affect the rates charged at the time. 
of filing or to be charged thereafter." 
"The proposed escalator clause is nothing more than a fixed 
rule under which future rates to be charged the public are 
determined. It is simply an addition of a mathematical 
formula to the filed schedule of the company under which 
the rates and charges fluctuate as the wholesale cost of 
gas to the company fluctuates. Hence, resulting rates under 
the escalator clause are as firmly fixed as if they were 
stated in terms of money.5 

109 

The charge that the cost adjustment clause is an improper delegation of power to set rates is not well founded for three reasons. The first is that inherent in the statutory grant of power to regulatory agencies is the con­tinuous jurisdiction of these agencies over utility regulation, regardless of the form or character of the rate schedules that it authorizes (given that the authorizations are legal and constitutional). A second season is that the regulatory body can at any time suspend a rate order and, pending an investi­gation of its justness and reasonableness, either rescind and order new rates or sustain it. The third, alluded to in the Virginia Supreme Court opinion, is that the details of the operation of the cost adjustment clause are sub­ject to the approval of .the regulatory body. As pointed out earlier, the regulatory body exercises its continuous jurisdiction by monitoring the opera­tion of the clauses through the reporting procedures and review. 
110 

REFERENCES 

1. 	
G. William Fowler, "Purchased Gas Adjustment Clauses: An Adjuster's Viewpoint." St. Mary's Law Journal, vol. 6, no. 3, page 567 (fall 1974). 

2. 	
City of Norfolk v. Vir~inia Electric Power Company, 90 S.E. 2d 140. 

3. 	
City of Chicago v. Illinois Connnerce Commission, 159 N.E. 2d 776, 779. 

4. 	
City of Norfolk v. Virginia Electric and Power, 90 S.E. 2d 140, 148. 

5. 	
Cit>'.: of Norfolk v. Vir~inia Electric and Power, 90 S.E. 2d 140, 148. 


111 

CHAPTER VIII: RECOMMENDATIONS 

UTILITY FINANCE 


bodies should allow rate levels that are sufficient (1) to 
pay higher interest costs on additional debt and equity capital, · 2) to strengthen credit ratings to minimize interest charges, and (3) . to create an 'equity ratio sufficient to protect bond marketability. 
Under present conditions, a return on equity of at least 1) percent per annum may be required to meet these objectives. 
UTILITY RATE STRUCTURES 
Utility rate structures should be redesigned (1) to ensure a level of utility service adequate to meet basic residential consumption needs· and 
(2) to discourage wasteful and inefficient use of energy resources. 
I 
Under the present declining block structure, the average price per unit of energy decreases as consumption increases; such a system is neither eco­nomically justifiable nor compatible with stated policy objectives. Each alternative rate structure discussed in this report--inverted rates, flat rates, peak-load pricing, and lifeline rates--is an improvement over the present system in termS of both equity and conservation. The unpredictable element in each is its ability to meet utility revenue requirements. Since utilities have both expertise and a vested interest in maintaining the fi­nancial viability of the industry, they should assume the initiative in re­forming rates to achieve these goals. 
UTILITY ACCOUNTING SYSTEMS 
All Texas utilities of comparable size and type should be required to adopt the same uniform system of accounting. 
112 

In designing the accounting system an effort should be made to balance the benefits .of using updated methods (e.g., the future test year and price-level accounting) with the costs of varying from the current accounting require­ments of the Federal Power Commission, the Securities and Exchange Commission, and other regulatory authorities. 
THE TEST YEAR IN UTILITY RATE REGULATION 
Regulatory bodies possessing substantial staff and budget capabilities should use a future test year which coincides as closely as possible with the period in which prospective rates will be in effect. 
I 
Regulatory bodies possessing only moderate staff and budget resources should use a mixed test year in settin_g prospective rates for · utilities. 
Regulato9 bodies possessing little or no staff ~d budget capabilities should use the historical test year. 
Utility regulation in Texas should incorporate a system of reporting and monitoring procedures to facilitate checking the accuracy and reliability of 
' 
test year data. 
PURCHASED GAS ADJUSTMENT CLAUSES 
Gas utilities should be allowed to adjust their rates quarterly through the use of mandatory purchased gas adjustment clauses. 
Rate increases effected through purchased gas adjustment clauses should be subject to' refund 1if found to be unwarrant"ed upon review by the proper· regulatory authority. 
GENERAL RECOMMENDATIONS 
The State government should: 
(1) encourage energy conservation to decrease demand for natural 
c .4 
gas and electricity; 
(2)" pay increased attention to the relation of costs to benefits 
in regulation, particularly in areas of environmental pollu­
tion; and 
113 

(3) conduct independent studies to confirm utility forecasts of 
_.fQture utility demand, construction costs·, and the effect of price and rate structures upon demand. 
Consumers in Texas should be made more aware of the costs of individual energy consumption. 
State and local governments should (1) encourage the owners of private buildings, especially apartment buildings~ .to require lessees to be respon­sible for their own utility bills and (2) enact statutes requiring all public office buildings to have electricity meters for each tenant. 
114 


Part II 
Public Utility Service Quality: 
The Need for Regulatory Reform in Texas 

CHAPTER IX INTRODUCTION, METHODOLOGY, AND SUMMARY OF FINDINGS 
INTRODUCTION 
This is the first of six chapters which report on analysis of public utility service quality in Texas. The purpose of this chapter is to introduce and sum­marize the remaining chapters, and to provide an overview of service quality prob­lems and proposed regulatory reform. Subsequent chapters will examine problems in detail, elaborating on problem definitions, empirical evidence, and possible policy reforms. 
Research Motivations 
Two concerns motivated this analysis: (1) An awareness of service quality problems in Texas or across the nation which were, or threatened to be, severe and socially disruptive; and (2) current efforts to improve Texas regulation of public utilities appeared to concentrate almost exclusively on rate regula­tion, to the neglect of service quality. 
(1) Service quality problems: Aware of a few symptoms of service quality problems, there was interest in the magnitude of these problems' potential in Texas. For example, could the ''blackouts" and ''brownouts" which occurred in the northeastern United States occur in Texas? Reports of fossil fuel shortages threaten important consequences for Texas' electrical and natural gas services. Complaints come from rural areas about inadequate telephone and power service. Residents of new subdivisions suffer delays before obtaining utility services. Drinking water in Texas, in some areas where water is delivered by private companies, was reported unhealthy. Cable television, although a relatively new service, has generated consumer complaints about signal quality. 
116 

Thus, part of the impetus for this study was a need to validate these reports and to establish, with greate~ scope and accuracy, the full magnitude of service quality problems. 
(2) Regulatory Neglect of Service Quality: Another motivation for this study was provided by the current legislative response to public pressure for utility regulatory reform. Our perception was that reform efforts fo­cused primarily on service rates. Service quality regulation seemed especi­ally myopic in light of future trends. Most observers anticipate continued rate escalation because of inflation, because of resource shortages, and be­cause of the costs of environmental preservation. If these forecasts are accurate, the relationship between rates and service quality must be under­stood. Through some process, society must decide the level of service which utility industries should provide for various rates. With critical services provided by monopolies and with consumers relatively defenseless without con­sumption alternatives, shouldn't government become equally involved in regu­lation of service quality--especially when service quality is directly related to product prices which, in most cases, government already regulates? 
Objectives of the Analysis 
Our objective was to determine what reforms might be warranted in Texas for regulation of public utility service quality. To achieve this, we under­took two activities: (1) to determine what, if any, conceptual obligation existed for either the industry and/or government to insure quality service; and (2) to ascertain the nature and magnitude of any failures to meet that obligation that might have occured or may occur in the future. Only if an obligation could be defined and if empirical evidence suggested non-fullfill­ment, then could regulatory reform be proposed. 
117 

ANALYTIC METHODOLOGY 

Overview 
Our policy recommendations must be qualified by our analytical methodology. The strength of our problem definition and proposals for change is no greater that the conceptual framework and factual foundation from which our conclusions derive. 
This inquiry was neither scientific nor exhaustive. Quality of service is a relatively new concern in public utility regulation. Especially in Texas, there has ·.not been extensive prior examination of the problem. 
Nonetheless, our examination caused sufficient immersion in service quality problems to provide significant insight into the Texas situation. Our analyti­cal design was heuristic, and relatively systematic and comprehensive. Our re­search team was exposed to important information sources such as the legal literature, basic texts on utility regulations, informal seminar discussions, and personal interviews with representatives of state and local government, the utility industry, and public interest groups. In addition, there was limited cominunication with other state and federal regulatory commissions. · Our insight lies in conceptualization of problems and potential remedies. Empirical evidence only suggests problems and solutions to an extent that further analysis, with more ample resources, must precede major policy decisions. 
METHOLOGICAL DESIGN 
Our approach to this analysis consisted of three elements: (1) con­
.. ~ 
ceptualization of ·a definition of service quality; (2) application of this conceptual construct to empirical analysis of Texas' utility service; and 
(3) 
from steps 1 and 2, derivation of a crude specification of Texas' unique needs and a range of policy alternatives. 

(1) 
Problem conceptualization: Our immediate purpose was to construct a tax­


118 onomy of potential service quality problems, which would reflect a comprehensive overview. An initial taxonomy was created through discussion among the research team. To obtain a better grasp of the problems a decision was made to examine specific Texas utilities: natural gas, electric, telephone, cable television, and drinking water services. From this utility oriented study, an improved problem taxonomy evolved. 
The next challenge was to define what service quality ought to be, to characterize prescriptive models of service quality which could then be em­ployed to test whether or not a specific service was below quality. What was the obligation of the service producer and/or government to deliver a quality product? What was the appropriate or conventional definition of quality pro­duct? And, what were the obligations of the producer and government to offer services which did not degrade the environment, did not injure third parties, or did not abuse consumers who were limited in their options in dealing with monopolistic producers? Gonceptual definitions of service quality were based on application of two principle information sources: (1) economic theory and (2) statutory and case law from federal, state, and local government. 
(2) Empirical analysis of Texas: Using conceptual definitions as an analy­tical framework, information was sought which might reveal the actual service quality situation in Texas, how Texas compares to the conceptual ideal. 
This inquiry attempted two directions: (1) evidence of past problems, and (2) anticipation of future problems. Historical evidence was sought through newspaper files, through consumer complaints registered with elected officials, governmental agencies, and c~nsumer interest groups, and through discussions with appropriate experts. Anticipation of future problems proceeded from current 
119 
news report and expert analysis of future conditions, as well as some un­scientific prognostication. 
(3) Recommendations for Change: This phase of analysis involved comparison of conceptual definitions with empirical findings, to contrast service quality standards of what should be with what was, or perhaps may be, in Texas. A gap between the conceptual ideal and our perception of Texas reality become identified as a service quality problem. This problem characterization then inspired potential remedies. 
A range of policy prescriptions are offered which respond to specified problems. We are unable to attest to their political feasibility or their cost/benefit effectiveness. Each proposal is suggested only as a candidate for intensive study, if additional research confirms existence of the problem toward which the proposed change is addressed. 
SUMMARY OF CONCLUSIONS 
General Summary 
We are concerned about the future quality of public utility services in Texas. Public utility service is critical to the welfare of individual Texans and to the state's economy. These essential services are produced mainly by regulated monopolies. To date, this regulation has been only slightly con­cerned with service quality. There is limited historical evidence that these conditions have led to either inadequate service quality or major abuse of consumers. However, the future may not be so optimistic. 
Without change in regulator}r attitudes, several future conditions threaten service quality. Resources essential to production of quality service are 
120 

scarce. Technological production alternatives are often similarly scarce, environmentally expensive, and time-distant before practical operation. Re­quisites for environmental preservation will either constrain service produc­tion and/or increase service rates. In combination with inflation, these trends will cause service to be more expensive and/or reduced in quality, which will exacerbate current consumer discontent with utility service costs and quality. 
Texas will soon confront substantial consumer pressure to minimize utility service rates without a capacity to evaluate concommitant impacts on service quality. If Texas' regulation continues to focus only on rates, then the utility industry will determine unilaterally the service quality to be offered for those rates. In addition, individual consumers will be sub­ject to monopolistic business practices which may or may not fairly apportion service costs and allocate quality service, without any convenient mechanism for redress. 
Therefore, we advocate increased leadership and regulatory responsibility by Texas government in determination of the cost and quality of public utility services. Utility regulation must be equally concerned with rates and service quality. Service quality must be defined, monitored, and enforced. In the ratemaking process, utilities should agree to provide a certain quality of service for specified prices. These industries must then be held accountable to such agreements. Technical information on service quality gathered by each company, unavailable to this study, is essential for this accountability and for prudent rate negotiations. 
Potential, near-future crises may also warrant increased Texas governmental activity. Resource scarcity, environmental standards, and natural disasters 
121 

threaten interruption and curtailment of utility service. To minimize social 
disruption, prompt service restoration and fair allocation of reduced service among all consumers must be assured. Concurrent with threatened service re­duction, growth in service demand may overwhelm production capacities. There may be time-lags where production capacities must "catch-up" with demand. Future demand should be anticipated; production capacities should be planned 
accordingly. If service shortages occur, service quality and costs must be 
fairly allocated among potential consumers. In our opinion, these issues of service allocation under scarcity are critically important and should not be left solely to decision by private enterprise. To avoid chaos and to assure equity, government must assist those allocation decisions. 
In addition to these crisis-condition allocations of service and costs, there are the daily, routine decisions as to the conditions under which an individual consumer may or may not be serviced and at what rates. These conditions consis~ of deposit requirements, adequate information on consumer alternatives in service rates, billing procedures and late payment interest charges and the process of service discontinuance. Currently, consumers who feel unfairly treated must depend on sympathetic treatemnt by either the utility company or the courts. We believe Texas government ought to define consumers' rights to quality service and provide an administrative mechanism for adjudicating complaints. 
Finally, there is an impprtant, long-range aspect of service quality which demands governmental involvement. Ultimately, Texans must make long-range de­cisions as to what level of public utility service can be sustained and afforded, what kinds of lifestyles can be devised to consume only that level of service, and how to plan for both the service production and lifestyles. These decisions 
122 

can be prudent only when based on accurate information on the alternatives and the full costs of those alternatives. Texas government must assist in provision of this information. Substantial enlightenment can derive through research, planning, and broadspread dissemination of information. However, the most persuasive information is price. Consumer decisions are made on 
the basis of present and anticipated budgets and service prices. We firmly believe that rational decision will occur only if people pay the entire ex­pense of services consumed. Therefore, Texas government ought to act so that the full costs of varying levels of utility service are known to Texas con­sumers so they may make their decision. So that service rates encompass all costs of service provision, regulatory bodies must allow rates to reflect re­search and development costs necessary for future service, market prices of resources for production as opposed to governmentally restricted or subsi­dized prices, and the full costs of environmental degradation and pollution abatement. Only by returning these costs to the consumer will society appre­ciate the expense of quality service and act accordingly. 
Government must assist in an incremental evolution toward these pricing practices, so that radical changes do not seriously harm consumers and become socially disruptive and so that compensatory alternatives are available to the poor. Concurrent with pricing reform ought to be investigation of less-service­consumptive lifestyles and planning for those lifestyles. 
All the above-suggested roles for increased governmental activity are complex and ambitious. We think that state government is the only appropriate authority for such activity. These problems are statewide, and necessitate statewide solutions. 
Furthermore, we urge that state-level regulation of public utilities include not only the conventional industries--natural gas, electricity, and 
123 

telephones, but also be concerned with water and cable television services. If not already, water and cable television services will soon equal the tra­ditional utilities in their contribution to Texan lifestyles. 
Problem Definitions and Recommendations 
The preceding discussion presented an overview of our conclusions. This section will summarize conceptual problem definitions, empirical findings in Texas, and recommended policy alternatives. Remaining chapters are detailed analyses within each problem area. 
As reported in our methodology, considerable effort was devoted to a con­ceptualization of service quality problems. We devised a taxonomy to organize the many manifestat~ons of service quality problems under several broad con­cepts. These classifications are not mutually exclusive and are inter-related and overlapping. Five different perspectives on service quality were developed: 
(1) 
resource allocation, (2) quality of the consumed product, (3) governmental intervention in .utility service extension, (4) protection of consumer rights, and (5) social costs in service provision. Each will be summarized below: 

(1) 
Resource allocation for Texas utilities: Production of public utility services employs a technology which converts fuels and/or energy, equipment, personnel, land, water, and capital into a delivered product. Service quality is therefore directly a function of the quality and availability of this tech­nology and the resource inputs. 


· There appears reason to anticipate critical resource shortages in Texas' future. Energy may be in short supply. Most energy now comes from natural gas which is rapidly depleting. Alternative energy sources involve substan­tial conversion costs, environmental costs, and conversion lead-times. Scarcities are evident elsewhere. There are equipment shortages in telephone . 
124 

service. Skilled maintenance manpower seems inadequate in rural areas. Land is becoming less available; yet needs for rights-of-way and plant sites in­crease. Water is in short supply in niany parts of the state. 
Currently, governmental regulation assists private utility companies in obtaining capital and land resources. Is governmental intervention necessary elsewhere to maintain service quality through a minimal, assured flow of pro­duction inputs? We believe the only response is affirmative; government must take regulatory responsibility here. In case of immediate crisis where critical shortages threaten discontinuance of service, state government must ration those resources to insure minimal service according to priorities which protect health and welfare. In addition, state government must demand efficient land-use and land-use planning, must assist in research and development of new technologies, and must enhance long-range planning through provision of accurate information on resource supplies, consumption rates, and potential shortages. 
(2) Quality of the consumed prqduct: Conventional legal definitions of public utility service quality usually include: (1) adequacy, the service must per­form functions for which it is intended; (2) non-discrimination, the product must be uniform in quality for all consumers in similar circumstances; (3) reasonable continuity, the product must be available when demanded; and (4) safety, the product should not be hazardous when consumed. 
According to this definition, / evidence indicates Texas water and tele­phone service quality have been substandard. Furthermore, there is reason to anticipate problems in the future for all utilities studied. 
The courts currently must operationalize and apply these rather vague standards of quality. In Texas, only the natural gas industries and, to some extent, the water companies are administratively regulated for service quality. 
Therefore, we recommend that, for all utilities, the State specify mean­ingful service performance standards, monitor and evaluate actual service per­formance, and enforce the standards either by factoring performance into rate­making calculations and/or, where reasonable, administratively requiring per­formance. Finally, we suggest that the State should promulgate procedures for prompt service restor~tion and for service allocation according to identified priorities, when service is interrupted or curtailed by emergencies. 
(3) Governmental intervention in utility service extension: Here service quality is defined in terms of the producer's capacity to service present and future consumers, to meet consumer demand for service. Because services are essential to individual welfare, additional service ought to be available as desired--if the need is reasonable, if service provision does not prevent the company from achieving a reasonable profit~ and if present consumers do not suffer degradation of current service quality. 
Provision of quality service, as defined herein, requires advance plan­ning to supply production capacity and requires fair allocation of service and of production costs among existing and new consumers. 
In Texas, two problem areas have been experienced: (1) the inability of telephone companies to provide service promptly to residents of some new housing developments; and (2) general discontent in rural areas about their utility service. As resource scarcity intensifies and as demand grows, it is reasonable to forecast service extension problems across all utilities. 
Therefore, we propose the following: (1) The State Government should define specific planning requirements for public utilities in anticipation of increased demand, and State Government should coordinate closely its develop­ment planning with .utility service planning; (2) State Government should de­
126 

fine legislatively and administratively, the specific conditions 'under which extension of utility service is reasonable in unincorporated areas; (3) an independent administrative mechanism should be created to make a fair deter­mination of service need and to allocate costs of service extension; and (4) State Government should promulgate priorities for allocating services among existing users and between current and future users in the event that resources cannot be secured to meet the needs of everyone. 
(4) Protection of consumer rights: Here, concern is with the relationship between a specific utility company and consumers where conditions of service depend on company policy and employee discretion. Problems emerge in routine company decisions as to whom service shall be provided under what rates and conditions. Avenues of redress in case of consumer grievance are negotiated with the company or legal suit. 
In Texas, problems have arisen in these policies and practices--mainly with the electric and telephone companies: failure to inform consumer's of alternative services and service rates; prohibitive or discriminatory de­posit requirements; unfair service discontinuance, usually related to late payment of bills; "gross-net" billing charges which penalize late payment according to the size of the bill regardless of. the days late; and less than prompt repair and service restoration, especially in remote rural areas. Re­dress for such problems has been less than satisfactory because discontented consumers must carry their complaints to a frequently unyielding monopoly company or go through a relatively expensive law suit. 
Our recommendations are twofold: (1) State Government define reasonable corporate practices and procedures relating to rate information, deposit practices, service discontinuance and prompt repair service; and (2) State 
127 

Government provide a less-expensive, less-complicated process of administrative 
adjudication for complaints of unreasonable practices. 
(5) Allocation of social cost: Economic theory dictates that, for efficiency and equity, consumers must pay the full costs of producing the consumed good or service. Efficiency is served because consumers maximize satisfaction of their preference, subject to their budget constraints, by consuming quantities of goods or services at prices where competitive firms maximize profits. Thus, no -.ore resources are devoted to production of those goods and services than is profitable to the producer and is demanded by the consumer. Equity derives because the consumer pays all production costs through service prices. No one else is barm!d by, or must subsidize, another's consumption. 
Social costs are deviations from this principle, and therefore are in­efficient and inequitable. Social costs are costs of production and/or con­s1111ption borne by third parties not participating directly in either produc­tion or consumption. Social costs cause inefficiency because the consumers' price for a good or service is less than total actual costs and therefore more is consumed than might be if the price was greater and encompassed all costs. Usually more of something is consumed if it is cheaper. Because consumption is excessive, so is the allocation of resources to production of that service or product. Social costs are also inequitable because a third party is sub­sidizing other's production and consumption without commensurate benefits. 
Social costs associated with production of public utility service occur commonly in the form of safety hazards and environmental degradation. These costs usually are not returned to the consumer, directly in relation to con­sumption, but are visited on third parties independent of their consumption. For this reason, utility services are probably consumed in excess of those 
128 

levels which would occur if all costs were returned to the consumer. This 
results in inefficient allocation of resources to production of those ser­vices. Similarly, it is unfair for third parties to be victimized by other persons' consumption of utility services. 
In Texas, social costs have occured in natural gas pipeline accidents and in air pollution from electrical generation using "dirty" fuels. Most energy employed for electricity generation in Texas comes from combustion of natural gas, which is an environmentally clean fuel compared to immediately-feasible substitutes such as oil and coal. As natural gas becomes less available, it is anticipated that pollution will get worse. Also, as a shift to other fuels is necessitated, Texas will have to deal with the radiation danger of nuclear fuels and waste. Finally, Texas has and, as demand for service grows, will continue to experience considerable environmental disruption by poles and wires along rights-of-way and by large plant sites. 
We urge the State to act to minimize these costs. Every effort should be made to encourage abatement of environmental pollution and of safety hazards. This encouragement can be provided by a fair sharing of abatement costs among consumers and utility owners. In addition, coordinated planning of land use and joint rights-of-way will reduce visual pollution and land waste. Under­grounding of wires and cable may also reduce visual pollution. State govern­ment must enforce safety and environmental standards for utility industries and permit costs associated with meeting standards to be included in rate­making calculations for fair allocation among consumers and company stockholders. 
129 

CHAPTER X: 
RESOURCE ALLOCATION FOR TEXAS UTILITIES 

American society is dependent upon abundant, inexpensive utility services. These ser:vices provide essential products and services: water, heat, light, and communications. These services are so essential that they are considered public necessities. Because they are public necessities, and because they are produced by monopolies, utility rates are regulated by government. 
Production of these services requires capital, labor, natural resources, and technology. Quality utility service is dependent upon the availability of these resources. At various stages of utility service production and main­tenance, resources needed are equipment, fuels, personnel, land, water, and (implicitly) capital. Technology is the process which converts resource into utility services. 
Currently, these resources are allocated through market processes of sup­ply and demand. With the exception of capital and land, only slight govern­mental involvement has been required to insure that utilities received adequate resources. Recently, however, this allocation process has been questioned, because of "market failures." Market failures disrupt equalibriating of sup­ply and demand in allocation of goods and servicei!s and their costs. 
These "failures" result from poor information on resource supplies and inappropriate prices for resources. Because of these market failures, short­ages of production inputs have appeared which could disrupt utility services. And this interruption could threaten public health, safety, and welfare. 
If society is threatened in this way, should the government expand its regulatory role to insure that utilities have adequate resources to produce services deemed essential? 
130 

RATIONALE FOR REGULATION 

Today's standard of living is founded on a relatively and historically inexpensive supply of utility services. Modern lifestyles are dependent on rapid, easy, and inexpensive access to these services. Massive, relatively-permanent facilities have been constructed, based on the expectation that these lifestyles would continue and could be sustained because of the con­tinued availability in inexpensive public utility services. Interruption or discontinuance of these services could affect the health, safety, and wel­fare of society. Because utilities are public necessities and because they usually are monopolies, they are granted government franchises. In accepting a franchise, utilities become obliged to provide safe, reasonable, and ade­quate service in exchange for unique privileges usually reserved for public entities. This is recognized in Texas law in Article 1435 which grants utilities the power: 
to construct, maintain and operate power plants and substP.tions 
and such machinery, apparatus, pipes, poles, wires, devices and 
arrangements as may be nece~sary to operate such lines and be­
tween different points to this state; to own hold and use such 
lands rights of way, easements, franchises, buildings, and struc­
tures, as may be necessary for the purpose of such corporation.! By granting these powers, government insures that the utility will have an adequate supply of one important input--land. 
In addition to being public necessities, utilities are regulated because they are natural monopolies. Natural monopolies are capital intensive and can achieve economics of scale over a large range of output, i.e. decreasing costs per unit of output. Natural monopolies persist as monopolies because dupli­cation of the facilities required by competition would only waste limited resources of society. Natural monopolies, if unregulated, will price their products or services substantially above cost, and will produce less than their 
131 
economies of scale will allow. As unregulated monopolies, the natural incentive 
for utilities would be to overprice their services and thereby earn large profits. For this reason, utility rates have been regulated by government under the powers of Article 1119. 
The regulatory body tries to prevent excessive utility prices and to insure provision of safe, reasonable, and adequate utility service in exchange for a reasonable return on investment. In allowing reasonable return to a utility, government attempts to insure quality service because the utility has the ability to raise sufficient capital to compete in the market for resources necessary to produce its service/­
A major determinant of utility service quality is the availability and quality of resources used in service production. According to economic theory, as supplies of resources become scarce their costs increase. For the utilities, this means: (1) it becomes increasingly expensive to meet the obligations to maintain and replace equipment; (2) as a result, the quality of the service itself may suffer; and (3) the costs of providing current levels of service will s·ignificantly increase. 
To date, society has relied upon market allocation of resource inputs. When an input is needed by a utility (or any other firm), the utility must locate a seller of that input and offer to purchase it. The price that the seller re­quires will be based on his cost of producing that input, and the prices other prospective purchasers are willing to pay. If the cost of the input is low, and the demand for that input is low, the utility will pay a low price. If the cost is high and the demand is high, then the utility will pay a high price for the input. In order for a utility to compete in this market, it must accept the current market price for that input. 
132 

Recently, questions have been raised about the market's ability to continue to allocate efficiently these resources for the benefit of society, because of oarket failures. Market failures exist when the independent, maximizing behavior or individuals or firms, in a competitive system, no longer leads to efficient allocation of resources. 
One assumption in a purely competitive market is perfect _information. This means that society is aware of resource supplies,. knows how long supplies will last and makes long-term investments based on this information. Problems arise when society does not anticipate shortages and builds large capital plant investments which are difficult to adapt to different sets of resources. There­fore, in the short run, plants are dependent upon current input mixes, and the availability of certain resources. 
A second assumption of.market allocation is that prices will rise as a good becomes scarce, thereby signaling society to shift to another production technology which uses inputs which are less scarce and therefore less expen­sive. Under this assumption, the market fails .when prices of inputs do not reflect their full production cost. Failure here is that prices of some utility inputs such as natural gas have had their interstate prices controlled by govern­ment. These prices have been artificially depressed, thereby preventing the price from giving the proper signal. Oil prices have similarly been unreal­istically low because of the oil depletion allowance and other tax write-offs for oil producers. 
In a period when prices of other inputs are rising, an input with an artificially low price will be in greater demand, resulting in increased depen­dence on that input. If the cost of producing the price-controlled input in­creases in time, the firm producing that input will be forced out of business because their costs will exceed revenues. Thus, price controls will increase 
133 

demand, encourage excess consumption, and reduce production of an input. 
In the past, resource shortages have resulted in varying obligations to provide adequate input supplies. In World War II, supplies of electric energy, gas, and water were reduced; conservation was required, and rationing was em­ployed. Wisconsin permitted curtailment of utility service when war conditions prevented construction of additional production and transmission capacity, and shifting demand to "off-peak-periods" would not suffice. Ohio permitted utili­ties to refuse to supply gas for space-heating that would replace other fuels for that same purpose. Precedents have been established for changing normal market allocations as conditions of supply change. 
Under normal economic conditions, inadequacy of resource supplies has not previously been experienced. No peacetime policy has been established as a result. Thus, market failures could drastically impair the efficiency and effectiveness of the market's allocative process and thereby impair the utili­ties' ability to deliver quality service. 
Utility service is essential for maintaining the health and safety of society. These market failures may jeopardize service. Something must be done to eliminate or correct these failures. Should government try to serve as the mechanism by which these market failures can be corrected, or should the government take over the market's role and serve as the allocating mech­anism for these inputs? 
EMPIRICAL EVIDENCE IN TEXAS 
The Policy Research Project sought to ascertain what inputs go into pro­duction of utility service, what problems arise in obtaining these inputs, and what are the future supplies of these inputs. In response to these questions, we found that utilities generally do not have much information on this subject. 
134 

Fuels 
Cable television, water, and telephone utilities have apparently experi­
enced no difficulties in obtaining adequate electrical energy. The availability 
of fuels for the electric utilities is not without problems, which will, in time, affect those utilities dependent upon electric energy. Natural Gas. Natural gas supplies are being depleted at a faster rate than any other fossil fuel. By 1980, gas supplies are expected to dwindle to 19.1 trillion cubic feet--about 3 trillion cubic feet less than the estimated demand for that 
2
year. Discovery rates of new sources are declining. Long lead-times are re­quired to bring natural gas wells into production. 
For the natural gas utility, shortage means the inability to maintain or increase service. For electric utilities, gas shortages require use of alterna­tive fuels for generating electricity. Alternative fuels are more expensive, not as clean environmentally, and in many cases, not as efficient. Fuels other than oil require constructing new generating plants, all of which carry greater capital investment costs and completion times longer than conventional generating facilities. In addition, shortages compound the problem of allocating increas­ingly scarce natural supplies. Coastal States Gas Corporation, for example, has been accused of limiting gas supplies to cities which have long-term contracts for natural gas service, and selling additional gas to industries willing to pay higher rates. Depletion of Coastal States' reserves has denied commercial and residential consumers in several cities of adequate natural gas, thus re­quiring voluntary conservation. Oil. Present furnaces for most electric utilities are capable of burning oil as a substitute for natural gas, with slight conversion. Many utilities ar~ 
reluctant to make this conversion, for these reasons: First, natural gas is 
a cleaner fuel than oil, eliminating the cost of air pollution abatement. 
135 

Secondly, many of the present boilers are old, and would require replacement 
sooner than projected if oil were burned rather than natural gas. -Thirdly, conversion to oil solves no real fuel supply problems since the availability of oil is almost as limited as gas. Coal. Coal is another possible fuel for electric power generation. It is more plentiful than other fossil fuels, but it is not as free from harmful pollutants. Most coal is high in sulfur content, requiring additional costs to remove sulfur to meet clean air standards. Recovery of coal often involves strip mining, also a serious degradation of the environment. 
Coal-burning facilities can be constructed in about seven years, making this fuel a convenient alternative for near-future use. It is not proximate to all areas, however; transportation costs will increase the expense of this fuel's use. · Nuclear. A new fuel for generation of electricity is nuclear energy. However, the cost of nuclear plants is 10 times that for conventional fossil-fuel gen­erating facilities; construction requires at least 10 years.3 Efforts to con­struct these plants have been met with several delays. As delays occur, infla­tion causes construction costs to escalate. A one-year delay can cause a 10 percent increase in total plant cost. 
Nuclear plants introduce new safety problems in construction and operation, and in transportation of nuclear wastes. Thus, this power source is surrounded by uncertainty. It nonetheless remains a frontrunner in the search for alter­native sources of energy. 
Obtaining adequate fuels appears to be the most significant problem facing utilities today. The major consideration for this problem is one of cost. Firms in Northeast Texas are developing coal as a future fuel. South Texas is re­searching the possibilities for thermonuclear energy. Central Texas and South 
136 

Texas have made plans for nuclear plants. Most utilities in the state are 
aware of the problem and are trying to prevent future crises. 
Equipment 
Quality of service is significantly determined by the quality of the equipment used to produce that service. For telephone utilities, central switching equipment and transmission cable are too often improperly serviced or antiquated, especially in rural areas. This results in wrong connections, static interference during calls, and individual or area-wide service inter­ruptions. For cable television, poor reception has been caused by improper and infrequent maintenance and r~placement of cable. For both telephone and cable services, companies have been slow at replacing old equipment. 
Another problem in maintaining adequate facilities is the scheduling of replacement supplies and equipment. Often there is a substantial time­lag between ordering and receiving equipment from suppliers. Planning is thus required to insure adequate time for delivery and installation. Drilling rigs for oil and gas production have been in short supply. Likewise, steel, aluminum, polyurthene, .and polyethylene used in transmission cables for telephone, electric, and cable television service have been difficult to obtain under current market conditions. 
Personnel 
There appears to be a shortage of highly-skilled manpower in the utilities industry. Incentives are needed to attract personnel with required skills. A common problem has been the shortage of trained technicians, particularly cri­tical in rural areas. For telephone and cable television services, this re­sults in poorly maintained equipment and delays in repair and installation of equipment. 
137 

Land Resources 
With growth in utility service consumption, an increasing number of rights­of-way and plant sites will be required. An input which must, therefore, be prudently used is land. Telephone, electric, and cable utilities all require lines for transmission of their services which, in turn, require land in rights­of-way. Currently, the State of Texas has no authority to require joint use of rights-of-way by utility companies, and joint use is rare. 
In addition to land for transmission and distribution, it has been esti­mated that, by the year 2000, 91 fossil fuel plants and 164 nuclear plant sites will be in operation. Nuclear plant sites, in particular, require large amounts of land. Clearly, there must be long-range planning for these power plant sites, and for allocation of land to other utility uses. 
Water Resources 
In the past, Texans generally have been able to live without much concern for the availability of water. Where other resources were available, a water supply was also generally available either in the immediate vicinity or at relatively short distances. People settled, developing supplies where they were found. Texans now, however, must be cognizant of rapidly depleting water reserves in the face of increased demand. 
There are two critical problem areas in Texas. First, there is a shortage of water in West Texas that is becoming critical. It is most acute in the "Pan­handle" area, particularly in Lubbock, where agriculture thrives on the Ogallala Aquifier. Unfortunately, the Ogallala Aquifier is rapidly running dry. 
Secondly, Houston is also suffering from a water shortage. A symptom of this problem is the sinking of the city. The Evangeline and Chicot Aquifiers-­the main supplies of water for the Houston-Galveston area--are underground 
138 

water storage systems which are being drained faster than they are refilled by 
annual rainfall. Each year, deeper wells are needed to find water. Because of the region's geology, water is a vital structural component of the clay and sand underlying the land surface; when water is removed, the land sinks. In fact, over 20,000 acres of Houston-Galveston area land has already sunk, or will soon sink beneath the water of Galveston Bay and its estuaries. More than $100 million in property has been lost so far. 4 
Capital 
At the present time, Texas' utilities have relatively little difficulty in attracting capital. Electric utilities in Texas for the past several years have enjoyed high bond ratings. Purchasing securities in Texas electric utili­ties still appears to be a sound investment. 
Cable television systems in Texas have also had no apparent problems ob­taining financial resources. This is typical of the entire cable television industry, because cable rates have been substantially higher than the cost of providing the service. Many cable systems have been fully paid for within five years of construction. 
Technology 
The quality of utility service is also a function of its teclmology. Electricity, telephones, and cable television are products of advanced tech­nology. Technological improvements have enabled utilities to convert to different sources of energy and equipment. 
Some utilities are more involved in research and development of new technology than others. Bell Laboratories, the research arm of the Bell Telephone System, has produced sophisticated couununication systems and also pioneered in the electronics and television industries. Other utilities, 
139 

however, spend comparatively little on research. The Federal Government has 
taken increasing responsibility in this area. 
CONCLUSIONS AND RECOMMENDATIONS 
In general, there is little historical evidence that utility companies in 
Texas have failed to meet their responsibilities to provide adequate inputs for 
the production and transmission of their services. There is, however, a need 
to review policies of both the utilities and government in the light of poten­
tial input shortages. The following policy recormnendations may alleviate fu­
ture inpµt problems: 
1. 
To assist long-range planning decisions, we urge that the State of Texas examine information generated and disseminated by the Fed­eral Government that may deal with resource supplies, consumption and possible shortages. To the extent that Federal information does not meet Texas' needs, state government should act to provide that information. · 

2. 
To insure that utilities will have the ability to develop new inputs and technology to meet society's needs, we feel that utility rates should be sufficiently flexible to allow funds for research and development to be included in the rate structure. To the ex­tent feasible, government should assist and encourage utility re­search. 

3. 
In recognition that land is a vital resource input in produc­tion and transmission of utility services, we urge state policies encouraging efficient and proper use of land including joint rights­of-way and planning for future plant~sites. 

4. 
We are content with neither pure market allocation of utility resources, nor with present government controls. We recognize that utilities must compete in resource markets with other indus­tries. To insure that resource prices give proper signals, we feel that governmental price controls and policies such as .subsi­dies, which may result in over consumption of resources, should be reviewed and corrected. By making necessary corrections, prices will more accurately reflect true scarcity of these resources. 

5. 
To insure that utilities have adequate technical personnel, we recommend that statewide vocational education programs be sensitive to manpower needs of the utility industry, particularly in the state's rural areas. 

6. 
In view of the fact that the unavailability of an input for utility service has the potential of creating a crisis situation, we feel that the State of Texas should establish an authority to allocate resources if severe scarcities arise. This already exists for land resources through the power of eminent domain. In the event of a utility crisis, the state should use all such powers to correct the situation. 


140 
141 

REFERENCES 

1. 	
Vernon's Texas Statutes Article 1435. 

2. 	
Chris Iouanna, City of Austin Assistant Power Production Superintendent, Interview, December 12, 1974. 

3. 	
Joe Havemann and James C. Phillips, National 5ournal Reports, November 2, 1974, page 1643. 

4. 	
William Broyles, "Disaster Part Two: Houston," Texas Monthly, December 1974, page 77. 


142 

CHAPTER XI: 

QUALITY OF THE CONSUMED PRODUCT 
All utilities deliver a product to their consumers, such as a signal, a substance, or energy. As a captive market for monopolistic producers of essen­tial services, utility consumers should receive a product which is cormnensurate in quality with similar products produced under competitive circumstances. 
The accepted standards or criteria by which the quality of a utility's product may be ascertained, in the absence of comparative competitive products, are: (1) adequacy--the product's ability to perform functions for which it is intended; (2) non-discrimination--the product's uniformity in quality as de­livered to all consumers of the utility in similar circumstances; (3) reason­able continuity--the product's availability when demanded by consumers; and 
(4) safety--the safety of consumers while consuming the product. 
The purpose of this chapter is to examine: (1) the rights of utility consumers to a product which meets these four criteria; (2) the attendant obligations of utilities and government to insure the delivery of a quality product; (3) the theoretical and legal basis of the obligations of utilities and government; and (4) present and potential problems in Texas which indi­cate failure of utilities and government to meet their obligations to insure quality utility products. Lastly, this chapter draws conclusions based on our findings, and makes recommendations for improving the quality of the utilities' products. 
DEFINITION OF THE OBLIGATION 
Two obligations exist with respect to product quality: (1) the obliga­tion of utilities to deliver a quality product; and (2) the obligations of 
143 

government to insure that utilities meet their obligation. 
Utility Obligation 
A utility has an obligation to deliver a product to consumers which meets 
the criteria of quality defined earlier. Furthermore, since a utility has the 
initial relationship to its consumers, its obligation precedes the obligation 
of government to insure product quality. 
Government Obligation 
The obligation of government is to insure that a utility's products meet 
standards of quality. This obligation requires that government undertake these 
functions: (1) establishment of the utility's service quality obligation; 
(2) 
legal establishment of comprehensive product quality standards; and 

(3) 
establishment of a mechanism for enforcement of quality standards. 


SOURCES OF THE OBLIGATION Consumers' rights to quality service derive from both theoretical and legal bases. Theoretical obligations emanate fro~ political and economic theory. Legal obligations have been expressed in legislation and in case law. 
Theoretical Obligation 
The obligations of both utilities and government pertaining to product 
quality are derived from: (1) the essential nature of utility services; and 

(2) the unique market relationship between monopoly producers and consumers 
of utility services. 

Nature of Utility Services. A primary characteristic of utility products is · their essentiality to modern living. Society has become dependent upon utility 
144 

products to the extent that failure to meet criteria of quality may jeopardize 
economic welfare, health, and safety. The criticality of service requires utilities to deliver a quality product and requires government to insure such delivery for protection of public welfare. Market Relationship. Utilities are generally monopolies, often legally approved. As a result, individual consumers of utility services normally do not have the protection against poor service quality provided in competitive market situations, i.e., ,alternative sources in the event of an unsatisfactory product. With legally approved monopolies, consumers are, in effect, deprived of market pro­tection by ·governmental action. This monopolistic market reduces incentive to utilities to provide a product which meets an acceptable (to the consumer) standard of quality; a competitive market would require competitive quality, or the utility would be forced out of the market by competition• . 
This unique market relationship thus creates the obligation of a utility to provide the quality product it would produce under competitive circumstances. In allowing a monopoly to exist, government also assumes responsibility to recognize the right of consumers to a quality product and to insure that such a product is received by consumers. 
Legal Obligation The expression of utility and government obligations regarding product 
quality are found in federal and state statutes and in case law. This section will describe legal obligations as expressed nationally and in Texas. National Articulation. The legal obligation of utilities to provide a quality product is nationally expressed in federal and state case law and regulatory statutes. These expressions clearly require utilities to provide services which are adequate, safe, just, reasonable, and non-discriminatory. This 
145 

legal obligation upon the utility is generally limited, however, by: (1) the 
intervention of circumstances beyond the control of the utility; and (2) the ability of a utility to improve its service without rendering it unavailable 
through precipitous rate increases which might result from product improvements. 
State and federal governments have also undertaken their responsibility for product quality through: (1) the passage of legislation defining, in broad terms, acceptable quality of utility services; and (2) the creation of agencies to administer legal service requirements of utilities, monitor service quality 
of utilities within their jurisdictions, negotiate between consumers and utili­ties in the event of unsatisfactory service, and require utilities to make im­
provements in the quality of their product. Texas Articulation. Unlike legal obligations expressed in statutes and in case law nationally, Texas law is weak in expressing obligations regarding quality 
utility products. Service quality is not addressed comprehensively in statutes or in case law, but is to be found in sporadic and isolated areas of law. 
Texas statutes and case law address product standards of adequacy, non­discrimination, safety, and continuity, as each standard pertains to particular utility services: 
1. Adequacy. Only telephone and water utilities in Texas have a duty, expressed in case law, to provide adequate service. Case laws require telephone companies to transmit a call and thus bring two parties into conununication1 , to connect one subscriber to another wherever a connection is requested2, and, with 
respect to long distance service, to bring a person at one point on its line to 3
its office so that one at another point desiring to talk to him may do so. Case law has determined that the grant of a franchise to maintain a waterworks system in a city must be construed strictly in favor of the public4; a franchise 
146 

permitting the use 	of its streets for the public water supply must be strictly 
construed in favor 	of the city and ambiguity or fair doubt is to be resolved in 5
favor of the public ; and a city is under no inherent duty to supply water to anyone living outside the city's limits, and except for the statute which con­fers the authority (Vernon's Ann. Civ. St. art. 1108), but imposes no duty, the city would even be without authority to do so.6 
2. Non-discrimination. Texas statutes state that electric and natural 
gas 	utilities may not discriminate against persons in service rendered under 7
similar circumstances. Although telephone and water utility companies are not included in this statute, case law has determined that telephone companies must act impartially and in good faith to all alike8, and that water utilities, as public service corporations, are required to treat all of the public alike9 and to treat all persons similarly situated alike with respect to service. 10 Case law has further held that a public water supply company is a quasi-public corporation and assumes the obligation to supply all applicants residing with­in the territory in which it operates, if demand is reasonable and within its capacity, but is not required to furnish water at unreasonable distances, which would cause los~. 11 Finally, case law has held that, while cities are under no legal duty to serve users of the water and sewer system outside of the corporate limits, once having elected to serve them, cities may not do so on a discriminatory basis.12 
3. 
Continuity. Only telephone and water utilities in Texas are under a legal obligation to provide reasonably continuous service through dicta which places a duty upon telephone companies to maintain, insp.ect, repair, and dis­cover defects in a telephonel3, and case law which requires a water company to furnish water to every citizen or resident having need of it.14 

4. 
Safety. Only telephone and water utility companies are under a legal obligation with respect to consumer safety. .Case law requires telephone com­panies to know the potential danger of their wires and to use ordinary care to safe-guard pe~sons and property from those dangers.15 Case law requires water utilities to exercise ordinary care in the operation of its systeml6, and to restrain pollution of drinking water.17 


PRESENT PROBLEMS IN TEXAS 
Unlike many other states and the Federal Government, Texas statutes have not established guidelines for utilities to follow regarding the reasonable­ness of service, nor imposed comprehensive statutory obligation upon utili­ties to provide service which meets standards of quality, nor undertaken the function of insuring that utilities provide quality products to its consumers. 
Texas has delegated responsibility for regulating service quality of telephone, gas, and electric utilities to incorporated municipalities. Cable television has been ignored as a utility by state government.18 Original jurisdiction for product quality of water utilities lies with the Texas State Department of Health, which has the responsibility to monitor and maintain drinking water quality based on national standards determined by the United States Public Health Service. The Railroad Commission has statewide juris­diction over natural gas utilities; however, the Commission has not been di­rected to establish and enforce comprehensive product quality standards. 
Thus, statutes in Texas have not established the utilities' product quality obligations, nor established comprehensive product quality standards. Only with respect to water utilities has there been statewide establishment and enforcement of product quality standards. 
148 

Consumers of electric, natural gas, and telephone service in unincorporated areas are unprotected from poor quality service, except to . the extent t.hat .resort to the courts is possible. Consumers of electric, natural gas, and telephone service in incorporated municipalities are protected from poor products to the extent that their cities are willing and able t~ establish and enforce standards of quality. Consumers of cable television service are completely .unprotected from poor service quality. 
According to our findings, problems of product quality in Texas are mainly confined to telephone service, its adequacy and continuity. Nevertheless, po­tential problems exist for all of the utilities. Product quality problems found in Texas are: 
Adequacy--Inadequacy of telephone service in some areas is indicated by: 
(1) poor direct-dialing service; (2) failure of equipment to make a connection or to make the appropriate connection; (3) noise and static interference during a call; and (4) the unavailability of operators to provide call assistance. The magnitude and scope of these problems is unknown. 
Continuity--Continuity of telephone service is also a problem in Texas. Subscribers have experienced the following problems: (1) extended service interruptions to entire service areas or to individual subscribers; and (2) interruptions in individual calls. 
CONCLUSIONS AND RECOMMENDATIONS Government has an obligation to insure that utilities deliver quality products to their consumers. This requires that government recognize its responsibility through: (1) establishment of utilities' product quality obligation; (2) establishment of specific standards of quality for utility 
149 

products; and (3) provision of a means by which these standards are enforced. Texas has largely failed to meet this obligation. 
The Texas Legislature has failed to recognize the obligation of utilities to deliver a quality product. Recognition of this obligation is limited to isolated and sporadic case law. 
Texas government has also largely failed to establish guidelines by which product quality measured, with the exception of water quality. Consumers of other utility products in unincorporated areas may only turn to the courts to obtain definition and delivery of a quality product. Even so, the costs to a plaintiff consumer associated with court battles against well-funded utilities renders this an unrealistic method of defining product quality. Furthermore, ·inco.rporated municipalities, which have authority to establish guidelines for product quality, seldom have resources to undertake such a function. As a result, product quality has not been effectively defined. 
Without a definition of product quality standards, enforcement is im­possible. Given the inability of cities to establish service standards in incorporated areas and the disincentives associated with court-definition of product standards in unincorporated areas, the enforcement obligation simply cannot be met. Since water products are the only utility services with statewide standards of quality, they are the only product whose ad­herence to such standards may be enforced. 
In light of the discussion in this chapter, we make the following reconnnendations for the purpose of improving the quality of the consumed product of utilities: 
(1) 	
The state should design service performance standards 
for the natural gas, electricity, telephone, water, 
and cable television utilities, and also any other 
services which are considered to be essential public 
utilities. 


(2) 
The state should monitor and evaluate service perform­

ance by means of regular testing and inspection. 

(3) 	
Monitoring results should be made available to rate­making bodies for use in calculation of future rate schedules. 

(4) 	
The state should require, when reasonable, performance by utilities to standards. 

(5) 	
The state should prescribe and enforce emergency regu­lations governing provision and allocation of utility service to customers during outages, curtailments, shortages, and any other emergency situations, such as hurricanes, natural disasters, acts of God, etc. 


150 

151 

REFERENCES 

1. 	
Southwestern Bell Tel. Co. v. Cook, 30 S.W. 2d 497 (Tex. Civ. App. 1930). 

2. 	
54 Texas Jurisprudence 2d 710. 

3. 	
Ibid. 

4. 	
City of Memphis v. Browder, 174 S.W. 982 (Tex. Civ. App. 1915). 

5. 	
Green v. San Antonio Water Supply Co., 193 s.w. 453 (Tex. Civ. App. 1917). 

6. 	
City of Houston v. Lockwood Inv. Co., 144 S.W. 685 (Tex. Civ. App. 1912). 

7. 	
Vernon's Annotated Revised Civil Statutes of the State of Texas, art. 1438. 

8. 	
Southwestern Bell v. Texas State Optical, 253 S.W. 2d 877 (Tex. Civ. App. 1952). 

9. 	
City of Houston v. Lockwood Inv. Co., 144 S.W. 685 (Tex. Civ. App. 1912). 

10. 	
Allen v. Park Place Water, Light &Power Co., 266 S.W. 219 (Tex. Civ. App. 1924). 

11. 	
Ibid. 

12. 	
City of Texarkana v. Wiggins, 246 S.W. 2d 622, 151 Tex. 100 (Tex. Sup. Ct. 1952). 

13. 	
Gandy v. Southwestern Bell Telephone Co., 341 S.W. 2d 554 (Tex. Civ. App. 186). 

14. 	
City of Houston v. Lockwood Inv. Co., 144 S.W. 685 (Tex. Civ. App. 1912). 

15. 	
54 Texas Jurisprudence 2d 616. 

16. 	
City of Denton v. Gray, 501 S.W. 2d 151 (Tex. Civ. App. 1973). 

17. 	
Newton v. City of Groesbeck, 299 s.w. 518 (Tex. Civ. App. 1927). 

18. 	
Vernon's Annotated Revised Civil Statutes of the State of Texas, arts. 1175 (12), 1119. 


152 

CHAPTER XII: GOVERNMENT INTERVENTION IN UTILITY SERVICE EXTENSION 
The problems of allocating services among present users and between pre­sent and future users must be addressed. Service allocation is an important aspect of service quality for several reasons. It determines the availability of service for future users and affects the quality and availability of service to existing users. 
DEFINITION OF THE OBLIGATION 
The public interest, as it pertains to public utilities, requires that present and future users of utility services receive a utility's service upon application for service and upon compliance with a utility company's reasonable preconditions to service. This principle is subject to three qualifications, however: (1) provision of service should meet an existing and reasonable need for such servicel; (2) provision of service should not jeopardize the utility's ability to earn a reasonable return on its investment in providing the service2; and (3) provision of the service should not unreasonably affect the safety, adequacy and cost of service to present consumers of the service. 3 Two sets of obligations are associated with the rights of utility users to receive ser­vice and with the public interest. One set of obligations is the responsibility of public utilities, and the other is the responsibility of government. 
The Utility Obligation 
Public utilities have a basic obligation to provide service to their pre­sent and future consumers. This obligation requires that a public utility: (1) meet service demands of pres~nt consumers on an equal basis, i.e. provide service, 
153 
within its service area, to all persons in similar circumstances and at similar rates4, and (2) provide service to new users within the service area. To meet these requirements, the utility must secure resources and adopt policies which are necessary for the fulfilling of the obligations, including anticipating and meeting growth in demand for services which may occur as a result of increases in use of the product by current users or increases in the number of users. 
The Government Obligation 
Government has responsibility for allocating services and the costs of extending those services among users. In times of shortages, the free market fails. This means that government must establish priorities for allocating services among existing users and set policies guiding the offering of services 
6
to new users. Should maintenance of safe, adequate and reasonable service to existing users be jeopardized by extensions to new users, government has the obligation to determine a fair allocation of service and costs among current and future users. Such allocations should be made in consideration of the rea­sonableness of the need of new users and the impact of extensions upon existing users.7 
SOURCES OF THE OBLIGATIONS 
ADEQUACY OF TEXAS LAWS 
Texas does not have legislation or an administrative body which can: 
(1) require utilities to anticipate growth in demand for services, except to allow cities of 25,000 persons or more to require extensions of up to two miles per year or as prescribed in the city charter; (2) require extension of service in rural areas where there is a reasonable need; (3) allocate costs of extending service between existing and future users; (4) allocate services between future and current users in the event of inadequate resources to meet the demands of both; or (5) require coordination of planning between utilities and government. 
PROBLEMS OF EXTENSION OF SERVICE IN TEXAS 
Texas laws are inadequate regarding the planning obligation of utilities. Cities over 25,000 may require extensions of up to two ~iles per year. Util­ities should be required to meet a growth in demand resulting from an increase in the number of users of the service and from an increase in the use of the services among current users. The absence of such requirements has contributed to the inability of telephone companies to provide prompt telephone service to the residents of new housing developments ' or the level of service desired by those inhabitants. 
Delivery of Services to Unincorporated Areas 
There is no statement of an obligation to provide service to users in unincorporated areas, even when a reasonable need exists. Users must therefore negotiate with the utility to obtain service and have often found themselves inadequate to do so. Furthermore, firms are not prohibited from using the pro­fitability of an extension as the only criteria in making extensions. 
155 
Allocation of the Costs of Extensions 
Should new users be required to pay costs in aid to construction for the extension, no independent source exists to fairly allocate costs between the consumer and the utility. The only remedy available to the consumer, in the event of a dispute, is the judicial system, a process which is costly and slow. 
Allocation of Services 
In the event that a utility should have inadequate supplies to meet the 
demand for its services, there exists no policy to allocate services among cur­rent and new users. The advent of fuel shortages for the gas and electric util­ities suggests that this will be a problem for the future. 
Determining Growth Policies 
Extension of service determines the growth of cormnunities. Currently no requirement exists to coordinate planning activities of utilities with the growth needs of communities. Industrial and residential developers negotiate directly with utility firms for services, a process sometimes resulting in difficulty in obtaining services for developers, and in failure to consider the growth policies of the cormnunity or the state. 
CONCLUSIONS AND RECOMMENDATIONS 
The basic obligation of utilities is to provide service to present and future consumers. Government is obligated to see that the service is extended fairly in terms of both availability and cost among existing and future users. Our evidence suggests that neither utilities nor government has fully met these obligations. We therefore recommend that: 
(1) 	
government define the obligation of utilities to anticipate future demand for services, 

(2) 	
government define the obligation of utilities to make extensions of service in unincorporated areas where there is a reasonable need, 

(3) 	
an independent mechanism be established to make a fair determination of service need and to allocate among consumers the costs of the extension, 

(4) 	
government undertake to establish priorities for allocating services among existing users and between current and future users in the event that resources cannot be secured to meet the needs of both, and 

(5) 	
government specify the obligation of utilities to coordinate planning of extensions of service with the growth policies of government. 

(6) 	
additional research evaluate formal utility service districts in which utilities would be legally obligated to provide ap­plicants in that district with service and upon which other utility companies would not encroach. 


156 

157 

REFERENCES 
1. 	Priest, A.J.G., Principles of Public Utility Regulation, Theory and Application, (see Gery Williams for rest of citation). 
2. 	Ibid., p. 237. 
3. 	Ibid., p. 236. 
4. 	Article 1438 V.A.T.S. 
5. 	Priest, A.J.G., Principles of Public Utility Regu1ation, p. 242. 
6. 	Ibid., p. 243-44. 
7. 	Ibid., p. 232. 
158 

CHAPTER XIII: PROTECTION OF CONSUMER RIGHTS 
Consumers of utility services, as has been noted, are entitled to a quality utility product, as defined by the product's adequacy, continuity, safety, and non­discrimination, at a reasonable cost. The topic of consumer rights as addressed in this chapter is concerned with and confined to the consumer-relations portion of the utility producer-consumer relationship, and specifically addresses consumer­relations areas which may affect the quality, cost and availability of utility services of consumers. Accordingly, the following are examined in this chapter: 
(1) utility company consumer-relations policies and practices which may affect the quality, availability and cost of utility services, (2) government involve­ment in consumer rights protection, nationally and in Texas, (3) the adequacy of government's present role in consµmer rights in Texas, and (4) consumer-relations problems in Texas, and (5) conclusions and recommendations concerning the role of Texas government in consumer rights protection. 
SUMMARY 
Consumer relations in the utility producer-consumer relationship affect the quality, availability, and cost of utility services. Generally, this aspect of service quality pertains to rules, regulations, and practices of utility com­panies in their relations with consumers. Selected areas of consumer relations examined in this chapter include deposit requirements, service discontinuance procedures, information, and repair services. 
In allowing utilities to operate as monopolies in providing a service critical to society, government assumes a responsibility to protect consumers 
159 

from abuses whic.h may arise from the monopolistic situation., i.e. government must insure that a quality utility product is available to the consumer at reasonable cost. In the area of consumer relations, this responsibility may be met through: (1) legal recognition and definition of consumer rights, and 
(2) governmental enforcement of defined rights. 
Governments nationally and in Texas have been involved to varying extents in utility consumer protection. Nationally, consumer rights have been defined in statutes and case law, and by regulatory agencies. Many regulatory agencies have been granted authority to enforce consumer rights. Unlike other states, Texas has no comprehensive definition of consumer rights, nor an effective mech­anism for enforcement of consumer rights. Compared with other states, the role of Texas in consumer rights protection is clearly inadequate. This inadequacy is emphasized by numerous problems in consumer relations in the state. 
To insure that the availability, cost, and quality of ut,:ility services of an applicant for or consumer of such services are not jeopardized by consumer­relations actions and decisions of utility companies, Texas should undertake the passage of comprehensive legislation designed to define consumer rights and establish an effective mechanism for enforcement of those rights. 
CONSUMER RELATIONS POLICIES AND PRACTICES 
Consumer relations encompass the relationships and areas of contact between utilities and consumers outside of direct service production and consumption. This section examines consumer relations generally, as well as some selected areas. 
Generally, relations between utilities and their consumers involve: (1) rules and regulations of utility companies which set forth company policy per­
160 

taining to consumers, such as policies defining deposit requirements, and (2) 
other practices of utilities which affect consumer relations, such as business 
office location and staffing practices. 
Utility Company Rules and Regulations. Utility companies customarily develop 
rules and regulations which express their policies concerning consumer relations. 
These often provide guidelines to company employees for determining which appli­
cants for service must pay a deposit, for determining the conditions under which 
service will be discontinued to a customer, and the like. 

Utility company rules and regulations affect service availability, quality, and cost. By setting standards for service provision and discontinuance, rules determine which applicants will receive service and which consumers will have service discontinued. Furthermore, such rules are generally designed to protect the company from losses incurred from unpaid bills, and as such, affect the cost and quality of service to all consumers. Other Utility Company Practices. Utility companies engage in other practices in consumer relations which are not governed ~y expressed rules and regulations. These other practices also affect utility service cost, quality, and availability. Such practices include location of business offices, staffing of business offices at particular times, the promptness of repair services, and the like. These practices affect service availability, quality and cost as well. For example, poorly located or understaffed offices may reduce the access of applicants to service and the access of consumers to prompt repair service. 
Selected Aspects of Consumer Relations 
The consumer-relations activities selected for more detailed examination illustrate the impact of consumer relations upon aspects of service quality and cost. These activities include: (1) deposits required of consumers of utility 
161 

services, (2) service discontinuance practices and procedures, (3) information provided to consumers and applicants for service, and (4) repair of defective equipment. Deposit Requirements. Utilities customarily require a deposit payment from applicants as a precondition to providing service. The purpose of deposits is to cover the eventuality of unpaid bills. Deposit decisions of utilities are generally governed by expressed rules and regulations regarding who must pay a deposit and the size of the deposit which must be paid. 
Deposits often bear a relationship to the anticipated or actual size of a consumer's monthly charges, and consequently may be increased or decreased by the utility in response to changes in a customer's consumption. Some util­ities, however, have flap deposit rates which have no relationship to individual consumption levels. 
Deposit requirements involve determination of who must pay a deposit. Some utilities require deposits from all applicants for service; others re­quire deposits only from applicants who, according to some criteria, are con­sidered credit risks. 
Deposit requirements potentially affect service availability and adequacy. If a utility's deposit requirements are excessive, then applicants for, or con­sumers of, the service may be prohibited from obtaining, or continuing to ob­tain, the service. The non-discrimination aspect of service quality is also indirectly related to deposit requirements. Unless criteria governing deposits, and the application of the criteria, express some notion of equity, then non­discrimination is violated. 
Service Discontinuance In the event of unpaid bills, utilities customarily discontinue service. 
162 
This practice is supported on the grounds that unpaid bills affect a utility's 
revenues and thereby adversely affect the utility's ability to provide adequate services at reasonable costs to consumers who pay their pills. As with deposit requirements, service discontinuance is generally governed by a utility's op­erating rules and regulations. These rules set forth causes for service discon­tinuance procedures to be followed prior to discontinuance, such as the provision of adequate notice to the affected consumer. In practice, consumers are gen­erally provided an opportunity to pay delinquent bills prior to service cutoff. 
Service discontinuance affects service availability. If procedures are instituted prematurely, for improper reason, or without fair opportunity for the consumer to respond, the consumer may be deprived of service when he is not jeopardizing service adequacy and cost to other consumers. Information. Utilities are the original source of information concerning alter­native services, rates charged fqr those services, deposit requirements, and service suspension and discontinuance conditions and procedures. Unless con­sumers have this information, they cannot behave rationally or appropriately in their relations with utilities. 
Generalizations are difficult regarding utility practices in voluntary provision of this information to consumers. Apparently information provision is not expressed in company rules and regulations. Utilities may provide exten­sive information regarding available services and rates to applicants, or may only provide them with limited information. Utilities may or may not provide information to applicants regarding service discontinuance causes and procedures, or information concerning rate increases. 
Obviously, information 'ffects service cost and availability. Inadequate information about services and rates may result in consumption which would be different if full information were available to the consumer. Inadequate infor­
163 
mation on service discontinuance as a bill collection practice may render service 
unavailable through the sheer ignorance of the offending consumer. If consumers 
are not informed of rate adjustments prior to those changes going into effect, 
consumers may underconsume or overconsume that product until made aware of the 
adjustment. 
Repair Service. When utility company equipment or facilities become defective, 
utilities generally provide repair service upon notice by a consumer or through 
facility inspection and maintenance programs. If repair service is not institute<.'. 
promptly after a complaint, then service continuity and availability becomes 
threatened. 

GOVERNMENT PROTECTION OF UTILITY°CONSU!.fER RIGHTS 
Government has a responsibility to insure that utility company practices and policies in consumer relations do not unnecessarily jeopardize the cost, availability, and quality of a consumer's utility services. 
Examined in this section are: (1) the rationale for government involve­ment in utility consumer rights protection, and (2) present government involve­ment, nationally and in Texas, in consumer rights protection. 
Rationale for Government Involvement 
The responsibility of government to protect rights of consumers derives from the nature of utility services and from the unique market relationship which exists between producers and consumers of utility services. 
The essential nature of utility services, combined with the limited number of service suppliers, requires government to provide a means to insure that utility companies do not engage in actions or practices which unnecessarily deprive the consumer of service quality and availability at reasonable cost. 
Because utilities are usually monopolies, individual consumers normally do not have the protections against consumer abuses provided in competitive market situations, i.e. alternative sources of the service to which they might turn. As noted earlier (Chapter XI), with legally-approved monopolies, con­sumers are deprived of these market protections by government action. This monopolistic supply creates the potential for abuse of utility consumer rights. 
This unique market relationship thus creates the rights of consumers to a product which would be produced under competitive circumstances, i.e. a pro­duct which is available, adequate, and of reasonable cost. In allowing monop­olies to exist, government assumes a responsibility to insure that these rights of consumers are legally defined and protected. 
GOVERNMENT INVOLVEMENT IN CONSUMER PROTECTION Government protection of qonsumer rights necessarily involves two func­tions: (1) legal recognition and definition of the rights of utility consumers, and (2) governmental enforcement of consumer rights. This section examines the involvement of government, nationally and in Texas, in these two functions of consumer rights protection. Legal Definition of Consumer Rights. The rights of consumers have been defined in federal and state statutes, case law, and administrative rules and orders. Such expressions have addressed consumer rights in a general manner, or have addressed specific aspects of consumer rights. 
1. General Ex.pression. As broadly expressed, legal definition of con­sumer rights often: (1) define consumer rights in relations to utility company rules and regulations, and (2) define consumer rights pertaining to utility company practices in consumer relations. 
165 

Both Texas and other governments have addressed utility company rules and regulations. State and federal regulatory statutes often require such rules to be reasonable, fair and just. Although Texas law addresses the subject, it only enables utilities to establish reasonable rules and regulations rather than re­quires all rules and regulations to be reasonable.l 
2. Specific Expressions. Statutes, case law, and rules and orders of administrative agencies have addressed specific aspects of consumer rights, in­cluding deposit requirements, service discontinuance, repair service, and in­formation. 
With deposit requirements, national case law has long determined that utilities may require deposits from consumers, and that deposits are a reason­able condition to which applicants must submit prior to receiving service. How­ever, the deposit must be an amount which is reasonable and intended to protect the utility's revenues from unpaid bills. Furthermore, administrative agencies in some states have prescribed criteria upon which utilities must base decisions regarding who should pay a deposit and the amount of deposits. Texas case law has similarly determined that utilities may require a deposit as a condition precedent to service,2 although there appears nothing about the reasonableness of deposits. 
Nationally, collecting charges through service discontinuance has consis­tently been held reasonable by the courts, since unpaid bills affect the ability of a utility to serve the public and provide service at reasonable cost. Nation­ally, limitations have been placed upon the power of utilities to discontinue service. These include: (1) service may not be discontinued for an unpaid bill during a dispute between the consumer and the utility as to the amount of the bill; and (2) utilities may be required to make reasonable efforts to give advance notice to consumers of service discontinuance, including making efforts to reach 
166 

the delinquent customer during non-working hours. 
Texas case law has addressed service discontinuance, and has held that utilities may discontinue service in the event of unpaid bills.3 Discontinuance is not considered proper when a consumer contends, in good faith and on rea­sonable grounds, that there has been overcharge.4 
Nationally, with prompt repair service, case law has determined that util­ities are under an obligation to repair defects in their facilities and equip­ment within a reasonable time. Texas laws have not addressed the issue of prompt repair service. 
Information is an additional aspect of service quality addressed outside of Texas, although Texas law does not specify the rights of utility consumers . to ade­quate information from utilities. Some regulatory agencies have required util­ities to provide public access to company maps, conditions of service, and 
I 
tariffs, and to provide applicants for service with information pertaining to procedures and conditions of service discontinuance. Enforcement of Consumer Rights. Once consumer rights are legally defined, it is the responsibility of government to provide a means by which disputes may be aired and adjudicated by a. disinte'rested party in a manner which will insure that consumers rights are effectively enforced. Mechanisms available for this are the judicial system and an administrative agency which may initially hear and decide disputes, with ultimate recourse to the courts. 
Initial enforcement of consumer rights is often delegated to statewide regulatory agencies. Even if such agencies are not specifically directed to enforce consumer rights, they may become informally involved in adjudicating and resolving disputes between consumers and utilities. Agencies which have been granted responsibility for investigating and hearing consumer complaints may arbitrate and protect consumer rights through: (1) informal negotiations 
167 

with utility companies, (2) issuance of formal rules and orders which compel particular actions from utilities with respect to consumer rights, (3) making of findings of law in formal hearings which may be concerned with the interpre­tation of legal definition of consumer rights, and (4) approving or disapproving company rules, regulations and practices. A party aggrieved by a decision of such an agency has recourse to the courts, once formal decision has been made. 
The Texas Legislature has created no statewide agency for the adjudica­tion of disputes between utility producers and consumers, perhaps due to the lack of legislative involvement in consumer rights definition. Essentially, the only enforcement recourse of consumers in Texas is to the courts. 
THE ADEQUACY OF TEXAS' r~rlOLVEMENT 
The task of defining and enforcing utility consumer rights has largely fallen to the judicial system in Texas. However, it may be argued that auth­ority over such rights is implied in statutes which grant Texas cities authority 
to prescribe rules and regulations governing the manner in which utility services are rendered. 5 However, these statutes are vague, have not been judicially clar­ified, and may not be construed to grant regulatory authority over consumer rela­tions to cities. Furthermore, little evidence exists to indicate that cities have become involved actively in consumer rights definition and enforcement. 
Texas involvement in the protection of utility consumer rights is clearly inadequate. In absence of governmental involvement, consumers may attempt to protect their rights: (1) through negotiations with utility companies, and (2) through recourse to the courts. These means of protecting consumer rights are inadequate for several reasons. First, in any negotiations with utilities, con­sumers have no leverage to obtain their rights in Texas, without adequate legal 
168 

definition of those rights. Second, in negotiations, consumers must ultimately capitulate to the stance of the monopoly utilities, or otherwise not receive service. Thirdly, the costs of resorting to courts for either the protection of presently defined rights or for definition of unexpressed rights would serve as a deterrent to most consumers whose resources are miniscule compared to those of large utility companies. 
CONSUMER RELATIONS PROBLEMS IN TEXAS To emphasize the inadequacy of Texas' role in consumer protection, this section examines problems which apparently exist in consumer relations in Texas. The information was gathered through search of legislative files. Research indicates that some abuse of consumers rights does exist in Texas, although problems appear mainly within electric and telephone utilities. Consumer re­lations problems in Texas generally relate to: (1) information, (2) service discontinuance, (3) deposit practices, (4) repair services, and (5) other problems. 
Information 
Utilities customarily charge rates to consumers based upon some classifi­cation of consumers derived from consumption of service, value of the service, or other criteria. Furthermore, prices for services may differ according to various equipment used in consuming a service. 
Within the Texas electric industry, consumers are not routinely informed of their eligibility for different rate classifications, nor of increases in the price of service which result from increased fuel costs which are automatically passed on to the consumer. Some evidence indicates that similar problems exist in the telephone industry, which apparently does not fully inform applicants for 
169 

service of the full array of alternative services and available prices for par­ticular classes of service. 
Service Discontinuance 
Service discontinuance within the electric and telephone industries is practiced according to the discretion and policies of each individual company. Service discontinuance is a particularly crucial practice of electric utility companies, where lack of residential energy for heating or cooking can be haz­ardous to health. A problem in the electric industry is that companies fail to inform government of service discontinuance, to enable government to mitigate, in some manner, the loss of residential energy. 
Service discontinuance practices in the telephone industry in Texas are governed by individual company rules and regulations, which appear to be reason­able and designed to protect the companies from losses incurred from unpaid bills. However, the application of company policies in particular instances has been a problem in Texas. Evidence indicates that discretion granted to telephone com­pany employees in implementing discontinuance policies often results in unfair or discriminatory applications. 
Deposit Practices 
A problem within the electric utility industry is the lack of strict guide­lines on deposit requirements. A similar problem exists in the telephone in­dustry. Company policies are often so broad that employees are allowed great discretion in implementation, which may result in unfair and discrininatory ap­plication of a company policy, as well as discrimination in access to service if deposits are prohibitively high. 
Repair Service The telephone industry in Texas has apparently had problems in providing 
170 prompt repair service to its customers in some areas of the state. Delayed re­pair service has been attributed to the unavailability of trained technicians in remote rural areas of Texas, to the inaccessability of business offices to consumers, and to the inability of consumers to reach operators to inform them of impaired service. 
Other Problems 
As mentioned, service discontinuance and deposit requirements are used by utility companies to decrease possibilities of losses incurred by unpaid bills. The electric industry in Texas uses an additional incentive for prompt bill payment by their consumers: the "gross-net" billing practice. Although this procedure of insuring prompt bill payment has not been tested in the Texas courts, its fairness and reasonableness is questionable. As presently used in Texas, this billing method imposes monetary penalty, determined as a fixed pro­portion of the monthly Bervice charge, upon all consumers who fail to pay their bills by a particular date. Monetary penalty bears no relation to the amount of time that a bill is overdue, and consequently does not fairly apply to consumers whose bills are one day late and consumers whose bills are much more overdue. 
CONCLUSIONS AND RECOMMENDATIONS 
The inadequacy of protection in Texas is clearly evidenced by the lack of a comprehensive legal definition of consumer rights in the state. To in­sure that the availability, cost, and quality of utility services of an appli­cant for consumer of utility services are not unnecessarily jeopardized by con­sumer relations actions and decisions of utilities, it is recommended that the State should undertake the following: 
171 

1. 	Passage of comprehensive legislation designed to define and enforce consumer rights and utility responsibilities related to the consumer relations. At a minimum, such legislation should include provisions which: 
a. 	
Require utilities to provide reasonably prompt repair service to all consumers; 

b. 	
Require utilities to establish and pursue equitable, reasonable, and clear guidelines for deposit require­ments and service discontinuance; 

c. 	
Require utilities to provide reasonably adequate infor­mation to applicants for service, including information concerning: (1) alternative service and rates avail­able to each consumer, (2) conditions under which ser­vice will be provided, and (3) service discontinuance procedures; 

d. 	
Require utility companies to provide information to present consumers regarding rate increases going into effect; and 

e. 	
Enable the State to undertake the administrative func­tion of enforcing consumer rights and utility responsi­bilities in an effective manner. 


2. 	Undertaking of a study into the gross-net billing practices of utilities to determine their reasongbleness, their neces­sity, and their effect upon service cost, availability, and quality. 
REFERENCES 

1. 	Ball v. Texarkana Water Corp. 127 SW 1068 (Tex Civ App 1910), Galveston 
v. Kenner, 240 SW 894 (Tex. Sup. Ct. 1922). 
2. 	
Arvin Harrell Co. v. Southwestern Bell Telephone Company 385 s.w. 2d 696 (Tex. Civ. App. 1964), Central Power and Light Co. v. Purvis, 67 S.W. 2d 1086 (Tex. Civ. App. 1934). 

3. 	
Withers v. Ft. Worth Gas Co. 238 S.W. 324 (Tex. Civ. App. 1921). 

4. 	
Southwestern Gas and Electric Co. v. Stanley, 70 S.W. 2d 413 (Tex. Sup. Ct 1934). 

5. 	
v.A.c.s., arts 1175(12), 1119. 


173 

CHAPTER XIV: 
SOCIAL COSTS IN PUBLIC UTILITY SERVICE 

A further aspect of service quality concerns social cost. Social costs occur whenever an effect or expense is imposed upon a third party as a result of an economic transaction between two primary parties. Since the effect upon the third parties is not included in the costs of the transaction to the two primary parties, such an effect is known as an "externality" and its expense to the third parties is known as a "social cost." 
Social costs are an important aspect of service quality. Social costs result from failure of the competitive market to allocate efficiently society's resources to the production of goo<ls and services. A prerequisite to efficient allocation is pricing of goods and services at their true costs to society, in­cluding those costs which are imposed upon third parties and thereby external to the actual producers and consumers of goods and services. 
Common externalities generated by public utilities are environmental damage and public safety hazards. This report examines these externalities in relation to: 1) the obligation of government to correct the market failure which creates externalities, 2) the conceptual sources and legal expressions of government's obligation, and 3) the present and potential existence of externalities created by utility industries in Texas, which indicate whether Texas government has ful­filled its obligation pertaining to social cost. 
DEFINITION OF THE OBLIGATION Given the desirability of efficient resource allocation within society and the inability of the competitive market to efficiently allocate resources when social costs exist, government must assume responsibility for correcting failures 
174 

of the market to account for social costs. The obligation of government to correct market failures may take two forms: 1) government may require that costs to third parties be reflected in the cost of the transaction which gen­erates the social cost, which would require measurement of the social cost and provision of a means by which the cost may be recompensed to third parties; and 2) government may require that producers of social costs reduce these costs to the greatest extent possible. 
SOURCE OF THE OBLIGATION 
The obligation of government to intervene to minimize social costs is 
conceptually derived from economic theory and is legally recognized in federal 
and state statutes and administrative rules and orders. 
Conceptual Source 
The obligation pertaining to social costs is derived from economic theory, 
which requires government, in a competitive market economy, to intervene in the 
economy in the event of market failure. This responsihility, as it relates to 
social costs of utilities, falls to government for two reasons: (1) the past 
role of government in utility product pricing, and (2) the nature of private 
firms. 
Past Role of Government. As mentioned, the existence of social costs constitutes 
a market failure, which results in overconsumption of the products which generate 
social costs, and thus, in inefficient allocation of resources by society. This 
is particularly true for utilities, since the price of utility products has been 
regulated by government. Political expression of consumer demands have often 
forced regulatory bodies to set rates as low as possible. Consequently, social · costs have not been included among considerations in rate making. 
175 
Nature of Firms. Although utilities are considered quasi-public in nature and a number of them are government-owned, there are also many which are investor­owned. As a result, officials of public utilities are obligated to their in­vestors to make as large a profit as possible, given the constraints of rate regulation. Since public investment is necessary for the survival of a utility, individual utilities cannot be expected to voluntarily correct for the social costs which are a by-product of their activities. If utilities did so volun­tarily, the costs to consumers would increase, resulting in decreased consump­tion and thereby decreased profits for the investor. Thus, it becomes the re­sponsibility of government to correct the market failure of a utility's social cost. 
In addition, government intervention becomes necessary as the number of externally affected parties and the number of economic units generating social cost increases. Government is the only entity large enough to efficiently and effectively control social cost. Individuals have very limited means of im­posing sanctions to reduce social cost. 
Legal Expression of the Obligation 
The obligation of government has, to some extent, been legally recognized and implemented in policies set forth, functions undertaken, and standards set by federal and state governments in the areas of public safety and environmental damage. This legal recognition is expressed nationally in state and federal statutes and administrative rules and orders, and in Texas in the State Consti­tution, statutes, and administrative rules and orders. National Law. Federal laws defines the primary responsibility of government in controlling social costs associated with environmental damage and public safety. 
Federal laws have reflected the belief that natural resources play a sig­nificant role in the nation's welfare. Depletion of these resources imposes a 
176 

social cost on present and future generations in the form of scarcities and en­vironmental damage. The belief that natural resources are vital to social wel­fare led to the Clean Air Act of 1963 and the National Environmental Policy Act of 1969. 
1. Public Safety. The federal government has recognized its responsibil­ity to public safety in several ways, including passage of policy legislation, creation of administrative and enforcement agencies, and establishment of safety standards. In establishing and enforcing public safety standards, the federal government is, in effect, correcting market failures by requiring abatement of externalities by those who produce them. 
Public safety social costs have been addressed in several ways by the federal government: (1) establishment of the Federal Power Commission, which sets comprehensive and detailed safety specifications for electric and natural gas utilities, (2) the Natural Gas Pipeline Act of 1968, as revised, which establishes policies concerning interstate natural gas pipeline safety and directs the Office of Pipeline Safety in the Transportation Department to estab­lish such standards, (3) the Clean Air Act of 1963, which provides financial as­sistance to state and local governments to abate pollution created by all in­dustries, and 4) promulgation by the Environmental Protection Agency of air quality standards to which particular electric utilities must adhere. Other states have addressed air quality through requiring use of low sulphur fuels in electricity generation. 
2. Environmental Damage. The Federal government has also addressed the issue of environmental costs through the National Environmental Policy Act of 1969. Like the Clean Air Act, NEPA does not specifically address public util­ities but has implications for all industries. This legislation states clearly the responsibilities of the Federal Government to protect the environment and to 
177 
promote efforts to eliminate future damage. The legislation also recognizes the obligation not to incur social cost to future generations. Furthermore, the EPA has promulgated water quality standards to which electricity utilities must adhere in returning water used in generating electricity. 
Other states have addressed the land disruption aspect of environmental damage by establishing agencies which have authority to approve utility rights of way. Texas Law. Most social cost regulation undertaken by Texas state government is accomplished through federally established guidelines. As a result, efforts in Texas do not differ significantly from the federal government's. However, Texas has taken a more limited role than other states in social cost regulation. 
1. 
Public Safety. Texas has recognized its responsibility to protect public safety only in natural gas and electric utilities. The Texas Constitu­tion (Article 1436a) requires electric utilities to meet the safety standards established by the Federal Power Connnission. Texas has also granted the Texas Air Control Board the authority to enforce EPA air quality standards for new, large electricial units; the board exercises its own authority for existing units. Federal standards governing natural gas pipelines, compressor stations, and service line safety have been adopted by the Texas Railroad Conunission, which has authority over natural gas utilities within the state. 

2. 
Environmental Damage. Only one agency has some control over social costs resulting from environmental damage produced by electric utilities within the state. Texas has not addressed issues of environmental damage resulting from activities of other utilities. 


The Texas Water Quality Board, through issuance of permits to electric companies, enforces EPA standards which require electric utilities to maintain levels of water quality and temperature prior to returning water used in elec­tricity generation to its source. 
Texas has not established a state agency with authority to approve utility rights-of-way. Incorporated municipalities have been granted such authority, but only within municipal boundaries. 
ANALYSIS OF FULFILLMENT OF THE OBLIGATION IN TEXAS 
To determine whether social costs are a significant by-product of utility activities in Texas, identification and analysis of empirically-evident social costs were made. To determine potential socials costs in the state, the present role of state government in control of social costs, and the anticipated growth of utilities were examined. 
Present Problems 
Our research indicates that most present problems of social costs in Texas are more associated with environmental damage rather than with public safety. Public Safety. Public safety problems in Texas are largely confined to the natural gas industry, which has pipeline problems, and to the electricity in­dustry, which creates air pollution. Although no social costs associated with other utilities were found, further research is necessary to state that no problems exist in those industries. 
1. Natural Gas. Present problems in the natural gas industry are rela­tively small. The problems which have been identified pertain to pipeline safety. The Department of Transportation, Office of Pipeline Safety is respon­sible for enforcing federal pipeline safety standards. The Texas Railroad Com­mission has responsibility for enforcing these regulations in Texas. The Com­mission keeps files on reported pipeline accidents. A reportable accident is defined by federal regulations to be any accident resulting in a fatality or any injury requiring hospitalization or any property damage exceeding $1,000. 
179 

Federal regulations require reporting of any accident to the Commission. We can only assume that all accidents are reported. In 1973, 55 accidents occurred in Texas. These accidents resulted in 1 death, sixteen injuries, and $2,593,119 in property damage. Of these 55 accidents, 8 were a result of corrosion, 22 were caused by an outside party, 10 by material failure, 10 by defects in equipment and the rest were miscellaneous. The Commission has engineers who periodically inspect pipeline facilities. During calendar year 1973, 72 such inspections took place. Fifty-eight operators were inspected. Out of this number, 11 de­ficiencies were found. All of these were either inadequate records or failure to file required reports with the Commission. All deficiencies were corrected. 
The Railroad Commission cannot provide blanket inspection of all utilities. In Texas, the gas utility companies are responsible for ensuring that the fed­eral standards are enforced by their company, except for the pipeline safety standards. These standards include such items as odorization standards. 
2. Electricity. The major health problem resulting from electricity 
production is air pollution, which threatens health in two forms: (1) particu­
·1ate emissions from generating plants, and (2) sulphur dioxide. Although attempts have been made to control this social cost by EPA, the control devices which electricity generators have been required to use have not operated prop­erly. Environmental Damage. The most prevalent forms of environmental damage caused by utilities in Texas today are: (1) visual pollution, and (2) excessive dis­ruption of land. 
1. Visual Pollution. Telephone, electric, and cable television utilities all require lines for transmission of their services to consumers. If these transmission lines are constructed above ground, as is often the case in Texas, visual pollution results. Visual pollution may be ameliorated to some extent 
180 

through joint use of transmission facilities and rights-of-way. Elimination of the problem may require placing all transmission lines underground. 
2. Land Disruption. Land is required by all utilities for two activi­ties: (1) generation of the utility product, and (2) transmission of the pro­duct to intermediaries or to ultimate consumers. The major problem pertaining to excessive and unnecessary land disruption in Texas at present results from the use of land for utility product transmission. 
Land disruption associated with product transmission is caused by two phe­nomena: (1) the use of large rights-of-way for utility transmission facilities, with neither joint use and reuse of rights-of-way, nor coordination among utili­ties, and (2) the use of undergroundin_g__of---transmission lines of pipes by utili­ties, again without coordination among utilities. The result is excessive, un­necessary use and clearance of land. 
Potential Problems 
Potential problems in Texas associated with public safety social costs have been primarily derived from problems which have occurred in other states, and are largely confined to natural gas and electricity industries. Potential problems in Texas associated with environmental damage appear to be larger than public safety problems, and are associated with all utilities. Public Safety. Potential public safety problems are associated with natural gas and electricity utility industries. Natural gas safety problems pertain to federal safety standards other than pipeline safety. The potential public safety problems in the electricity industry pertain to: (1) sulphur dioxide em­missions, (2) nuclear plant radioactivity, and (3) nuclear waste transportation, reprocessing, and disposition. 
1. Electricity. One hazard in generation of electricity is emission of sulphur dioxide. This pollutant affects persons suffering from lung ailment, 
181 

bronchitis, emphysema, or cancer. Some New York residents have experienced in-· cidents of illness and death from such fumes. 
Another potential safety problem is radioactivity from nuclear plants. Radioactive wastes produce noticeable biological effects, which cause injury and death. A major problem is the inability of science to determine damage resultant from prolonged exposure to small amounts. 
Radiation from nuclear power plants is of less concern than the problems of transporting and disposing of used fuels and nuclear waste. In transporting and reprocessing, radioactive waste could reach the environment through an accident. In disposition of nuclear waste, several centuries are required for the material to decay to innocuous levels; under such conditions, it is im­possible to guarantee future safety. 
2. Natural Gas. Potential safety problems in the natural gas industry derive from the inability of the Texas Railroad Commission to inspect all natural gas utilities within their jurisdiction. Rather, the burden of insuring that federal safety standards, other than pipeline standards, are met with the indi­vidual utility. Environmental Damage. Given the present roles of Texas in coordination of utili­ties' use of land and in requiring undergrounding of utility lines, and given the projected population growth of Texas which will require large increases in util­ity transmission and generation facilities, a large increase in the present en­vironmental problems is to be expected in Texas. Problems which could occur include: (1) increased visual pollution through overhead transmission wires, particularly in unincorporated areas of Texas, (2) increased land disruption re­sulting from increasing use of rights-of-way and the failure of government to require joint use of rights-of-way, to plan and coordinate utility plant and transmission line siting, to coordinate underground placement of utility lines 
and to compel interconnections between individual utility firms. 
RECOMMENDATIONS AND CONCLUSIONS 
The need for utility planning and coordinati'on exists on a statewide level. 
The lack of a central authority in Texas to supervise and control public utili­ties could easily lead to environmental degradation in the future. Service ex­pansion to anticipated new customers could irreparably damage the environment if not strictly planned and controlled by the state. The lack of state coor­dination and planning can only lead to increasing federal control. If the state wants to maintain control over utility companies, and the resources they use state officials must accept the responsibility of planning and coordinating practices of these companies. 
To encourage sound ecological practices by the public utility industry, 
we recommend establishment of state responsibility for functions which would include the following: 
(1) 	
The establishment of rules and regulations requiring 
placement of utility lines underground and encouraging 
joint use of undergrounding, where reasonable. 


(2) 	
The establishment of authority to determine the price 
of social cost abatement, to enable this cost to be 
included in the rate-making base and thus, allow that 
cost to be paid by the consumers and the stockholders 
of the utilities. 


(3) 	
The establishment of authority to coordinate all state 
agencies who have responsibilities impacting on public 
utilities. 


(4) 	
Establishment of responsibility for approval and coor­
dination of rights-of-way in rural areas and similarly 
encourage municipalities to coordinate rights-of-way. 


(5) 	
Establishment of authority for coordinating joint use 
of facilities, and authority to compel interconnections 
between utility companies, where possible. 



183 

LYNDON 8. JOHNSON SCHOOL OF PUBLIC AFFAIRS POLICY RESEARCH PROJECT 
• • 
UTILITY REGULATION IN TEXAS 

PART III: A MODEL BILL FOR 
UTILITIES COMMISSION 

A Report by The Utility Regulation Policy Research Project Lyndon B. Johnson School ofPublic Affairs The Unil'ersity of Texas at Austin 1975 ' 
©1975 The BOard of Regents The University of Te~ 
Price: $3.50 . 
INTRODUCTION 
The third section of the report is a model bill for the establishment of a Public Utilities Commission in Texas. At the time of research and drafting, the state had not yet passed a utilities bill of any kind~ and it is included here strictly as a model. 
The model has two parts: (1) suggested legislation and (2) a rationale for that particular point of legislation. Even though the version eventually passed by the state contains differences in form and substance, we feel that a point~by-point reference to the model may serve to clarify the reasons und~rlying a particular leg­islative decision and in some instances, to present alternatives. 
185 

A BILL TO BE ENTITLED 
AN ACT 
defining public utilities and providing for their regulation; relating to the creation, establishment, administration, main­
tenance, powers, duties, functions, and financing of the Texas Public Service CODDnission; providing for hearings and appeals; defining offenses and penalties; providing for the represen­
tation of consumers through the Assistant Attorney General de­signated as the consumer counsel; providing for the repeal of all laws and parts of laws in conflict herewith; and declaring 
an emergency. 
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS: 
ARTICLE I. GENERAL PROVISIONS 
Section 1.01. Short Title. This Act may be cited as the •Texas Public Service Conunission Act.• 
Section 1.02. Purpose. The legislature hereby finds and de­clares that because of society's dependence upon quality utility service, the public interest must be protected by a public ser­vice camnission guided by the principles of efficiency, progress, equity, stability, ecology, and energy conservation. These principles are not well served in a monopolistic market such as the public utility industry if the monopolies are unregulated. 
Therefore it is necessary for the Texas Public Service CODDnission to regulate the public utilities to: 
(a) 
assure that the earnings of a public utility company are sufficient to provide financial stability and the means for continued development of the utility services consistent with technological development of the utility services consistent with technological advances; 

(b) 
provide consumer protection from the abuses arising out of the absence of competition; 

(c) 
promote sound ecological and energy conservation policies;-and 

(d) 
confer upon the Commission the power, authority, and duty to supervise and regulate all public utilities in this state in all matters, whether specifically mentioned herein or not. 


186 
Section 1.03. Definitions. In this Act, unless specifically defined otherwise: 
(a) 
"Affected person" means any public utility affected by any action of the commission; the Attorney General of the State of Texas; any person or corporation whose utility ser~ vice or rates are affected by any proceeding before the commis­sion; and any person or corporation which is a competitor of · a public utility with respect to any service performed by the utility or who desires to enter into such competition. 

(b) 
"Affiliated interest" or "affiliate" means: 

(1) 
every person and corporation owning or holding, directly or indirectly, five percent or more of the voting securities of a public utility. 

(2) 
every person and corporation in any chain of successive ownership of five percent or more of the voting securities of a public utility; 

(3) 
every corporation five percent or more of the voting securities of which is owned or controlled, directly or indirectly, by a publiq utility; 

(4) 
every corporation five percent or more of the voting securities of which is owned or controlled, directly or indirectly, by any person or corporation which owns or controls, directly or indirectly, five percent or more of the voting securities of any public utility or by any person or corporation in any chain of successive ownership of five percent of such securities; 

(5) 
every person, corporation, or employee thereof that provides services, including legal services, for a tele­phone company; 

(6) 
every person and corporation having one or more officers or directors in common with any public utility~ 

(7) 
every person who is an officer or director of a public utility or of any ocrporation in any chain of successive ownership of five percent or more of voting securities or a public utility; 

(8) 
every person who and corporation which, after notice and hearing, the Conunission determines actually exercises any substantial influence or control over the policies and actions of a public utility, or over which a public utility exercises such control, or which is under common control with a public utility, such control being the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of another, whether such power is established through ownership or voting of securities or by any other direct or indirect means; 

(9) 
every person who or corporation which the Commis­sion may determine as a matter of fact after investigation and hearing is actually exercising such substantial influence over the policies and actions of the public utility in conjunction with one or more other corporations or persons with which or whom they are related by ownership or blood relationship, or by action in concert, that together they are affiliated with such public utility within the meaning of this section even though no one of them alone is so affiliated. 

(c) 
"Certificate of convenience and necessity" means a certificate issued by the Commission pursuant to Article VII of this Act granting a public utility the right to operate, build, expand or in anyway alter its physical property as well as the right to actually conduct business. 

(d) 
"Certificate of service". means a certificate issued by the conunission pursuant to Article VII of the Act defining the designated service area of each public utility and confining their operations to said service areas. 

(e) 
"Certificate of Environmental Compatibility" means a certificate issued by the Commission pursuant to Article VIII of this Act for the construction of utility facilities. 

(f) 
"Commence to construct" means any clearing of land, excavation, or other action that would adversely affect the natural environment of the site or route of a major utlity facility, but does not include uses in securing geological data, including necessary borings to ascertain foundation conditions. 

(g) "Commission" means the Texas Public Service Commission. 

(h) 
"Commissioner" means a member of the Texas Public Service Commission. 

(i) 
"Consumer" means any person who purchases or uses the products or services of any public utility. 

(j) 
"Cooperative corporation" means a.ny telephone or electric cooperative corporation organized and operating under Chapter 4, Acts of the Slst Legislature, 1st Called Session, 1950 (Article 1528c, Vernon's Texas Civil Statutes), respectively. 

(k) 
"Corporation" means any corporation, joint-stock com­pany, or association, domestic or foreign, and its lessees, · assignees, trustees, receivers, or other successors in interest, having any of the powers or privileges of corporations not possessed by individuals or partnerships, but shall not include municipal corporations, except as otherwise expressly provided in this Act. 

(1) 
"Customer" means any person, or any other entity whatsoever, contracting for or purchasing retail utilitv service from any public utility. 

(m) 
"Employee" means every person paid wages for service to the Cornrnissi.on, including engineers, accountants, attorneys, rate analysts, examiners, inspectors, secretaries, clerks, agents, assistants and every other person required to discharge the functions, perform the duties, and exercise the powers under this Act. 

(n) 
"Facilities" means all the plant and equipment of a public utility, including all tangible and intangible real and personal property without limitation, and any and all means and instrumentalities in any manner owned, operated, leased, licensed, used, controlled, furnisheq, or supplied for, by, or in connec­tion with the business of any public utility. 

(o) 
"Major utility facility" means any construction which constitutes a substantial environmental impact as determined by the conunission in consultation with the Consumer Counsel for consumer affairs under rules and regulations adopted for this purpose in terms of air pollution, water pollution, thermal pollution, noise pollution, visual pollution, or anv other signi­ficant alteration of the ecological system defined by the commission . The conunission shall further define the characteristics of "majorutility facility" with regard to each type of public utility under its jurisdiction. 


187 

188 

{p)  "Municipality"  means  any county  or municipality in this  
state.  
(q)  "Order"  means  the whole  or  a  part of the final dispo­ 

sition, whether affirmative, negative, injunctive, or declaratory in form, of the commission in a matter other than rule making but including issuance of certificates and rate setting. 
189 

(r) 
"Person" means any individual, partnership, association, government or governmental subdivision or agency, or public or private organization of any character, other than a corporation, and including its lessees, assignees, trustees, receivers, execu­tors, administrators, or other successors in interest. 

(s) 
"Proceeding" means any hearing, investigation, inquiry, or other fact-finding or decision..:..making procedure before or by the commission, and includes the denial of relief or the dis­missal of a complaint. 

(t) 
"Public utility" or "utility" means every person, legal entity, or corporation now or hereafter owning or operating in this state, for compensation, equipment, or facilities for: 

(1) 
the generation, transmission, distribution, sale, or furnishing of electricity to the public or for resale to the .public; or 

(2) 
the distribution, sale, or furnishing of natural, a'rtificial, or mixed natural and artificial gas to the public or to another public utility or municipally-owned utility for resale to the public; provided that the production, transmission, and storage of natural gas, the sale of natural gas in or within the vicinity of the field where produced, and the distribution or sale of liquified petroleum gas, shall not be included; or 

(3) 
the conveyance, transmission, or reception of telephone messages, communications, signals or information; the sale, use, or maintenance of telephone equipment and facilities. Nothing in this Act shall be construed to apply to telegraph services, television stations, or radio stations; or 

(4) 
the transmission, storage, distribuiton, sale, or furnishing of water to the public, or for resale to the public for any use; or the collection, transportation, treatment, or disposal of sewage, or other operation of a sewage disposal service, for the public; or 

(5) 
the distribution, sale, or furnishing of steam for any use to the public or to another public utility or municipally­owned utility for .resale to the public or for the generation of electricity to be distributed, sold, or furnished to the public or for resale to the public; or 

(6) 
the collection, conveyance, and the transmission of television and radio .signals for sale to consumers through a cable system; or 

(7) 
the generation, transmission, sale, or furnishing of any heat, light, or power to the public, or for resale to the public. 


190 

The term "public utility" or "utility" shall include muni­cipally-owned utilities, and cooperative corporations but shall not include any person or corporation not otherwise a public utility who or which furnished the services or commodity described in any paragraph of this subsection only to itself, its employees, or tenants as an incident of such employee service or tende~cv, when such service or commodity is not resold to or used by others. 
(u) 
"Rate means every individual or joint rate, charge, toll, tariff, rental, or other compensation whatsoever to any public utility made, demanded, or received for any service, pro­duct, or commodity described in this section offered, rendered, or furnished by such public utility, whether received directly or indirectly, and every rule, regulation, practice, requirement, classification, or contract relatinq to any such rate, charge, toll, tariff, rental, or other compensation or to any schedule or part thereof. 

(v) 
"Retail public utility" means anv person, firm, corpor­ation, partnership, municipality, political subdivision or agency, or cooperative corporation, now or hereafter operating, main­taining, or controlling in Texas any facilities for providing retail utility service. 

(w) 
"Retail utility service" means utility service furnished to a customer for ultimate consumption, but does not include wholesale utility service furnished by a public utility to another utility for resale. 

(x) 
"Rule" means any commission statement of general appli­cability that implements, interprets, or prescribes law or policy, or describes the organization, procedure, or practice require­ments of the commission. The term includes the amendment or repeal of a prior rule, but does not include statements concerning only the internal management of the commission and not affecting private rights or procedures. 

(y) 
"Service" is used in this Act in its broadest and most inclusive sense, and includes any and all acts done, rendered, or performed, and any and all things furnished or supplied, and any and all facilitJ.es used, furnished, or supplied by public utili­ties in the performance of their duties under this Act to their employees, other public utilities, and the public, including mem­bers of cooperative corporations, as well as the interchange of facilities between two or more of them. 


(z} "Utility service-consuming facility" means everything that utilizes utility services from a central station source. 
191 

BILL NUMBER, AUTHOR, AND INTRODUCTION: 
A bill number, author, and introduction are legislative re­quirements and should preface each bill. 
CAPTION: 
The caption is a brief summary of the bill; and is a mandatory requirement provided for by Article III, Section 35 of the Texas Constitution. 
Pro Con 
The short caption as opposed A longer caption might be to the long caption has the advan­preferred because the subject tage of not having to be amended stated in the caption may be as individual sections of the body broader but not narrower than of the bill are amended. the subject treated in the body 
If too much detail is included of the Act. A caption that is in the caption there is the danger not broad enough to express the that the body of the bill may be subject of the act will not suf­amended and the corresponding amend­fice, but a caption that is ment to the caption overlooked, thus broader in scope than the subject rendering the caption misleading. dealt with in the body of the act 
The repealing of previous laws will not invalidate the act. was preferred to the amending of While the amending process such laws due to the lengthy pro­would be considerably complex, cess involved in such amendment. the end result would be more en­
The repeal of specific laws compassing and comprehensive. provides for as little doubt as to The use of a general appeal Congressional intent as possible would have been technically as and avoids any difficulties that inclusive. might arise in future interpretation. 
ENACTING CLAUSE: 
The enacting clause is required by Section 29 of Article III of the Texas Constitution. 
BODY 
Statutory limitations govern the body of the bill only to the extent that it be broken into convenient lengths and be relevant to the caption. 
192 

ARTICLE I. GENERAL PROVISIONS 
Section 1.01 
Pro 
The title "Texas Public Ser­vice Commission" was chosen be­cause it is comprehensive and lends itself well to the broad range of responsibilities this act assigns to it. The choice of title reflects on emphasis on service to the public. Many of the more "progressive" states have adopted the "Service" com­mission. 
Section 1.02. 
Con 
Objections to this title in consideration of one including the word "utilities" are that the lack of such inclusion may tend to obscure the opera­tions and functions of the commission from the public. 
The purpose clause is an optional argument or explanation to arrange specific elements so as to illuminate meaning and legisla­
tive intent. 
Pro 
We have chosen to include a 
policy statement because such a 

' statement is helpful to the reader, is a main source of information, and opens the minds of the makers to the specific problems. The policy statement may be resorted to in order to illuminate the body of the bill but may not be used. to distort its interpreta­tion. The policy statement also sets guidelines for judicial inter­pretation of this act. 
Con 
The opposition to the use of a policy statement revolves around the extra length incurred to outline a subject already detail~d at length. 
193 

Section 1.03 (Definitions} 
Pro 
The definition section is written to clearly define or explane the terms used in the body of the bill. All the terms were included in this initial section rather than in various sections throughout the bill to provide one central location point. 
(a}, (b} "Affected person" and "affiliated interst" were de­fined as broadly as possible in order to provide a comprehensive inclusion of all such persons and interests. 
"Voting securities" were used instead of other measures of equity to provides for the most complete coverage of the controll­ing interests in a corporation. 
(c), (d} , (e} . Certificates, issued as specified, provide the commission with both the authority and the mechanism to influence, determine, and regulate operations, service areas, and environmental impact of public utilities consis­tant with the goals of this Act. 
The participation of the consumer counsel in the decision­making process regarding the deter­mination of a substantial environ­mental impact guarantees a greater degree of accountability of the com­mission for its additional input coming from a different perspective than that of regulation. 
(f} -(r} Self explanatory. 
(s) "Public utilities" was defined to encompass various as­pects of electricity, gas, tele­phones, water, steam, television and radio signals, plus any new sources of energy that may be de­veloped in the future. 
(t}-(y) Self-explanatory 
194 
Con 
In that some terms apply specifically and exclusively to single articles in the bill, they might have been placed in that article to focus attention to their meanign within that context. 
(a} , (b} Detailing points in this manner leaves the possi­bility open that a person or interest may not have been itemized and was therefore in­tentionally excluded. 
(c), (d) , (e} In the issuance of certificates of environmental compatitility, the .consumer coun­sel is only consulted in regard to the determination of what consititutes a substantial environmental impact. In effect, consultation could mean no input into the determination process at all, re~ulting in a potentially biased commission to make determinations as it wished resulting in possible harm to the industries or to consumers. 
(s) There is the possi­
bility of ambiguity over the 
jurisdiction of national and 
instate regulatory bodies. 

ARTICLE II. ORGANIZATION OF COMMISSION 
Section 2.01. Creation of Commission; Salaries of Members. 
The Texas Public Service Commission is hereby created. The 
Corrunission shall be composed of six members, appointed by the 
Governor of Texas with the advice and consent o~ the Senate, 
for terms of six years. The salaries of members of the Commis­
sion shall be as nearly as possible, corrunensurate with executive 
salary standards within the utility industry. 

Section 2.02. Appointment of Corrunissioners; Terms of Office. Immediately after this Act takes effect, the Governor shall · with the approval of the Senate, appoint two Commissioners, · whose terms shall expire two years after appointment, two Commissioners whose terms shall expire four years after appoint­ment, and two Commissioners whose terms shall expire six vears after appointment. At the expiration of each of the above named terms, there shall be appointed, in the same manner, two Commissioners to hold o=fice for a term of six years. The Commissioners shall elect one of their members to be Chairperson of the Commission, for a term of two years with a maximum of two such terms. The Chairperson shall be non-voting, except in the event of a tie vote. 
Section 2. 03. Vacancy. A vacancy on the commission shall be filled by an appointment by the Governor with the advice and consent of the Senate. If the Senate is not in session, the Governor shall make an appointment subject to the approval of the Senate when next convened. Such an appointment shall con­tinue until the original term has expired. 
Section 2.04. Qualifications of Members of the Commission. 
(a) 
No person is eligible for appointment to the commission if at any time during the two-year period immediately preceding appointment he served as an officer, director, owner, employee, or partner of a public utility company or affiliated interest thereof, or if he or his immediate familv owns or controls, directly or indirectly, stock or bonds of any class or any value in a utility company or any affiliated interest. This prohibi­tion does not apply to the interest of a member or f orrner member of a public utility cooperative; although officers of such co­operatives shall be ineligible under the terms of this section. 

(b) 
To be eligible for appointment to the commission a person must be a qualified Texas voter at the tirne of appointment and a citizen of the United States. Each nember of the commission shall qualify for office by taking the oath prescribed for other state offices. 

(c) 
If any Conunissioner, or any appointee or employee of the conunission shall become a candidate for elective office, such act shall be deemed as a resignation, and the vacated position shall be filled by appointment by the Governor as provided herein for other vacancies; provided, that if such name be filed as a candidate without personal knowledge or con­sent, the individual shall have three days after actual notice of such filing in which to repudiate such action by public statement, withdraw from the race, and declare that he is not and will not be a candidate and will not accept the office if nominated or elected. If any such person shall vacate his/her position on the conunission, or as an appointee or employee thereof to run for office, he shall not be eligible for re­appointment on the Commission or re-employment by the Conunission for a period of two years. 

(d) 
If a member of the conunission or a person employed by the commission becomes the owner of any stocks or bonds, or becomes pecuniarily interested, other than voluntarily, in any public utility or affiliated interest, he must divest himself of the ownership or interest within 30 days after such acquirement. 

(e) 
No member of the commission or officer or employee of the commission may personally or through any partner or agent render any professional service, or ~ake or perform any contract for or with any public utility or affiliated interest. This prohibition does not include contracts for utility products and services or equipment for using utility products and services when the Conunissioner, officer or employee is acting as a consumer. 


195 

(f} No member of the conunission or officer or employee of the commission may accept or receive from any utility or from any person, firm, or corporation associated with a utility in other than a customer relationship, any gift, entertainment, meal, transportation, or other thing of value. 
(g} No member of the commission, or officer or employee of the commission may receive any remuneration for any service rendered to or any employment with a public utility or any affiliated interest for a period of five years after leaving the membership of the commission. 
(h) Each Commissioner shall devote full time to the duties of the conunission. 
Section 2.04. Employees, Agents, and Assistants. (a) The conunission shall employ professionally trained engineers, account­ants, attorneys, rate analysts, skilled examiners, inspectors, secretaries, clerks, and other employees required to discharge the functions, perform the duties, and exercise the powers under this Act. 
196 

(b) All employees shall receive such compensation as is fixed by the commission. The salaries and benefits of all employees in positions requiring professional or technical t training or experience shall be commensurate with the salaries and benefits of employees of the public utilities within the jurisdiction of the commission. 
Section 2.05. Qualifications and Prohibitions upon Commissioners, Employees, Public Utilities, and Others. (a) Qualifications and prohibitions prior to service with the commission: 
(1) 
Every person nominated for appointment or applying for employment to the commission shall fully disclose any pecuniary or other interest in, or relationship, whether himself/herself or any immediate family member, with any public utility or affiliated interest, in a report which shall be filed with the secretary of state, in such form as the secretary of state shall prescribe, no later than 30 days after nomination or application for employment, provided, however, that failure to disclose such interest in or relationship with an affiliated interest as to which the nominee or employee did not know or have reason to know of the status of affiliation, shall not constitute a violation of this subsection, if an amended report is filed within 10 days after the nominee or employee does acquire knowledge or reason to know of such status. 

(2) 
No candidate nominated for appointment to the commission nor any member of his or her immediate family, may solicit or accept, any gift, gratuity, or contribution from any public utility or affiliated interest or from any agent, ~epre­sentative, officer, owner, director, partner, or attornev or the partner or associate of an attorney, of anv public utility of affiliated interest. 

(3) 
No person is eligible for appointment to the commission or employment by the commission, if at any time during the two-year period immediately preceding appointment he served as an officer, director, owner, employee, or partner of a public utility company or affiliated interest thereof, or if he or his immediate family owns or controls, directly or indirectly, stock or bonds of any class or any value in a utility company or any affiliated interest. This prohibition does not apply to the interest of a member or former member of an electric or telephone cooperative; although officers of cooperatives shall be in-­eligible under the terms of this section. 

(4) 
To be eligible for appointment to the commission a person must be a qualified Texas voter at the tine of apooint­ment and a citizen of the United States. Each member of the commission shall qualify for office by taking the oath prescribed for other stat~ offices. · 

(b) 
Qualifications and prohibitions during service with the commission: 

(1) 
If any commissioner or employee of the commission shall become a candidate for elective office, such act shall be deemed as a resignation, and the position shall be filled by appointment by the Governor as provided herein for other vacancies or personnel procedures; provided, that if such name be filed as a candidate without his/her knowledge or consent, he/she shall have three days after actual notice of such filing in which to repudiate such action by public statement, withdraw from the race, and declare that he/she is not and will not be a candidate and will not accept the office if nominated or elected. If any such person shall vacate his/her position on the commission, he shall not be eligible for reappointment on the commission or re-employment by the commission for a period of two years. 

(2) 
Unless specifically authorized by this Act for disposition of ex-parte matters, commissioners or employees of the commission assigned to render a decision or to make findings of fact and conclusions of law in a proceeding shall not communi­cate, directly or indirectly, in connection with any issue of fact or law with any party or his representative, except upon notice and opportunity for all parties to participate. 

(3) 
No commissioner or employee of the commission shall directly or indirectly solicit or request from, or suggest or recommend to, any public utility or its affiliate, or to any agent, representative, attorney, employee, officer, owner, direc­tow, or partner thereof, the appointment to any position or the employment in any capacity of any person by such public utility or affiliated interest. 

(4) 
No public utility or affiliated interest or any person, corporation, firm, association or business which furnishes goods or services to any public utility or affiliated interest, not any agent, representative, attorney, employee, officer, owner, director, or partner of any public utility or affiliated interest, or any person, corporation, firm, association, or business furnish­ing goods or services to any public utility or affiliated interest shall give or offer to give any gift, gratuity, employment, or entertainment whatsoever to any commissioner or employee nor suggest or recommend or directly or indirectly solicit, the appointment or employment on the commission of any person, nor aid, abet, or participate with any commissioner, employee, former commissioner or former employee of the commission in any activity or conquct which would constitute a violation of the Act. 

(5) 
Each employee shall devote his/her full time to his/her duties as they relate to the commission. 

(c) 
Qualifications and prohibitions during service on the commission, and for a period of five years after such service in the case of commissioners, and for a period of two vears after such service in the case of employees. 

(1) 
No commissioner or employee or immediate family member of either shall: 


197 
198 

a) have any pecuniary interest either as an officer, director, partner, owner, employee, attorney, con­sultant, or otherwise, in any public utility or affiliated interest, or in a person or corporation or other business en­tity a significant portion of whose business consists of fur­nishing goods or services to public utilities or affiliated interests, or in any customer group or association which has appeared before the commission during his period of service, but not including a group or association supported solelv by gratuitous contributions of money, property, or services not tied to any business interest; 
b) purchase or otherwise voluntarilv acquire ownership or control, whether directly or indirectly, or any stocks, bonds, or other p'ecuniary interest in a public utility or affiliated interest. 
. c) accept any gift, gratuity, or entertainment whatsoever from any public utility or affiliated interest, or from any person, corporation, agent, representative, emplovee, or other business entity .a sigl)ificant portion of whose busi­ness consists of furnishing goods or services to public utili­ties or affiliated interests, or from anv agent, representative, attorney, employee, officer, owner, director, or partner of any such business entity or of any public utility or affiliated interest; provided, howeve~, that the receipt and acceptance of any gifts, gratuities, or entertainment after termination of service on the commission, whose cumulative value in anv one-year period is less than $100, shall not constitute a violation of this Act. · 
d) personally or through any partner or agent render any professional service, or make or perform any con­tract for or with any public utility or affiliated interest, or receive any remuneration for any service rendered to or any employment with a public utilitv or affiliated interest. 
(2) 
, If a member or employee of the commission becomes the owner of any stocks or bonds, or becomes pecuniarily in­terested involuntarily in any public utility or affiliated interest, he shall inform the attorney general of such ownership or interest and divest himself of the ownership or interest within 30 days after such acquirement. 

(d) 
Qualifications and prohibitions after service on the 
commission. No former conunission member or employee shall 
appear before the conunission on behalf of any public utility or 
affiliated interest in any capacity or have any responsibility 
at all in connection with any particular matter which was 
pending before the conunission during his period of employment 
or membership. 


(e) 
Commissioners and employees shall be in written agree­ment with the above qualifications and prohibitions prior to appointment or employment for service on the conunission and shall be subject to action by the Attorney General in the event of violation of this agreement. 

(f) 
For purposes of this section, the executive secretary 
and the Consumer Counsel shall be considered employees of the 
commission subject to the same prohibitions as are imposed on 
employees of the commission by this section. 


(g) 
The prohibited activities in this section do not include contracts for public utility products and services or equipment for use of public utility products when the commissioner or employee is acting as a consumer. 


199 
Section 2.06. Financial Statements. Prior to confirmation and 
on the 1st of April each year thereafter, each member of the 
conunission shall file a statement showing his current assets 
and liabilities and a copy of his joint 6r individual federal 
tax return for the previous year. 
Section 2.07. Executive Secretary. The commission shall em.ploy 
an executive secretary who shall serve at the pleasure of the 
commission. The executive secretary shall: 
(a) 
keep full and accurate minutes of transactions and 
proceedings of the commission; 


(b) 
be custodian of the files and records of the commis­
sion; and 



(c) perform other duties required by the commission. 
Section 2.08. Consumer Counsel. It shall be the duty of the Attorney General of Texas to assure that the interests of the consumers of public utility services are fully represented in all matters before the commission or otherwise within its jurisdiction. He shall designate an assistant attorney general who shall be called the "Consumer Counsel" and who shall organize and direct a staff independent of the conunission. The Consumer 
Counsel shall have the authority and duty, independent of anv 
200 

limitation by the commission, to direct such staff in the 
following: 

(a) 
accumulation of evidence and other information from 
public utilities and from the accounting and technical and 
other staffs of the commission and from other sources for the 
purposes specified herein; 


(b) 
preparation and presentation of such evidence be­
fore the commission or its appointed examiner in proceedings; 


(c) 
conducting investigations of public utilities under 
the jurisdiction of the commission; 


(d) 
preparation of proposed changes in the rules of the 
commission; 


(e) 
preparation of recommendations that the commission 
undertake investigation of any matter within its authority; : 


(f) 
preparation of recommendations and a report of such 
staff for includsion in the annual report of the commission; 


(g) 
preparation of proposals for legislation affecting . Public utilities and the c?mmission; and 

(h) 
engaging in such other general activities as are 
r€asonably necessary to enable him to perform these duties. 



Section 2.09. Attorney General to Represent Commission. The Attorney General of Texas shall represent the commission in all matters before the state courts, and any court of the United States, and before any federal public utility regulatory commission. 
Section 2.10. Office of Environmental and Energy Conservation . 
. The commission shall establish under its jurisdiction an office of ecology and energy planning with the function of serving .in an advisory capacity to the commission on energy and ecology matters, including plant siting, pollution standards, avail­ability of resources and other matters related to environmental and energy conservation. The commission shall employ a lawyer and a conservationist and a supporting staff for this office. 
Section 2.11. Offices and Seal. The commission shall have a seal with a star of five points with the words "Texas Public Service Commission" engraved thereon. The principal offices of the commission shall be in Austin, Travis County, but addi­tional offices in other locations within the state mav be esta­blished as the commission May consider appropriate. The commission may hold sessions at any place within the state as it may consider appropriate. 
201 
ARTICLE II. ORGANIZATION OF COMMISSION 

Section 2.01 
Pro 
Most states have had the best success with between 3 and 5 Commissioners, with the larger states tending to have the larg­er numbers. (Nation -wide the number ranges between 1 and 7.) Due to the size of Texas, and the State legislative require­ment that the number of commis­sioners fall into a multiple of 3, six commissioners was deter­mined to be the desired number. 
Such a multi~headed com­mission has the advantge, when adjudicating private disputes, of protecting participants against the possiblity of arbitrary dicision; and when formulating policy it may have the advantge of assuring that consideration is given to con­flicting points of view. It would also be more difficult for any concerned party to un­derly influence a majority of a six member commission than one with only three members. 
Appointments by the Governor with the approval of the Senate is the prevalent form of selection of commissioners, in use in 24 states. (11 states use variations of appointments, 3 states select commissioners through the legisla­ture, and 13 states use the elec­tive procedure. 
Executive appointment has become increasingly popular due to the popularity of the short ballot and increasing confiderice in the efficiency of executive leadership. 
202 

· Con 
As an administrative device, six commissioners are likely to prevent inci­sive decisions and vigorous action. Lines of authority and responsibility are likely to become blurred and Commissioners may become engrossed in the details of operation instead of adjudi­cation and policy formulation. 
With the present situ­ation in Texas of high visi­bility of utility operations, the constitutionally weak position of the Governor, and the persistent system of poli­tical rewards, it could be ar­gued that the elective process would result in an intelligent and equitable selection of com­missioners. 
It also may be pointed out that there is a tendency for appointed officials to be defeated candidates "rewarded" for their efforts although this need not be the case. 
Pro 
It is generally recog­nized as a more progressive policy in that it frees commis­sioners from the responsibility of spending time and money in periodic campaigns, and allows governors wider choices of quali­fied persons who might not choose to stand for election. 
Further note might be made of the expense and effort needed for elections, the low public awareness of the operations of regulatory commissions, and the experience of the Railroad Commis­sion of no commissioner being elected who did not first serve as an appointee. 
Six-year terms are required by the Texas Constitution, how­ever this is a popular term length in most states, with the over­lapping of the te~ms providing for continuity of commission policy. 
Six commissioners appointed for six-year terms, overlapping at two-year intervals, also pro­vides each governor the opportun­ity to appoint at least four com­missioners to the commission. 
Con 
While in most states terms of 6 years are set by law, a decided minority of commissioners qualify as experi­enced from the point of view of tenure considering the importance of experience as an essential part of training and the responsibility of the office 
(Less than half of the appointed commissioners serve more than one term.) 
In view of the complex nature of the duties of the public service and the desira­bility of acquantance with the internal affairs of a wide range of the utility companies under the jurisdiction of the commis­sion which can be acquired only after years of service, the argument exists that the tenure of office should not be subject to the limitations that are founc in most states. Ten years may not be too long a period for the term of appointment. 
203 

Pro 
State commissioners' salar­ies are typically below profes­sional and executive salaries paid for work of comparable re-by other entities in both the public and the private sector. Under such conditions, relatively high turnover rates, often involv­ing transitions to utilities, carriers, or law firms represent­ing regulated firms, become in­evitable. 
A strong case could be made for the initial establishment of salaries competitive with both public and private entities to provide a strong attraction for well-qualified commissioners from the agencies inception; and provi­sions for adjustment of salary to maintain incentive for such com­missioners. 
Section 2.02 
Pro 
Simultaneous appointment of commissioners, in staggered terms, is standard technical procedure in the case of a newly created Commis­sion. 
Pro 
While 28 states provide for a form of appointment of the Chairperson by the governor, 
(22 by election by the commis­sion, and 2 by election of the population) election by the commission was determined to be preferable in the Texas situation 
204 

Con 
A discretionary amount was chosen because it would be flexible and reflective of the condition of the general econ­omy of the state. 
Con 
Such a procedure allows one governor to select all the initial commissioners, having great impact on both the future commissioners 
(possible reappointment) and the establishment of agency policy and strength. 
A practicable alternative is not available however. 
Con 
Appointment of the chair­person by the Gov~rnor would allow for more input and direc­tion from the Governor and in­creased accountability to him. 
The shore and limited ten­
ure of the Chairpersonship has 
the disadvantage of prohibiting This method lessens further discretion of selection by the governor and directs the .account­ability of the chairperson to the commission. 
A two-year term, not to exceed two terms was selected to restrict domination of the chairpersonship to one member and thus to provide for increased input from all chairpersons 
Pro 
This status given co the chairperson is a second-best solution to the problem posed by the even number of chair­persons. It could be viewed as a neutralizing element to the power associated with the position thus keeping the chair­person within closer status of the other commissioners. 
Section 2.03 
Pro 
The appointment by the. Governor with the advise and consent of the Senate is the standard method of filling a vacancy on the commision. This policy provides conti­nuity of commission operations with a minimum of disrupture and deviation from scheduled filling of positions. 
Section 2.04 
(a) Strict' limitations governing the eligibility of commissioners is made to con­tribute to the effort to insure continuous direct.ion and leadership by the same member in the event of such a desire by the commissioners. 
Con 
The even number of commis­sioners requires a mechanism to break tie votes, in this case the chairperson being non-voting in the case of a tie, causing a dis­incentive for the position of chairperson. 
Such a restriction on the position of chairperson limits the incentive of com­missioners to attain this posi­tion since, on critical issues, commissioners would have voting power denied the chairperson. 
Con 
In the event the Senate is not in session and its ap­proval of a Governor's appointee the Senate next convenes, the appointee has the advantage of serving on the commission until that time, in effect limiting the Senate's check on the Gov­ernor's discretion. 
Con 
(a) Limitations of this nature may be cited as unduly stringent having effect of un­necessary interference in the 
205 

the separation of the conunission from any influence of the utility industry. A two-year period of separation from a utility com­pany or affiliated interest and a complete divestment of owner­ship or control in such company or interest is considered essential to inusre the above separation. · 
Two years is considered adequate time for utility re­lationships and interests to subside with any shorter dura­tion leaving these issues open t6 speculation. While small specified amounts of equity or control are often permitted in comparable positions it is no considered unreasonable to re­quest a nominee to transfer such equities to unrelated investment opportunities. 
Both measures are set at arbitrary and stringent levels to promote the appointment of the most sincere of candidates with the least discrepancy of interests. 
Pro 
(b) While voter and citizen­ship requirements do not directly relate to the duties of a conunis­sioner it is argued that these requirements will add toward the elimination of conflict of inter­est, specifically eliminating the out-of-state commuting commissioner. 
(Twenty-eight states provide that their commissioners be qualified voters before holding office.) Commissioners from the state are more likely to be responsive to the Texas populous and their needs. 
The oath for state office is standard procedure. 
perhaps unrelated private affairs of an applicant to the commission and eliminating some sincere and otherwise elibible nominee. 
Con 
(b) Again, these limita­tions allow for the possible exclusion of otherwise quali­fied candidates and extend the realm of qualifications into a commissioners personal choice of place of residence and citi­zenship. 
The inclusion of religious status, even an optional one, brings antoher personal! prefer­ence, and an even less related one, into the realm of public stipulation and scrutiny, vio­lating the doctrine of separa­tion of church and state. Further­more, the expression of only one preference is provided for with no options for those of other per­suasions. 
206 

Pro  Con  
(c)  This  restriction is de­ (c)  While  this restric­ 
signed to prevent the position of  tion generally benefits the  
commissioner from becoming  a  stepp­ commission,  it may be argued  
ing stone to other offices, at least during the duration of office on  that it deters some people from serving on the commis­ 
the commission,  and  to promote  sion and inhibits professional  
full-time devotion to the duties of the office during this period.  mobility and personal spontan­ity.  

Pro Con 
(d) This provision is a fur­(d) It is also a limita­ther elimination of a possible con­tion on personal choice of in­flict of interest. vestment. 
Pro Con 
(e,f,g,h) The remaining limi­(e,f,g,h) Likewise, each tations are similarly desigried to imposes some restriction on inhibit the development of conflicts the personal discretion and of interest and promote full-time goals of individual commis­service to the commission. sioners, officers, and employ­
ees of the commission. 
Pro Con 
(i) The oath of office is ne­(i) cessary for compliance with stan­dard appointment procedures. This provides for a definitive time for an appointment and ·assumption of the duties of office for legal pur­poses. 
NOTE: Miscellaneous qualifications omitted. 
While relatively few qualifications are specified by law in states across the nation, some commonly required qualifications that have been omitted in this bill are a minimum age requirement (required in 17 states), ' bond (20 states), specific education aqd professional requirements (5 states), competency (3 states), matur­ity (1 state), one member female (1 state) and various provisions for removal. 
These have been determined to be either unrelated to commis­sion performance, unnecessary, or lending to dubious purpose (as removal tends to be engendered for purely political purposes.) 
207 

Section 2.04 
Pro 
There is little substitute for a professional and qualified staff for efficient and intelli­gent regulation. It has long been taken for granted that most state regulatory agencies have persistently suffered from sub­stantial personnel deficiencies in terms of both numbers and qualitative attributes. 
The requirement that the conunission shall employ such em­ployees insures some degree of quality and reinforces the ori­entation of this bill to quali­tative, effective, and comprehen­sive regulation. It also reflects that a variety of expertise will be necessary. 
That such personnel shall re­ceive compensation commensurate with that of similarily qualified personnel within the utility indus­try aids the conunission's ability to attract such personnel, to keep such personnel from moving on to better-paying posit1ons, and to lessen the possibility of undue utility influence and cooptation. 
Section 2.05 
Pro 
This section has been written with the intent of contributing to the effort of insuring quality regulation and service through qualified conunissioners and em­ployees and minimizing the possi­bility of conflicts of interes·t. 
Focus in the qualificiations and prohibitions that have been established are: (1) the separa­tion of the commission from the utility industry and any undue in­fluenqe therefrom, (2) the full­time devotion to the duties of the conunission during the period of 
208 
Con 
While quality personnel is a laudable goal, it is im-. possible to guarantee such personnel through legislative means. "Professionally trained• and "connnensurate" as deter­mined by the connnission are conditions too vague, albeit unavoidably so, to be meaning­fully effective. 
Also, since state salaries are typically lower than those of the utility industry, these provisions would cause a burden on the state budget and an im­balance of pay scales between this state agency and other state agencies. 
Con 
Most objections to these requirements fall under one of the four following points: 
(1) 
They provide for the often unnecessary interference by the government into the pri­vate lives of individuals. 

(2) 
Quality of performance is dependent on the character of individuals and cannot be legislated by an Act of the Legislature 


service to the commission, and 
(3) 
the inhibition of the develop­ment of conflict of interests among employees and commissioners. 

(a) 
Restrictions on the behavior during the period between nomination and appoint­ment to the post of commissioner, as well as the full disclosure of interests are desirable both to help prevent the development of conflicts of interest and to add to the awareness of the possibi­lities of such points of conflict in the future. 


A two-year period of separa­tion from a utility company or affiliate prior to service on the commission, as well as a complete divestment of ownership or control in such company or interest is con­sidered essential to further insure this separation. 
Voter and citizenship require­ments eliminate any out-of-state commuting commissioner and provide for commissioners who, it may be argued, have more awareness of in­digenous situations and ~re more responsive to local needs. (Twenty­eight states provide that their com­missioners be qualified voters be­fore holding office. 
(b} The restrictions during services attempts to: (1) prevent positions on the commission from becoming stepping stones to elec­tive offices, (2) prevent conflicts of interest by prohibiting the offering of gifts and the unau­thorized input into the decision­making and personnel processes, and (3) require full-time devo­tion to duties on the commission. 
(c,d} Restrictions both dur­ing and for a specified period of time after service, are designed to further insure the separation be­tween utility and commission inter­ests. These prohibitions are 
209 
(3) They impose restric­tions on personal discretion, 
(e.g. place of residence) in­hibit professional mobility and spontaneity, limit choices of investment. 
(4) They may deter many qualified people from entering service on the commission. 
aimed in general at the prevention of any "reward" by the utility in­terest to a commissioner or employee for an action while in service to the commission. 
(e) 
This subsection provides for enforcement of the above provi­sions. 

(f) 
These prohibitions must extend to the consumer counsel and the executive secretary to prevent any conflicts of influence or undue influence upon their judgment. 


Section 2.06 
Pro 
This offers a specific date for filing. The date is early enough so as to provide informa­tion to the legislature for in­spection while it is in session. 
Section 2.07 
Pro 
This provides for a com­mission employee who is admini­stratively powerful enough to ef­fectively coordinate the cornrnis­sion' s work. It also provides for a seat of administrative re­sponsibility and accountability. 
Section 2.08 
Pro 
This section provides for a balancing of the competing inter­ests of the consumer and the util­ity. The purposes of this legis­lation would not be fulfilled 
Con 
This section could be viewed as an invasion of pri­vacy. Given the lack of spe­cificity in this section the possibility exists for an un­scrupulous commissions con­flicts of interest remaining hidden. 
Con 
This provides for an employee who can have a great deal of administrative power but who is not accountable to the governor or the electorate; and who could use this posi­tion to affect apolicy deci­sions that should be made by the commissioners. 
Con 
This provision for a con­sumer counsel gives one person with too much power to cause regulatory lag, influence com­mission business, affect utility 
210 

without this section because: 
(1) the consumer counsel provides a vehicle for the public to have it's interests constantly safe­guarded. This is necessary since the average citizen has neither the time, expertise nor monetary resourc­es to defend his interests against the utilities who are using the con­sumers money to insure that their own interests are upheld; an, (2) the consumer counsel can act as the watchguard of the commission to ensure that its enabling legis­lation is adhered to both in letter and in spirit. 
Section 2.09 
Pro 
This is a constitutionally required provision. 
Section 2.10 
This provides the commission with a consumer oriented conser­vation-directed research staff as a balance against the utilities own staffs. In particular this gives the commission a source of comparison information when judg­ing the environmental and long range planning effects of various utility company requests for rate increases, new construction, rule changes, etc. 
business, and abuse his of­fice for the purpose of mak­ing headlines. 
Also, there should be conflict of interest provisions affecting the consumer counsel. 
Con 
This office will be a costly attempt to stifle any progressive business practices and/or ventures that the utili­ties may feel are necessary. It could easily lead to commis­sion rulings that would limit the utilities ability to pro­vide future service demands. 
211 

ARTICLE III. POWERS AND DUTIES OF THE COMMISSION 
Section 3.01. Jurisdiction of the Commission. (a) The commission shall have general power and exclusive original 
jurisdiction to regulate and supervise rates, services, and other intra'state business of every public utility herein de­fined with the exceptions stipulated in Section and to do all 
things, whether specifically designated in this Act or implied herein, necessary and convenient to the exercise of such power 
and jurisdiction. 
(b) 
Rules of the Commission. 

(1) 
The comMission shall adopt such rules implement­ing the provisions of statutes enforced or administered by it as it considers to be necessary to effectuate the purpose of the statutes providing such rules do not exceed the bounds of correct interpretation of the statutes. 

(2) 
The commission shall adopt such reasonable rules and regulations relative to all inspections, tests, audits, investigations, hearings, and other such activities as carried out by the commission and shall make suqh rules and regulations available to the public. · 

(3) 
The commission may call and hold hearings, administer oaths, receive evidence at hearings, issue subpoenas to compel the attendance of witnesses and the production of papers and docu­ments, and make findings of fact and decisions -with respect to administering -the provisions of this Act or the rules, orders, or other actions of the commission. 

(4) 
The commission shall act only when a quorum, which shall be a majority of its members, is present. 

(5) 
All rules adopted by the commission shall be in accordance with the Administrative Procedures and Texas Register Act of 1975. 


Section 3.02. Orders, transcripts, and files. All orders of the commission shall be in writing and shall contain detailed findings of fact and conclusions of law, separately stated. Findings of fact, if set forth in statutory language, shall be accompanied by a concise and explicit statement of the under­lying facts supporting the findings. If, in accordance with commission rules, a party has submitted proposed findings of fact, the decision shall include a ruling upon each proposed find­ing. The commission shall retain a copy of the transcript and 
212 

the exhibits in any matter in which the commission issues an 
order. All files pertaining to matters which were at any time pending before the commission and to records, reports and 
inspections required by this article shall be public records. 
Section 3.03. Public Information: Availability of Rules, Orders and other Information. 
(a) 
The commission shall: 

(1) 
index and make available for public inspection all rules, including rules of procedure, and all other written statements of policy or interpretations formulated, adopted, or used by the commission in the discharge of its functions; 

(2) 
index and make available for public inspection all final orders, decisions, and opinions; 

(3) 
file in the office of the secretary of state a certified copy of each rule adopted by it, index.ed as above; and 


,(4) index and make available for public inspection all reports filed with the commission under Sections of this Act. 
(b) 
All items made available for public inspection shall be public records not subject to any exception of Chapter 424, Acts of the 63rd Legislature, 1973 (Articles 6252-17a, Vernon's Texas Civil Statutes), and shall be furnished upon request to any person at prices fixed to · cover costs of publication, copying, and mailing. 

(c) 
Copies in indexed form of all rules and all final orders, decisions, and opinions shall be deposited in the State Law Library, Legislative Reference Library, and in such major law or other libraries in various parts of this state as the commission shall deem sufficient to provide reasonable regional access. 

(d) 
No commission rule, order, or decision is valid or effective against any person or party, nor may it be invoked by the commission for any purpose, until it has been indexed and made available for public inspection as required by subsection 

(a) 
of this section. This provision is not applicable in favor of any person or party who has actual knowledge of the rule, order, or decision. 


Section 3~04. Commission Reports. The commission shall publish 30 days after the close of the states ~iscal year and make avail­able to the Legislature a reoort summarizing for the preceding year its proceedings, listing its receipts and the sources of its receipts, an? listing its expenditures and the nature of such 
213 
expenditures, and setting forth such other information concern­ing its operations as may be of general interest, and such financial and other information concerning the operation of the public utilities under its jurisdiction as will disclose their actual workings and financial condition. The annual report shall include a comparison of actual rate of return with that prescribed by the commission for each public utility. The annual report shall be submitted in draft form to the assistant attorney general designated pursuant to Section 2.07 of this Act, who shall append to it a consumer report to be published therewith. The assistant attorney general shall submit the entire report to the legislature and governor by the first day of November that same year. 
Section 3.05. Right to Information. (a) The commission shall have the authority to inquire and investigate the management of the business of all public utilities and shall keep itself informed as to the manner and method in which the same is conducted, and shall obtain from any public utility all necessary information to enable the commission to perform its duties. 
(b) In the event any public utility fails to furnish the commission with information required of it by the commission, the commission shall issue an order directing the delinquent public utility to furnish the information forthwith, or to show good cause why such information cannot be obtained. Failure of any public utility to comply with the order of the commission shall be a violation of this Act. 
Section 3.06. Production of Books and Records of a Public Utility. (a) The commission may require a public utility or its offices or agent to produce books, accounts, records, and memo­randa or certified copies of books, accounts, records, and memoranda when necessary to an investigation or proceeding before the agency. 
(b) The order requiring the officer or agent to produce the books, accounts, records, and memoranda shall state a reasonable time and place for production. The examination may be made by the commission or any authorized person employed by the commission. 
Section 3.07. Right to Inspect. (a) The commission or any commissioner or any person employed by the commission for that purpose shall have, on demand, the authority to inspect the books, accounts, records and memoranda of any public utility in relation to its business and affairs. Any person other than one of the commissioners who makes the demand shall produce his authority to make the inspection or reproduction. 
214 

(b) The cornmission and its agents and employees may enter the premises occupied by a public utility to make in­spections, examinations, and tests and to exercise any author­ity provided by this Act. The commission may set up and use any necessary apparatus and appliances on the premises. 
Section 3.08. Out of State Information. The commission rnay require, by order of subpoena served on any public utility, the production within this state at the time and olace it may designate, of any books, accounts, records, or memoranda kept by that public utility outside the state, or verified copies in lieu thereof if the commission so orders. Any public utility failing or refusing to comply with any such order or subpoena shall be in violation of this Act and shall for each calendar day it shall so fail or refuse to comply with said order, forfeit not less than· $5,000 nor more than $50,000. 
Section 3.09. Examining Officials and Personnel. The commis­si.on, a commissioner, or an examiner may examine any officer, agent, or employee of a public utility concerning the affairs of the utility. The examination shall be made under oath. 
Section 3.10. Reasonable Notice. The commission and its agents and employees shall act under Sections 3.05, 3.06, 3.07, 3.08, and 3.09 after giving reasonable notice to the utility. The public utility is entitled to be represented when inspections, examinations; and tests are made on its premises. 
Section 3.11. Uniform Accounting Forms. (a) Every public utility shall keep and render to the commission in the manner and form prescribed by the commission uniform accounts of all business transacted. 
(b) 
The commission after notice and hearing, shall esta­blish a system of accounts to be kept by the public utilities which are subject to its jurisdiction by the provisions of this Act. It shall also classify such public utilities and establish a system of accounts for each class, and prescribe the manner in which such accounts shall be kept. It may prescribe forms of books, accounts, records, and memoranda to be kept by such public utilities. 

(c) 
In the case of any utility regulated by the Federal Power Commission, the Federal Communications Commission, or :any other Federal regulatory agenc~r, compliance with any svstem of accounts prescribed for the pRrticular class of utilities bv such federal agency may be deemed a sufficient compliance with the system prescribed by the commission, provided that the 


215 

commission may prescribe supplemental or modified method for systems of accounts, where such does not conflict with those prescribed by the Federal agency. 
(d) 
In prescribing a uniform system of accounts, the commission shall require all public utilities operating both intrastate and interstate to indicate separately the portion of each account entry dedicated or ascribed to intrastate and interstate operation, respectively. Telephone companies under the jurisdiction of the commission shall separate their intra­state account entries between local and toll services, in accord with such methods as the commission shall prescribe. All public utilities providing service both within and without incorporated areas, or between one incorporated area and one or more other incorporated areas, shall be required by the commission to separate account entries to reflect investment, cost, and income divisions among such areas. Any separations method or procedure adopted by the commission shall applv uniformly to all public utilities of the same kind or class. 

(e) 
Every public utility engaged directly or indirectly in any other business than that defined in Section of this Act shall .keep and render separately to the comrnission in like 11\a~er and form the accounts of all such other business, in which case all the provisions of this article shall apply to the books, accounts, records, and memoranda of such other business. 

(f) 
Every public utility shall keep separate accounts to show all profits or losses resulting from the sale or lease of appliances, fixtures, equipment or other merchandise. 

(g) 
Every public utility is required to keep and render its books, accounts, records, and memoranda accurately and faithfully in the manner and form prescribed by the conunission, and to comply with all directions of the comrnission relating to such books, accounts, records, and memoranda. It is unlawful for any public utility to keep any books, accounts, records, or memoranda other than those so prescribed, or those prescribed by or under the authority of any other state or of the United States, except such as are explanatory of and supplemental to those prescribed by the commission. 

(h) 
The commission shall enforce intended accounting definitions on procedures through publishing rules and regula­tions and through annual audits of utility records and accounts. Utility companies shall be held in violation of this Act if their accounting techniques do not coincide with commission rules and regulations. 


216 

Section 3.12. Office: Documents in State. Every public utility shall have an office in a county of this state in which its property or some part thereof is located in which it shall keep all books, accounts, records, and memoranda required by the commission to be kept within the state. No books, accounts, records, or memoranda required by the com­mission to be kept within the state shall be removed from the state, except upon conditions prescribed by the commission. 
Section 3.13. Reports~ The commission shall have the power to: 
(a) 
require that public utilities report to the commis­sion such information relating to themselves and all affiliated interests both within and without the state of Texas as the commission may reasonably consider useful in the administration of this Act; 

(b) 
establish forms · for all reports; 

(c) 
determine the time for reports and the frequency with which reports are to be made; 

(d) 
require that any reports be verified. 


Section 3.14. Required Reports. (a) Every public utilitv and such affiliated interests as the commission shall reasonably require shall file certified copies of such forms as the com­mission shall prescribe and at such intervals not to exceed one year: 
(1) 
copies of all forms filed with the Securities and Exchange Commission regarding issuance and transfer of stocks and securities; 

(2) copies of all federal income tax returns; 

(3) 
separate annual reports showing all payments of compensation (including salary, wages, and expenses) for adver­tising, charitable contributions and gifts, and for persons representing any public utility in respect to legal, adminis­trative, or legislative matters in Texas, or for representation before the Texas Legislature or any other governmental agency or body; 

(4) 
annual reports in the form of a balance sheet showing revenues from operation in this state, expenses of that operation, investment in property used and useful in the rendi­tion of such service, and such other entries as the commission may prescribe; 

(5) 
any contract or arrangement between any public utility and any affiliated interest. The conanission may require any such contract or arrangement not in writing to be reduced to writing and filed with the commission; 

(6) 
any reports filed with any federal agency or any governmental agency or body of any other state. These reports are due to the commission at the same time as they are due to the respective federal or state agencies. 

(b) 
Public utilities operating both intrastate and inter­state shall indicate separately the portion of the revenues, expenses, and investments referred to in paragraph (4) of Subsection (a) of this section-dedicated or ascribed to intra­state operation. Telephone canpanies under the jurisdiction of the cononission shall separate their intrastate revenues, expenses, and investments between local and toll services, in accordance with such procedures as the commission shall pre­scribe. These separation procedures shall not conflict nor be inconsistent with those prescribed by the Federal Communications Commission. All public utilities providing service both within and without incorporated areas, or between one incorporated area and one or more other incorporated areas, may be required by the commission to separate revenues, expenses, and investment along corporate boundaries. 

(c) 
Each public utility shall file with the commission a quarterly report showing its gross receipts from intrastate charges for the preceding calendar quarter and the fee due under the provisions of Article of this Act. Such reports shall be filed within 45 days of the last day of any such quarter. 

(d) 
The basic financial statements in the annual report of a public utility shall be examined by an independent certi­fied public accountant and his opinion thereof included in the annual report filed with the commission. 


217 

Section 3.15. Schedules. (a) Every public utility shall file with the commission, in such form and at such times as the commission shall designate, schedules showing all rates including interstate and intrastate rates which are established and in force at the time, or to be enforced in the future, for any service performed by it within the state, or for any service in connection therewith or performed by any public utility controlled or operated by it. 
(b) Every public utility shall file with the commission, as a part of the schedule, all rules, regulations, classifications, 
218 

privileges, or facilities granted or allowed, and any form of 
contract or agreement, which in any manner affects or relates 
to rates or service. 

(c) . Where a schedule of joint rates or charges is in 
. force between public utilities, such schedules shall in like manner be filed with the conunission. 
(d) Every public utility shall keep copies of the 
schedules open to public inspection in a form and place readily 
accessible to the public, under such rules, and regulations as 
the commission may prescribe. 

Section 3.16. Informal conununications with commission. (a) The 
commission shall prescribe regulations providing for the keeping 
of records or logs of all communications by public utilities, 
their affiliates, and their representatives with any member of 
the commission or its officers or employees. 

(b) Such records shall contain the name of the person 
contacting the agency, the name of the business entities repre~ 
sented, a brief description of the subject matter of the communi­
cation, and the action, if any, requested by the public utility, 
affiliate, or representative. These records shall be compiled 
on a monthly basis and made available to the public. 

Section 3.17. Quality of Service. (a) The commission, after 
reasonable notice and hearing had upon its own motion or upon 
complaint, may ascertain and fix just and reasonable standards, 
classifications~ regulations, or practices to be observed and 

· followed by any or all public utilities with respect to the service to be furnished; ascertain and fix adequate and reasonable standards for the measurement of the quantity, quality, pressure, initial voltage, or other conditions pertaining to the supply of the service; prescribe reasonable regulation for the examination and testing of the service and for the measurement thereof; and establish or approve reasonable rules, regulations, specifications, and standards to secure the accuracy of all meters, instruments, and equipment used for the measurement of any service of any public utility. Any standards, classifications, regulations, or practices now or hereafter observed or followed by any public utility shall be filed by it with the corrunission, and the same shall continue in force until amended bv the public utility or until changed by the c~mmission as herein provided. 
(b) The commission may examine and test any meter, instru­
ment or equipment used for the measurement of any service of 
any public utility, and may enter upon any premises occupied by 
any public utility for the purpose o~ making such examination and 
tests and exercising any power provided for in this Act, and mav 
set up and use on such premises any apparatus and appliances · 
necessary therefor. The public utility shall have the right to 

219 

be represented at the making of the examinations, tests, and inspections. The public utility, its officers and employees shall facilitate the examinations, tests and inspections by giving every reasonable aid to the commissioners and any person or persons designated by the commission for the duties aforesaid. 
(c) Any consumer or user may have any meter or measuring device tested by the utility once without charge after a reasonable period to be fixed by the commission by rule, and at shorter intervals upon payment of reasonable fees fixed by the commission. The commission shall declare and establish reasonable fees to be paid for other examining and testing of such meters and other measuring devices on the request of the consumer. If the test is requested to be made within the ·period of presumed accuracy as fixed by the commission since the last such test of the same meter or other measuring device, the fee to be paid by the consumer or user at the time of his request ·shall be refunded to the consumer or user if the meter or measuring device is found to be unreasonably defective or incorrect to the substantial disadvantage of the consumer or user. If the con­sumer's request is made at a time beyond the period of presumed accuracy fixed by the commission since the last such test of the same meter or measuring device, the utility shall make the test without charge to the consumer or user. 
Section 3.18. Safety: Rules and Regulations. (a) The commis­sion shall have the power to enforce by orders, rules, or regulations after a hearing had upon its own motion or upon complaint the duty of the utility companies to maintain and oper­ate its facilities and premises in such manner as to promote and safeguard the health and safety of its employees, customers, and the public. This includes but is not limited to the health hazards caused by pollution. 
(b) 
The commission may prescribe the installation, use, maintenance and operation of appropriate safety and other devices, appliances or new technology; order any alterations in construc­tion, location, maintenance, or operation required in the interest of public safety; establish uniform or other standards of equipment; and require the performance by the public utility of any other act which the health or safety of its employees, customers, or the public may require. 

(c) 
The commission shall examine the public utilities facilities annually to insure that its standards are being realized. 


220 

Section 3.19. Regulation of Division of Revenues. It shall 
·be the duty of the commission to insure that revenues arising from service afforded by or using the facilities of two or more public utilities, or from use of properties owned jointly by two or more utilities, are divided between or among the companies concerned on a basis which is fair, just, reasonable, and not unreasonably discriminatory. Agreements between public utilities for the division of revenues shall be subject to the approval of the commission; however, the approval by the commission of any such agreement shall not prevent the commission from continuing to exercise its regulatory jurisdiction over such revenue. 
Section 3.20. Joint Hearings and Investigations; Reciprocity. 
(a) The commission shall have full power and authority to make joint investigations, hold joint hearings within or without .the_state, and issue joint or concurrent orders in conjunction or concurrence with any official, board, commission, or agency of any state or of the United States, whether in the holding of such investigations or hearings, or in the making of such orders, the commission shall function under agreements or compacts be­tween states or under the concurrent power of states to regulate the interstate commerce, or as an agency of the Federal govern­ment, or otherwise. 
(b} The commission shall have full power and authority to 
arrange reciprocity of treatment of public utilities of this 
state by regulatory bodies under regulatory laws of other 
states, and to that end the commission is hereby vested with 
power to impose upon public utilities of other states the same 
penalties, restrictions, and regulations as are imposed upon 
public utilities of this state by the regulatory body of such 
other states when operating into, out of, or through such other 
states. 

221 

ARTICLE III. POWERS AND DUTIES OF THE COMMISSION 

Section 3.01 Pro Con 
(a) 
If a state regulatory commission is to be effective it must be given general power and jurisdiction. It is unreason­able to assume that every possible problem and solution can be spelled out in the text of the statute so general power must be given to the commission to deal with those issues the legislature did not specify but did intend. Exclusive original jurisdiction eliminates diffu­sion of authority and duplica­tio~ of criteria for regulation and thereby provides for effec­tive regulation. 

(b) 
Inherent in the rule­making process is the opportun­ity for participation by all concerned parties. The adop­tion of rules by the commission is essential to effective regu­lation as the statute for the most part provides the intent but not the specific guidelines for the utility companies to follow. Without this obligation to make rules, regulation would be too piecemeal, without con­tinuity, and not beneficial to the public or the public utility company. 


The benefit of making rules available to the public reflects the intent of the statute to hold the commission accountable for its actions and accountability is best accomplished in the eye of the public. 
(a) A recurring theme in opposition to state regulation is vagueness in the statutes because vagueness leaves the door open to no regulation which does not serve the con­sumer or public or to harmful regulation in which the public utility is controlled and directed to the point of not being able to attract capital or provide the service at a reasonable profit. 
Exclusive original jur­isdiction would be a disadvan­tage to effective regulation if the commission is "captured" by the utility companies be­cause the courts would not be able to intervene on the pub­lic's part until late in the appeal stage. 
(b) Since it is the commission which will adopt rules, any rules it chooses will be adopted. Therefore, if the commission became extremely biased in favor of consumers, it would adopt rules destruc­tive to the utility companies and the utility companies would have no say in preventing this rule until late in the appeals process and would have to suf­fer its effects until that time. The converse is true also, if the commission became pro-utility, consumers and the public could suffer the effects of the rules and have no imme­diate say in changing the rules. 
222 

Pro 
Subsection (b) (3) is developed in detail in Sec. of this Act. It is mentioned in this section merely to demonstrate the powers and duties of the commission in re­gard to hearings and all that is related to hearings i.e., oaths, duces tecum••• 
Section 3.02 
Since a ruling upon each proposed finding of fact is required. Consumer advocate groups such as Common Cause or the Sierra Club could present facts which would have to be analyzed, providing for better input into the decision-making process and also a better pic­ture of the commissions intent and possible bias. 
This section also is de­signed to have the orders of the commission available to the public, for the purpose of hold­ing the conunission accountable and to provide the public with the information necessary to understand what is being accom­plished which affects them. 
Section 3.03 
Pro 
The objectives of this section are: the dissemination of information, availability of information, and openess of the commission to the public eye. 
This section is in con­currence with the Texas Freedom of Information Act. · 
Con 
Many findings of fact could bog down the commission and make effective regulation break due to time lags. 
Whenever records, re­ports or inspections are made part of the oublic record, they might not be as inclusive or detailed as they should be be­cause of the possible backlash which could result from frankness. 
Con 
Such a requirement may prove costly and tirne consmn­ing to the commission at the expense of the consumer. 
223 

Section 3.04 
Pro 
The purpose of the 
commission reports being pub­
lished by October 11 of each 
year is to insure that the · 
report is available to legis­
lators prior to the legisla­
tive session so that if new 
issues regarding regulation 
have arisen, they may be 
addressed in the legislative 
forum. Since the Senate 
approved the appointment of 
the commissioners, its respon­
sibility should continue in 
the area of oversight of the 
commission. 
The assistant attorney 
general's consumer report is 
to be attached to the commis­
sion report not only so that it 
can be presented to the governor 
nor and legislature as a unit, 
but also the assistant attorney 
general can react to the commis­
sion report. This due to the 
governor and legislature by 
November 1 so that both can 
have adequate time to study both 
reports and respond to them 
in anticipation of the upcoming 
legislative session. 
A system of checks and 
balances is being developed here 
so that effective utility regu­
lation may occur without strong 
bias in either the favor of the 
consumer or the utility company. 
Section 3.05 & 3.06 . 
Pro 
The commission must have access to information in order to make decisions which will be effective. The statute says necessary information and the 
224 
Con 
The regulatory process might be subject to political pressure which is not neces­sarily in the interest of effective regulation. When the report is reviewed by the legis­lature, it sets the stage for the renewal of the issue of regulation which in turn could cause certain political figures to add amendments to the sta­tute which could interfere with the goals of the commis­sion, especially stabilitv and predictability of commission operations. Too much oversight could cause delay, confusion, and frustration within the commission. 
Con 
A biased commission in the favor of the consumer could inquire and investigate to the extent of interfering with the utility company operations. 
Pro 
management of the business 
are the points of tangency 
between the commission and 
the utility company. This 
serves as a safeguard for 
the utility company as it 
could refuse the commission 
information not related to 
regulatory issues and pre­
vent the commission from 
interfering with the day to 
day operation of the plant. 
Section 3.07 
Pro 
In order to have access ·
to the information which is 
~eces~ary for effective regu­
lation, the commission needs 
the power to inspect records 
and inspect premises. Tne 
statute does not spell out 
which records, as the comrr.is­
sion needs to exercise this 
discretion. 
Section 3.08 
Pro 
Many utility companies 
operate or have offices out­
side of Texas and keep records 
there which apply to Texas 
utilities. This section gives 
the power to the conunission to 
obtain these records. 

The penalty stipulated in this Act is in the for~ o~ a forfeiture of bond apd is tough. Insignificant financial penal­ties would not serve as a de­terrent to utility companies to procrastinate. 
225 
Con 
The commission might make nublic information re­garding the policies or plans of a utility company which are not rightlv the concern of the commission. 
Con 
The commissions power to set up and use any neces­sary apparatus and apoliances on the utility company's pre­mises is vague and could cause interference or disrup­tion in the day to day opera­tion of the company. 
Con 
The penalty could be viewed as excessive for the crime. 
Section 3.09 
Pro 
Often it is the per­sonnel of a utility company which can give insight and/or interpretation to written in­formation. Therefore this section gives the power to the corrlllission to examine utility company personnel under oath. 
Section 3.10 
Pro 
Reasonable notice and representation are both guar1­antees to the utility company that they cannot have unreason­able demands placed upon them or that they have to let commission officials examine materials or records privately. Yet representation does not imply cross examination. 
The intent of this section is merely organizational and custodial in regard to repre­sentation during examinations. 
This section leaves some discretion to the commission, which is needed as each inves­tigation is unique and might call for a unique response in regard to reasonable notice and representation. 
Section 3.11 
Pro 
(a) Uniform accounting systems are desirable because they provide reliability, uni­formity, and comparability. Uniform systems insure that the facts and figures needed for proper regulation are available and presented in a 
Con 
Interruption of day to day operations of the utility company is a potential threat. 
Con 
"Reasonable notice" is vague. If the conmission be­came biased, i.e. either pro utility or pro consumer, reason­able notice could take on dimen­sions which would not provide for effective regulation. 
"Entitled to be repre­sented" is also vague as who determines what representation is or is not? 
Con 
(a} A uniform svstem of
~ 

accounts is less . than ideal as a source of management oriented information for the decision­making processes involved in the running of a business. Regulatory accounting is to aid regulator, and not management. 
226 

Pro 
predetermined form and fashion. Uniformity can be provided throughout each type of util­ity for a specific size of gross annual revenue. Uni­formity in the industry allows regulation to compare the behavior of utilities that face similar situations for indicators of effective manage­ment practices. Uniformity over time allows comparison of one annual period to another as an indication of growth, long run profits, investment, etc. 
(b) 
Th~ commission shall establish a system of accounts, after notice and hearing. This provision gives the utility companies an opportunity to express their opinion or give their interpretations to various aspects of accounting techniques. 

(c) 
The issue of conflicting demands of state and federal re­gulators was reaffirmed in 1964 when the Supreme Court refused to review a lower court decision in the Appalachian Power Co. case 


(379 US 829) which held that if reouirements conflict, the FPC's system of accounts would be re­garded as the basis of regulation. This subsection grants to the commission the power to require supplemental systems of accounts, just as long as they don't con­flict with those prescribed by the federal agencies. 
(d) Since this commission only has the power to regulate intrastate rates, it is neces­sary to determine rate base i.e., investment and cost for those services furnished within the state for the people of the state. 
Con 
The result could be for management to be fitted into an "accounting strait jacket" which would result in an inaccurate portrayal of the events which have occured. 
(d) Separations method and procedures can be extremely difficult or impossible to ­account for. Investment and cost at times cannot equitably be separated between areas served, and to separate them would be to misrepresent the real investment for an area. 
227 

(e) 
, (f) The conunission must be kept aware of other activities of public utility companies because these activities often reflect profits and/or losses in the total picture of the company, The regulatory process would be hindered if it took into account losses due to non­utility activities of the company and raised rates of utilities in order to compen~ sate for these losses. 

(g) 
,(h) These subsec­tions provide for restric­tions placed on utility companies in regard to keep­ing other accounts. This is necessary as additional account would provide informa­tion to the companies which would not be available to the commission, thus adversely effecting good regulation. 


This subsection requires the conunission to enforce its requirements through annual audits. Without this stipu­lation, the requirements would be meaningless. 
Legal support for the power to require uniform accounting has been consistent. In 1912, the Supreme Court stated that in order to fulfill its obli­gations of reasonable rates, a commission must have a system of accounting which would prevent concealment of forbidden prac~ tices. (Interstate Commerce Conunission v. Goodrich Transit Co. 224 US 194,211). In 1932, the Court granted the primary exer­cise of discretion in accounting procedures to the conunission. 
(Norfolk and Western Ry. Co. v. U.S., 287 US 132,141). 
(e) , (f) Since the conunission is organized only to regulate public utility companies, those subsidiary or non-utility activities of companies should be of no concern to the commission. The commissions inquiry into these activities could be co~sidered an invasion of privacy. 
228 
Section 3.12 
Pro 
This section applies to every utility operating in whole or in part in Texas. This insures-that necessary information will always be available to the commission or else the utility will be in violation of this Act. 
The utility company is benefited by not having to keep all its records in Travis County, but rather in a county of its choice. · 
The utility company is benefited by not having to keep all its records in Travis County, but rather in a county of its choice. 
Section 3.13 
Pro 
This section grants the power to the commission to re­quire utility companies to keep records, how to keep the records and with what frequency so that it (the commission} can be aided in effectuating regula­tions. This power is general, allowing for commission dis­cretion so it ~ay apply criteria for records to what is appro­priate and/or unique to each utility company. 
Reliability, uniformity and comparability would be standards served by this section. 
Con 
This section does not aid in the accessability of records to the commission as the records can be kept in any county or counties within the state which implies long time delays in getting to or receiving said records. 
Con 
The lack of specificity in this section could lead to indiscretion by the commission which would place an unreason­able demand on the utility companies in regard to the form of the reports and their frequency. 
229 

Section 3.14 
Pro 
By filing the same reports with the commisison as it filed with the Federal Government, the utilities will be bald accountable to the conwission and less able to amend or change reports to present their argument for regulation to the commission in a different light than what was presented to the commission. 
The specificity of this section insures by law that certain reports will be given at least annually to the commis­sion even if the commission would not request them. This insures that the required in­formation will be available in the long run in case a commis­sion with new members wants to examine the history of a utility company. 
The report mentioned in subsection(3) of subsection 
(a) is necessary to show the amount of unallowable expenses to be figured when determining the rate base. 
Subsection (b) recognizes that the power of the commission is restricted to intrastate regu­lation and therefore revenues, expenses, and investments are to be separated between intrastate and interstate figures. 
Subsection (c) provides for statement of the fee due to the commission on a quarterly basis. 
Con 
These reports will result in unnecessary expenses and a probable increase in rates to the consumer. 
In some cases the diffi­culty of separating expenses and investment is great and perhaps impossible. 
230 

Section 3.15 
Pro 
The filing of all schedules with the commission and the making of schedules open to public inspection in­sures accountability of both the utility company and the commission to any interested third party. The third party would be able to see what rates are in effect and if any rules, regulation, classifications or privileges have been granted to establish these rates. And if privileges have been granted, was it with the approval of the commission and are they consistent with the intent of this Act in regard to regulating rates of utilities. 
Section 3.16 
Pro 
This section calls for the fu~l disclosure of communications between the parties involved in regulation, i.e. the commission and the utility. compani,es and.. affiliates. Ideally this would deter "special deals" made for certain utility_companies, or at least make them public and open to scrutiny. 
Informal communication can also demonstrate the informal organizations being formed be­tween the utility company and the commission. This is vital information to be known by an interested third party who challenges the current regula­tory practices. 
Con 
Con 
The regulations pro­vided for in this section are nearly impossible to enforce as informal communications are also considered at times private or irrelevant and therefore easily rationalized as being not worthy of being on record. 
By reauiring all in­formal communications to be on the record, much informal communication will cease and in turn the commission will have less information avail­able to it, especially since these informal communications are to be open to the public also. 
231 

Section 3.17 
Pro 
This section empowers the commission to set standards in relationship to the quality of service and the measurement of service. 
A conunission without this power is· not sufficiently regu­lating the utilities as utility company costs can be lowered thus causing a higher profit without any interaction with the commission occuring. The lower costs, however, could reasonably imply a lowering of the quality of service. So by regulating the quality of service, true and complete regulation of rates is occuring. 
The commission also has the responsibility to see that the consumer is protected from faulty equipment used in the measurement of any service as faulty meters would effectively result in higher charges to the customer. Therefore, effective regulation depends upon the actual charges made to customers and this necessarily involves the quality of service and the quality of measurement of service. 
The public utility is pro­tected in this section by the guarantee that it may be repre­sented at the making of exami­nations. 
Section 3.18 
Pro 
External costs caused by pollution should be interna­lized by the public utility as it is a cost of providing the service and all costs should be calculated when determining a rate base. 
232 
Con 
This section grants to the canmission the right to enter upon any premises and set up apparatus to make tests of equipment. Also the pub­lic utility and its offices and employees are to help in the examinations or inspections. This is a broad power and large responsibility placed on the commission and the public utility respectively, and is vague enough to cause misin­terpretations on both parts and interruptions of business activity. 
The vagueness can lead to delays in inspections and interruptions in business activities. 
Con 
To internalize the cost of safety and pollution stand­ards which are achieved by the installation, use, maintenance and appreciation of new or different equipment, will cause utility rates to increase, and 
Pro 
Historically public utilities do not internalize pollution and some other safety costs and there is no reason to assume this practice will change unless enforced by the power of law exercised by a commission. 
Society's awareness of the environment has called for a higher quality of life -one which is safe and healthful. A utility commission is the logical arm of the will of the public to enforce rules and regulations to achieve this quality. 
Section 3.19 
Pro 
If economies of scale are achieved by two or more public utilities using the same facil­ities, these should be reflected in the rate base and can be done so by dividing the revenues be­tween the public .utilities. This not only provides for an equitable distribution of revenues, it also provides ••. a more accurate financial pic­ture of the utility companies. 
Seciton 3.20 
Pro 
Joint investigations, joint hearings and issuance of joint orders by the c6mmission are appropriate under certain cir­cumstances (such as one utility providing service to many and large areas or two utilities providing service to the same area) when the efficiency and economy of joint proceedings do not effect the outcome of the proceedings. 
233 
is this increase worth the results given that the public utility companies are not thE most dangerous polluters? 
Uniform standards of equipment as established by the commission, may place un­due economic strain on older utility equipment which might totally have to be replaced to meet the standards. 
Con 
This section provides for the division of revenues on a basis which is not unreasonably discriminatorv. This state­ment can be tWisted by a commis· sion because it is vague. Per­haps a more definite formula would provide for effective regulation. 
Con 
Joint investigation and hearings may water down the defense of one party if the other party is less prepared to represent itself or in violation of rules to a greater extent than the first party. 
Reciprocity of treatment can lead to disagreements be­tween commissions which in turn can place undue strain and 
Pro 
This section merely opens this option to the commission to hold joint investigations and hearings and in no way obliges the commission to do so. 
The reciprocity of treatment clause recognizes that state boundaries do not necessarily reflect the boundaries of the effects of a public utility i.e., pollu­tion and operation of f acili­ties certainly can go beyond state lines and therefore to regulate effectively the commission must have this power. 
Con 
confusion upon utility companies who try to perform standards placed upon them by conunissions. 
234 

ARTICLE IV. REGULATION OF RATES 

Section 4.01. Regulatory Authority. The commission is empowered to fix and regulate rates of all public utilities covered by this Act, including rules and regulations for determining the classifi­cation of customers and services and for determining the applica­bility of rates, and to take such action as may be necessary to prevent and eliminate practices forbidden by this Act. Whenever a public utility does not itself produce or generate that which it distributes, transmits, or furnishes to the public for compensation, but obtains the same from another source, the commission shall have the power and authority to investigate the cost of such production or generation in any investigation of the reasonableness of the rates of such public utility. 
Section 4.02. Reasonable Rates. It shall be the duty of the com­mission to insure that every rate made, demanded, or received by any public utility, or by any two or more public utilities jointly, shall be just and reasonable and in conformity with the orders and regulations of the commission. Rates shall not be unreasonably preferential, prejudicial Qr discriminatory, but shall be suffi­cent, equitable and consistent in application to each class of con­sumers. Any doubt as to reasonableness shall be resolved in favor of the consumer. 
Section 4.03. Reasonable Re 1 turn. (a} In fixing the rates of a public utility the commission shall fix its overall revenues at a level which will permit such utility, if well and prudently managed to recover its operating expenses together with a reasonable return on its invested capital. In determining the rates the commission shall also consider the public need fJr adequate, efficient, and reasonable service. 
(a} Invested Capital. "Invested capital"means the original cost of the facilities, franchises and patent rights and other intangible property of a public utility, used and useful in rend­ering instrastate service in this state, together with necessary materials and supplies, receivables, cash and other assets neces­sary for operation of the utility, reduced by all necessary re­serves for depreciation and customer contributed capital and all other disallowable expenses. 
(b} Valuation of Properties. All faciliti~s, franchises and patent rights and other intangible property, and materials and sup­plies, which were dedicated to public use prior to January 1, 197 , and all charges for depreciation, amortization, or consumption thereof shall be valued at the actual money cost (or the actual money value of any consideration paid other than money} of the pro­perty to the utility which owned the property on that date; pro­vided, however, that if any such property was acquired from an affiliated interest or from any person or corporation which became 
235 

an affiliated interest as a result of or in conjunction with the transaction or transactions by which such property was acquired, . such property shall be valued at the original cost to such affi!'­iated interest, or to its affiliate from which it acquired such property. All such property which shall have been dedicated to public use on or after January 1, 197 , and all such charges re-· lating ·thereto, shall be valued at original cost, _that is the act­ual money cost (or the actual money value of any consideration paid other than money) of the property at the time it shall have bee been first dedicated to public use, whether by the utility which is the present owner or by a predecessor. 
(c) 
Separations. Costs of facilities, revenues, expenses, taxes, · and reserves shall be separated as between interstate ele­ments and intrastate elements, local and intrastate toll elements, and municipal and unincorporated area elements, as prescribed by the commission. 

'(d) Net Income. "Net income" is the total revenues of the public utility less all reasonable and necessary expenses as de­termined by the commission; the commission shall determine expenses and revenues in a manner consistent with the provisions of this Act and with the following: 

(1) 
Depreciation. Depreciation, amortization, or deple­tion of the several classes of property of each public utility shall be determined according to rules established by the commis­sion. The observed depreciation deducted from the capital invest­ment to arrive at the value of the property should be consistent with the depreciation expense which is deducted from the annual gross profit to compensate for unmaintained wear and tear. Only a loss in plant value which is not restored by maintenance is allow­able depreciation. 

(2) 
Income Taxes. If the public utility is a member of an affiliated group which is eligible to file a consolidated income tax return, and if it is advantageous to the customers of the public utility to do so, income taxes shall be computed as though a consoli­dated return had been so filed and the utility had realized its fair share of the savings resulting from the consolidated return, unless it is shown to the satisfaction of the commission that it was rea­sonable to choose not to consolidate returns. The amounts of income taxes saved by a consolidated group of which a public utility is a member, by reason of the elimination in the consolidated return of the intercompany profit on purchases by the public utility from an affiliate, shall be applied to reduce the cost of the property or services so purchased. The investment tax credit allowed against federal income taxes, to the extent retained by the utility, shall be applied as a reduction in the rate base contribution of the as­sets to which such credit applies, to the extent and at such rate as allowed by the Internal Revenue Code. 

(3) 
Interest. Interest expense, excluding interest payments on long-term debt as defined by the uniform system of accounts, shall be allowed as an expense of doing business. Interest allocable to plant under construction shall be capital~ ized. In the case of a public utility doing business in more than one state, the interest expense shall be allocated as between states according to the relative values of the physical plant in the various states. If the utility is a member of an affiliated group of companies, the interest expense allowable shall be its proportionate part of the interest expense of the entire affiliated group. 

(4) 
Expenses Disallowed. The following shall not be allowed as costs or expenses for rate-making purposes: business gifts, unreasonable business entertainment, institutional and other advertising or public relations expenses, or legislative­advocacy expenses. Charitable or civic contributions shall not be allowed. Any compensation paid to any person who is an officer or employee of the United States, or of any state, or of any local government of any state, shall be disallowed as costs or expenses for rate-making purposes. The commission shall disallow any other expenses which it finds to not directly benefit the consumer. 

(5) 
Transactions with Affiliated Interests. Payment to affiliated interests for CO$ts of any services, property, right, thing, or for interest expense shall not be allowed as either capital cost or as expense except to the extent that the commission shall find such payment to be reasonable. Any such finding of reasonable­ness shall include specific statements setting forth the cost to the affiliate of each item or class of items in question and a finding that the price to the utility is no higher than prices charged by the supplying affiliate to its other affiliates or divi­sions for the same item or items, or to unaffiliated persons or co corporations. No mark-up above direct cost shall be allowed on pur­chases of goods from an affiliated interest which are manufactured by a third party unless the commission finds that the utility's requirements ~or such goods are insufficient to permit it to buy in economical quantities directly from the third parties. No approval granted to any public utility by the commission with re­spect to any contract with, or any donation to or from, an affil­iated interest, and no exemption granted by any regulation or order of the commission with respect thereto, shall bind or requrie the commission in fixing the rates o+ such public utility to take into consideration any unreasonable pq.yment made, or any property, right, or thing received by such public utility, under any contract entered into, extended, or amended, or donation given or received, pursuant to such approval or exemptiop.


236 
,. 
(6) Expenses for Rate Proceedings. Expenditures by a public utility in any rate proceeding before the regulatory author­ity of any other state shall not be allowed as either capital cost or expense for rate-making purposes by the commission. Expendi­tures in connection with any rate proceeding under this Act shall be capitalized and amortized over such period as the commision may 
237 

prescribe. Expenditures in connection with other proceedings be­fore thecommission shall be allowed as expenses as they are incurred, unless they are found to be unreasonable. Expenses for appeals from commission decisions shall not be an allowable expense._ 
Section 4. 0-6. · Rate Change·s and Proceeding·s. (a) No public utility shall make any change in any duly es.tabli'shed rate except after 30 days' notice to the connnission, to each rate payer in his monthly bill, and to the governing body of each municipality and county which shall be affected by such change, and publication in conspicuous form and place of a notice to the public of such proposed change once in each week for four successive weeks in a newspaper having general circulation in each county containing territory affected by the proposed change, which notice shall plainly state the changes proposed an the time when they go into effect. The notice to the connnission shall state the change proposed to be made in the rates then in force, the expected resulting change in revenues to the utility, the classes and numbers of consumers affected, and the time when the modified rates will go into effect. 
(b) 
The burden of proof to show that the rate change is just, reasonable, and necessary shall be upon the public utility seeking the change. 

(c) 
The commission, for good cause shown, may allow changes in rates to take effect prior to the end of such 30 day period under such conditions as it may prescribe, subject to suspention as pro­vided herein. All such changes shall be indicated immeidately upon its schedules by such utility. 


(d} Whenever there is filed with the connnission any schedule modifying or resulting in a change in any rates then in force, the commission shall upon complaint or may upon its own motion, at any time within 60 days from the date when such change would or has become effective, and, if it so orders, without answer or other formal pleading by the utility, but upon reasonable notice, includ­ing notice to the governing bodies of all affected municipalities and counties, enter upon a hearing to determine the propriety of such change. The commission shall hold such a hearing in every case in which the change constitutes an increase in rates to con­sumers, provided that an informal proceeding may satisfy this re­quirement if no complaint has been received before the expiration of 45 days after notice of the change shall have been filed, and if the Conswner Counsel recommends such proceeding. In all matters other than the time periods established by this article, the pro­visions of Article V shall be applicable. 
(e) Pending the hearing and decision, the commission, after delivery to the affected utility of a statement in writing of its reasons therefore, may suspend the operation of th~ schedule but not for a longer period than 120 days beyond the time when the. schedule of rates would otherwise go into effect. If the commis­sion finds that a longer time will be required, the co~ssion may further extend the period for not more than a total of nine mon~hs 
by notifying the affected utility of the reasons for the extension. 
238 

If the commission does not make a final determination concerning any schedule of rates within a period of nine months beyond the time when the schedule of rates would otherwise go into effect, the schedule shall be deemed to have been approved by the commission. This is subject to the authority of the commission thereafter· to tinue a hearing in progress, or to commence a hearing pursuant to Subsection (d) of this section, provided that no new temporary rates may be fixed before the expiration of 120 days following the end of the suspension period. 
(f) 
The commission may in its discretion fix temporary rates for any period of suspension under this section. During the sus­pension by the commission as above provided, the rates in force when the suspended schedule was filed shall continue in force un­less the commission shall establish a temporary rate. The commis­sion may give to the hearing and decision of questions arising under this section preference over all other questions pending before it and decide the same without undue delay. 

(g) 
Notwithstanding any order of suspension of a proposed increase in rates, the public utility may put the suspended schedule into effect 120 days from the date it would have become effective if not suspended, or any date subsequent thereto within the suspension period, by filing with the commission a bond in an amount approved by the commission with sureties approved by the commission, conditioned upon the refund, in a manner to be pre~ scribed by order of the commission, of the excess in increased rates, including interest thereon, which shall be at the current rate of interest as determined by the commission, collected dur­ing the period of the suspension if the schedule so put into ef­fect is finally disallowed by the commission for the protection of persons affected. During any such period when suspended rates are in effect under bond or other arrangement, the commission may, in its discretion, require that the public utility involved shall keep an accurate account of payments made by consumers under the rate or rates which the public utility has put into operation in excess of the rate or rates in effect immediately prior thereto. If the public utility fails to make refund within 30 days after such final determination or within such additional period of time as may be allowed by the commission for good cause shown, the com­mission shall sue therefore and is authorized to recover on behalf of all persons entitled to a refund. In addition to the amount of the refund and interest due, the commission shall be entitled to recover reasonable attorney's fees, court costs and the esti­mated cost of administering the distribution of the refund to per­sons entitled thereto. If the commission fails to file suit for a refund within a reasonable time, any person or corporation en­titled to a refund may sue the utility in behalf of himself or it­self and all other persons and corporations entitled to such refund. The amount and elements of recovery shall be the same as if the com­mission had sued. No suit under this subsection shall be maintained unless instituted within two years after the end of the period of 


239 

time prescribed by the commission for repayment of refunds. No public utility shall put a suspended rate schedule into effect as provided by this subsection until at least 120 days after the ·com­mission has made a determination concerning any previously filed change of the rate schedule or the change. has otherwise become effective under Subsection (e) of this· section. 
{h) If, after hearing, the commission finds the rates to be unjust or unreasonable or in any way in violation of any provision of law, the commission shall determine the leve1 of rates to be charged or applied by the utility for the service in question and shall fix the same by order to be served upon the utility; these rates are thereafter to be observed until changed, as provided by this Act. 
Section 4.07. General Rate Proceedings. At intervals of not less than 3, nor more than 5 years, the commission shall conduct a general rate proceeding with .respect to the rate structure of each public utility doing business in Texas. In connection with such proceeding the Commission shall determine for each year not previ­ously so determined {or at least the last 3 complete fiscal years where there has been no prior determination) the amount of the net income of the public utility and the rate of return earned by the public utility. Upon the conclusion of each such general rate proceeding the commission shall enter an order fixing prospectively all the rates and charges of the public utility. 
240 

Section 4.01. 
Pro 
The regulation of rates 
is basic to the regulation of 
public utilities, and it is 
essential that a conunission be 
authorized to fix and regulate 
rates. 

Different classes of cus­
tomers can be determined because 
of economies of scale. 

The conunission must have 
the power to investigate all 
sources of production or genera­
tion relevant to a particular 
utility in the setting of its 
rates or otherwise there will 
be a gap in regulations. 

Section 4.02 
Pro 
This section is intended to control the preferential, discri­minatory rates of some public utilities and to establi$h the theoretical base for rate regu­lation. 
A strong consumer orienta­tion consistant with the remainder of this Act, is provided for. 
Section 4.03 
Pro 
(a) The rate of return is fixed at a level which is favor­able to both the public utilities and their consumers. Neither side 
is given preference at the expense of the other side. This subsection supports pru­dent management by the utilities. 
(b) This subsection allows for the protection of the utility indus­try industry. It· is recognized 
Con 
The utilities have the interest of their customers in mind and will set their rates at a level that meets with the approval of both their customers and stockholders. 
Con 
This section might be used to promote a flat rate structure. 
Words such as "reason­able rates" and "not unreason­ably preferential" are vague and leave considerable dis­cretion which could be abused by a biased conunission. 
Con 
"Reasonable" as used here with both service and return is subject to multiple inter­pretation. 
241 

that the attraction of capital is of primary importance for a healthy utility industry. Thus, a rate com­mensurate with this need is part of the basis for a "reasonable return." 
This Act does not set a minimum or maximum rate of return. Instead, it allows the commission to set the rate of each utility at the level most desirbale to the utility and its customers and al­lows for maximum flexibility. 
Section 4.04 
Pro 
A two-year period was used instead of the usual twelve-month period. The former more adequately reflects the rates of the utility; it diminishes the effects of econo­mic cycles and fluctuations. 
The future test year was not used because rates are going up and because techniques utilizing a future period have not been perfected or the projected period clearly defined (see pages 64-66 and 69-70 of Utility Regulation in Texas). 
Section 4.05 
Pro 
Basic to the setting of the rate of return is the determina­tion of the value of the utility's investment or the "rate base." This Act utilizes the original cost method instead of the fair value or reproduction cost new methods. The original cost tech­nique has the advantage of admin­istrative practicality and popu­lar understanding. It also pro­motes stability and is not subject to multiple interpretation as is "fair value." The reproduction cost new method requires extensive appraisals, which are costly and time consuming, and cannot be 
kept up-to-date. 
Con 
Two years may be too long a period; it has a greater tend­ency to include abnormal periods that would skew the base the information. 
Con 
The original cost method does not provide ideal allocation and use of resources during per­iods of changing price levels. 
242 

Pro 
(c) 
Interstate elements do not make up part of the rate base and are not subject to this Act; thus they should be separated from the intrastate elements. This proce­dure simplifies the information required by the commission. 

(d) 
(1) Due to the highly tech­nical and estoric nature of depre­ciation, it is deemed necessary to allow the specialists on the com­mission staff to set the deprecia­tion standards. 

(d) 
(2) This procedure is advantageous to consumers and reduces costs. 

(d) 
(3) Interest is a major cost that would hinder expansion if it were not allowed as an ex­pense vecause this would lower the return and make it more difficult to attract capital. 

(d) 
(4) All activities should be disallowed which do not directly benefit the utility's consumers. This includes advertising which is unnecessary in the present ener­gy shrotage situation. Consumers should be able to decide which char­ities they want their money to be given to. This subsection dis­courages conflict of interest and other abuses concerning consumers dollars. : 

(d) 
(S) This subsection pre­vents utilities from hiding their funds in the accounts of affiliated interests and exposes excessive charges paid to affiliates. This promotes an accurate representa­tion of costs and profits and acts as one substitute to the market­place. 


243 
Con 
Such a procedure causes an additional administrative burden and cost to be placed on the utilities. 
This clause is not speci­fic and is thus subject to the particular orientation of the commission. 
This lowers the utility'sprofits. ­
This creates the possibility of less of an incentive for the utility to seek the lowest inte1­est rates possible. 
This is restrictive towards the activities of the utilities and lowers the rate of return thus discouraging capital invest­ment. 
The compensation of any person who is appointed to serv~ on any board or commission of local government without compen­sation as a public service should be an allowable expense. 
This is an invasion 0£ business privacy. It causes a distortion of the company's profit picture by looking at more than the one company. It also inhibits the expansion of utilities into other fields 
(vertical integration). 
Pro 
(d) (6) Not allowing expenses for appeals discourages excessive appeals. 
Section 4.06 
(a) Thirty days notice by the utilities prior to a rate change allows the commission, governing bodies or consumers time to file complaints. 
The intent of the Act is to allow all interested parties to participa~e in the regulatory pro­cess. 
(b) 
In keeping with the con­sumer orientation of this Act and to minimize the investigatory acti­vitl,..es of the commission, the utili­ty .must bear the burden of proof for ~ny rate change • . 

(c) 
This practice allows the commission to reduce regulatory lag and minimize the loss of reven­ues to the utility. · It also allows for commission flexibility. 

(d) 
This subsection places the responsibility on the commission for informing the public of a hear­ing~. It also directs the commission to hold a hearing on all rate in­creases unless there is no complaint received.. The use of an informal hearing if no complaint is filed allows a reduction of regulatory lag. 

(e) 
This protects the utility industry in that rates cannot be permanently suspended. It enour­ages the utility to plan better. The ni,ne-month period gives con­sumers and others time to prepare a case against the rate increase. 

(f) 
Temporary rates help the industry and prevent a decline in the quality of service. This 


244 
Con 
"Unreasonabl~~ expen­ditures are vague and sub­ject to abuse. 
At is expensive for the utility to have to inform all consumers and governing bodies concerned of a pending rate change. 
This is biased in favor of the consumer. 
The phrases "for good cause shown" and "such conditions as it (the commission) may prescribe" are vague and .leave too much dis­cretion to the cornrnission. · 
The utility experience$ un­certainty because of the time lag, which also causes a loss of revenue. 
Capital flow problems are caused by the delays, which can be considerable if the . commission extend the period. 
Temporary rates could be set at an unjust level if there was a biased commission. 
Pro 
subsection provides for the con­
tinuation of the current rates; 
there is no· increase unless tl:">J'} 
commission so rules. 

(g) This subsection alJ_ows the utility to put its rate into effect without undue delay. It also requires a bond to be filed which can be used to refund, with inter­est, all overcha_rges to all custom­ers. 
An additional directive re­quiring the utility to keep an ac-L~ curate account of payments made by consumers. is necessary ·in order 
· that the commission will know the persons or corporatioqs who msut be reimbursed if the rates are found to be escessive. 
The short time period pre­
scribed promotes quick refunds. 
If the utility jails to make re­
funds and the commission tails to 
sue for the same, any person or 
corporation is allowed to file 
suit. This acts as a check on 
a weak commission. 

(h) The commission has the 
information and the objectivity 
to set the rates at a level which 
benefits both the consumers and 
utility companies. This section 
prevents the utility from having 
to return with a second rate re­
quest when their request is found 
to be unreasonable or unjust. 

Section 4.07 
This allows the commission 
to review the reates of all 
utilities at least once every 
three to five years. Otherwise, 
there is the chance that, with a 
weak commission, some utilities 
might get by with a higher rate 
of return than is allowable Lnder 
this Act. 

Con 
If a temporary rate was set too high, it would neces­sitate rebates to customers. 
The filing of a bond could tie up a portion of the utility's capitol. 
"Reasonable" is vague and subject to abuse if the commission is biased. 
The commission may set the rate at a level deemed unfair or confiscatory by the utility company. 
This Act already covers a rate of return that is exces­sive. There is no provision for an automatic or a commission­allowed this requires all raises in fuel costs to be absorbed by the utility until it can get a rate change and causes more rate proceedings, it insures that all rate changes are considered and 
245 
Pro 
Con 
approved by the commission. 
A fuel adjustment clause en­
courages higher fuel costs 
and less bargaining with the 
fuel supplier. 
The "rate equali~ation reserve" was left out of this Act because it is a complicated process that would require more staff and commission activity. Until funds were paid into the reserve, there would be no monies available to pay a utility for a shortage resulting from a low rate of return. Without such a reserve, the utility companies are induced to keep down their costs, thus raising their pro­fits. There are advantages to this system as well. A rate process also allows the cam~ mission another method of closely checking the utility companies' books. 
ARTICLE V. PROCEDURE BEFORE THE COMMISSION 
Section 5.01. Complaints. 
(a) 
The Commission, on its own motion, or any person, corpora­tion or the governing body of any political subdivision, may com­plain in writing, setting forth any act or thing done or omitted to be done by any person, corporation or public utility, in viola­tion or claimed to be in violation of any law which the commission has jurisdiction to administer or of any rule or order of the commission, or any rate, service regulation, classification, prac­tice or service claimed to be unfair, unreasonable, inadequate or unjustly discriminatory. Direct damage is not a necessary prere­quisite to the filing of a complaint. 

(b) 
The commission may prescribe by rule the form of complaints filed under this section. 


Section 5.02. Notice of Complaints. 
(a) 
Upon the filing of a complaint, the commission shall cause a copy thereof to be served upon the person, corporation or utility complained of. 

(b) 
The copy of the complaint shall be accompanied by a no­tice from the commission calling upon the addressed party to satisfy the complaint, or to answer the same in writing, within such reason­able time as may be specified by the commission in such notice, not to exceed 20 days. 

(c) 
A copy of the complaint shall also be delivered to the governing body of each affected municipality and county and to any other person the commission shall deem appropriate. 


Section 5.03. Satisfaction of Complaint; Dismissal. 
{a) If any person, cor-poration or utility complained against shall satisfy the complaint within the time specified by the com­mission, the commission by order shall dismiss the complaint. Such order shall specifically define the matter complained of, describe the manner in which the complaint has been satisfied, and make such findings of fact and law as required for other orders. The party against whom the complaint has been dismissed shall be relieved from responsibility only to the extent shown in the order. A copy of such order shall be sent within 10 days to the complaintant. 
{b) If such person, corporation or utility shall not satisfy the complaint within the time specified, and it shall appear to the commission from a consideration of the complaint and the re­sponse to it, or otherwise, that reasonagble grounds exist for 
247 
investigating such complaint, the commission shall fix a time and place for a hearing. 
(c) The commission may dismiss any complaint without a hear­ing if in its opinion reasonable grounds do not exist for investi­gating such complaint, and a hearing is not necessary 
Section 5.04. Service of Notice. Service of notice of all hear­ings, investigations and proceedings pending before the commission and of complaints, decisions, orders, and other documents shall be made personally or by mail, as the commission may direct, upon a person authorized to receive service of process. 
Section 5.05. Joinder of Parties and Causes. All matters upon which complaint may be founded may be joined in one hearing, or may be heard separately, as the commission in its discretion may order. Joinder or separation shall be ordered when the commission finds that confusion of issues or duplication of effort to the in­convenience of parties may be. thereby avoided. 
Section 5.06. Hearings. 
(a) 
All hearings before the commission or its representative ­shall be public and shall be conducted in accordance with this Act and the Administrative Procedures and Texas Register Act. 

(b) 
The complaining party and the corporation or person com­plained of and such corporations or persons as the commission al­lows to intervene shall be entitled to be heard and to introduce evidence and present arguments. All parties may be heard in person or by attorney. In order that all parties be heard the commission shall award from the regulation fund reasonable attorpey's and expert witness' fees and otherwise provided for in this Act. 

(c) 
The Consumer Counsel shall be a party in every hearing and shall represent the interests of consumers of public utility services and present the findings and recommendations of the com­mission staff. 


Section 5.07. Rehearing. 
(a) 
Any party to the proceedings or any affected person may apply to the commission for a rehearing on any matter determined in the proceedings. 

(b) 
The motion for rehearing shall state the ground or grounds on which the applicant contends that the decision or order is unlaw­ful or unreasonable. 

(c) 
The conunission may grant the motion and hold a rehear­
ing on any of the grounds stated in the application if it finds 
sufficient reason therefore. 


(d) 
No motion for a rehearing shall in any way operate as 
a superdeas or in any manner stay, or postpone the enforcement of 
any existing order except as the conunission may by order direct. 


(e) 
If the motion for rehearing is granted, the conunission, after such rehearing and a consideration of all facts including those arising sicne the original order or decision was made, may affirm the original order or decision or may rescind or modify it if it finds that such order or decision or any part thereof is 


248 
-unlawful or unreasonable. 
(f) 
The rehearing proceedings shall conform with such general rules of procedure as the conunission may establish and the Admini~ . strative Procedures Act and Texas Register Act. 

(g) 
Any decision or order made after rehearing shall have the same force and effect as an original decision or order. Only one rehearing shall be granted by the conunission; but this shall not be construed to prevent any party from filing a new application or complaint. 


Section 5.08. Amendment and Rescission of Orders. The commission 
may, at any time after notice and after opportunity to be heard as 
provided in the case of complaints, rescind or amend any order made 
by it. Any order rescinding or amending a prior order shall, when 
served upon the party affected, and after notice thereof is given 
to the other parties to the proceedings, have the same effect as is 
herein provided for original orders; but no such order shall affect 
the legality or validity of any acts done by such party before ser­
vice of the notice· upon such party concerning such change. 
Section 5.09. Record of Proceedings. 
(a) 
A reporter appointed by the ponunission shall made a com­plete record of all proceedings and testimony at each hearing be­fore the commission, a conunissioner, or an examiner. 

(b) 
The record in a hearing or rehearing shall be the same 
as in contested cases as set forth in the Administrative Proce­
dures and Texas Register Act. 


(c) 
The commission shall furnish a copy of the transcript of any proceeding to any party on demand and upon payment of the cost af the transcript. 


249 
Section 5.01 
Pro 
Since this legislation intended to bring accountability to teh regulatory process, it is especially important that the con­sumer, as well as others, be able to petition the commission to investigate and to correct any violations of this Act. In order to promote citizen involve­ment and insure strong oversidht of the compliance required of the utilities by this Act, any person, corporation, or governing body of any political subdivision may file a complaint even though this party has not experienced direct damage. This section is written to allow all concerned parties the ability to file com­plaints under this Act. 
Pro 
Although the Administrative Procedure Act includes a section on notice, it does not adequately address the serving of a complaint. It is essential that a copy of the complaint be sent as quickly as possible to all affected parties. 
Section 5.03 
Pro 
The commission should have the authority to dismiss the com­plaint when it has been satisfied in order to prevent unnecessary de­lay. It should also be able to dis­miss a complaint without a hearing if it decides that reasonable grounds do not exist for an investi­gation. This should prevent frivil­ous and unreasonable complaints from overloading the process. 
Con 
Without direct damage as a necessary prerequisite to the filing of a complaint, unlimited numbers of complaints may be filed, thus overloading the work of the commission. Portions of this section covered by the Administrative Procedure Texas Register Act. 
Con 
This is standard admini­strative procedure and does not need to be specifically detailed here. 
Con 
The conunission is given no guidance as to what con­stitutes reasonable grounds for dismissal. This lack of specificity in the Act leaves room for abuse by the commis­sion. 
250 

Section 5.04 
Pro 
The Administrative Procedures and Texas Register Act of 1975 defines the procedures for setting the time and place for a hearing and for the inclusions in a notice. 
It is important that authorized persons receive notice either per­sonally or by mail to insure their knowledge of the matters outlined in this section. 
Section 5.05 
Pro 
In order to reduce regulatory lag, inconvenience, and costs, several matters complained about may be heard together if the com­mission as decides. 
Section 5.06 
Pro 
This section compliments and further clarifies the hearings pro­cedures in the Administrative Pro­cedure and Texas Register Act. 
(b) The commission is given the authority to award attorney's and witness' fees to a prevailing party, thus making it easier for the consumers to stop violations of this Act. This subsection pro­vides a further check against com­mission abuses by making it finan­cially feasible for a non-monied party represented by counsel to become involved in the process. The intention here is that no awards be given to utility com­panies. 
251 
Con 
Certified mail, despite being expensive, is the only way to fully insure that the authorized person receives the notice. There is no definition of whom the commission may de­cide is authorized to receive is authorized to receive service of process thus allowing room for considerable discretion and abuse by the conunission. 
Con 
Con 
This procedure would encour­age complaints and bring on a rash of them. 
It discriminates against utilities. 
Pro 
(c) The consumer counsel's job is to see that the interests of the consumers, which otherwise might be subjugated to those of the utilities, be represented and protected. 
Section 5.07 
(a) Sections governing wit­nesses, depositions, contempt, rules of practice and procedure, technical rules of evidence, effect of infor­mality and decisions are covered by the Administrative Procedures and Texas Register Act. 
Section governing rehearings, amendments, rescission of orders, and record of proceedings are cov­ered partially in the same Act. 
(b) 
This allows the commission an opportunity to know the issues that may be involved in the rehear­ing. 

(c) 
Following from the above sub-section (b), this gives the commission power to dismiss un­necessary rehearings. 

(d) 
This provision keeps vested interests from delaying a legal or reasonable order or decision. 

(e) 
This sets out the spe­cific alternatives or options for the commission that could result from a rehearing to rescind or modify any of its earlier orders or decisions. This section will directly guide the commission in its decisions for the protection of all parties concerned. 


Con 
(c) This is an unfair bias in favor of consumers~ 
(b) 
The lack of specificity could cause the motion for re­hearing to be denied. 

(c) 
This provision could give the commission too much discretionary power which could lead to abuses if the commission were biased. 

(d) 
This could allow un­lawful and unreasonable orders or decisions to have unneces­sary financial loss to utilities and/or consumers. 


252 

Pro 
(f) 
This gives the commission the power to determine the degree of formality and method of conduct­ing the rehearings that best serves the consumer and the utility. 

(g) 
This lessens the amount of dilatory tactics that parties with vested interests can have, and helps eliminate potential regulatory lag. 


Section 5.08 
Pro 
Enables the coi;nmission to amend or rescind its..own orders without having to wait for a party to file a motion for a hearing. 
Section 5.09 
Pro 
(a) Provides for full and im­partial recording of and access to information that would encourage 
(rather than hinder) all parties to exercise their rights. 
(b) The Administrative Pro­cedures and Texas Register Act of 1975 section dealing with the record of proceedings concerns itself only with contested cases. Subsection (b) is meant to require the same for any hearings or rehear­ings. 
Con 
(f) 
Gives the commission too much discretionary power. 

(g) 
This Forces the parties into costly and time consuming district court appeals. 


Con 
This section would allow the commission to take action without the normal complaint of a concerned party. 
Con 
It would be too costly. 
253 
ARTICLE VI. DISCRIMINATION AND RESTRAINT OF COMPETITION 
Section 6.01. Discrimination. No public utility shall, as to rates or services, make or grant any unreasonable preference or advantage to any corporation or person within any classification, or subject any corporation or person within any classification to any unreason­able prejudice or disadvantage. No public utility shall establish and maintain any unreasonable differences as to rates of service either as between localities or as between classes of service. 
Section 6.02. Adherence to Schedules. No public utility shall directly or indirectly, by any device whatsoever or in any manner, charge, demand, collect, or receive from any person a greater or less compensation for any service rendered or to be rendered by the utility than that prescribed in the schedule of rates of the public utility applicable thereto when filed in the manner provided in this Act, nor shall any person knowingly receive or acce~t any service from a public utility for a compensation greater or less · than that prescribed in the schedules, provided that all rates being charged and collected by a public utility upon the effective date of this Act may be continued until schedules are filed. Nothing in this Act shall prevent a coopera­tive corporation from returning to its members the whole, or any part of, the net earnings resulting from its operations in proportion to their purchases from or through the corporation. 
Section 6.03. Restraint of Competition. No public utility shall discriminate against any person or corporation which sells or leases equipment or performs service in competition with public utility, nor shall any public utility engage in any other practice that may tend to restrict or impair such competition. 
Neither PRO nor CON 
These are standard provisions for public utility bills. 
254 

ARTICLE VII. CERTIFICATES OF CONVENIENCE AND NECESSITY 
Section 7.01. Certificates of Convenience and Necessity. Beginn­ing one year after the effective date of this Act, unless other­wise specified: 
(a) 
No public utility shall begin the construction, installa­tion, or operation of any new facility or system, or the construc­tion or installation of any extension, improvement, obtained from the commission a certificate that the present or future public convenience and necessity require or will require such construc­tion, installation, operation or extension. · 

(b) 
No public utility shall henceforth exercise any right or privilege or in any· W?J.Y render service directly to the public, or indirectly by serving any other public utility or agency engaged in public utility service, under any franchise or permit hereafter granted, or under any franchise or permit heretofore granted but not heretofore actually exercised, or the exercise of which has been suspended, without first having obtained from the commission a certificate that the public convenience and necessity require the exercise of such right or privilege. This section shall not vali­date any right or privilege now invalid or hereafter becoming in­valid under any law of this State. 

(c) 	
Except as otherwise provided in this Article: 

(1) 	
No public utility shall furnish, make avail~ able, render, or extend retail public utility service to any consumer without first having obtained a certificate of service which desig­nates the area in which such consuming facility is located. 

(2) 	
No public utility shall furnish, make avail­able render, or extend service to any utility service consuming facility to which such ser­vice is being lawfully furnished by another retail public utility on the effective. date of this Act, or to which service is lawfully commenced thereafter in accordance with this article by another public utility. 




Section 7.02. Exceptions. (a) A public utility shall not be required to secure a certificate of public convenience and neces­sity or a certificate of service for: 
(1) 	
An extension within or to a territory already served by it or to be served by it under a certificate of service, necessary in the ordin­ary course of its business; subject to review by the commission. 

(2) 	
Construction, operation, or extension, of ser­vice in progress on the effective date of this Act, until the expiration of six months as provided for in Section 7.05 of this 


255 
(b) 
As used herein for exemption from the necessity for certification, extensions shall be limited to devices for inter­connection of existing facilities or devices used solely for transmitting public utility services from existing facilities to customers of those services. 

(c) 
Notwithstanding these exceptions, all construction, installation, operation, or extension which constitutes or re~ sults in the establishment of a major utility facility shall be subject to commission approval as required in Article VIII of this Act. 

(d) 
When a public utility engages in construction or opera­tion without a certificate, the commission shall order the utility to cease and desist until the commission files a final decision on any complaint filed in relation to this activity by the utility or issues a further order. 


Section 7.03. Certificates of Service. 
(a) 
Every public utility must submit to the commission an application in the form prescribed by the commission to obtain a certificate of public convenience and necessity or a certificate of service or an admendment thereof. 

(b) 
On or before 90 days after the effective date of this Act, each public utility shall file with the commission a map or maps showing all its facilities on the effective day of this Act, separately illustrating facilities for generation, transmission, and distribution of its services. The map or maps filed by a retail public utility shall indicate the boundaries of the area which it is serving on that date and the area which it plans to serve from existing generation or transmission facilities or those under construction. · 

(c) 
The commission shall, at reasonable time intervals, re­quire the filing of revised maps showing alterations and additions made ~ince the last prior filing. 

(d) 
Every applicant for a certificate shall give reasonable public notice of its application to all affected persons .in such form and manner as the commission shall prescribe. 


Section 7.04. Certificate for Prior Operation. 
(a) Upon application made to the commission within six months after the effective date of this Act, the commission shall issue a certificate of public convenience and necessity for the construc­tion or operation then being conducted to any public utility actually 
256 
providing service to geographical area on the effective date of this Act. Any person or corporations actively engaged on the effective date of this Act in the construction, installation, ~xtension, or improvement of, or addition to, any facility or system used or to be used in providing public utility service, provided that such construction, operation, installation, exten­sion improvement, or addition to any such facility or system shall be brought into compliance with all regulations and oblications required by this Act or subsequent, regulations of the commission. 
(b) 
Upon satisfactory proof of the existence and operation of a retail public utility's distribution facilities on the effec~ tive date of this Act, the commission shall issue a certificate of service covering the service area of such utility, in accordance with the provisions of Sections 7.07 and 7.08 of this Act. The commission shall prepare or cause to be prepared a map or maps of uniform scale to show, accurately and clearly, the boundaries of the certified service area of each retail public utility as established under those sections, and shall issue such map or maps of certified service area to each retail public utility .as Certificates of Service. 

(c) 
A public utility failing to comply with the provisions of this section within the six-month period following the effective, date of this Act is guilty of violating this Act and is punish­able under the provisions of Article XIII of ths Act. 


Section 7.05. Issuance of Certificate of Convenience and Neces­sity; Terms and Conditions. 
(a) 
Certificates of convenience and necessity shall be granted on a nondiscriminatory basis, only after consideration by the com­mission of the following: adequacy of existing service, the need for additional service, the effect of the granting of a certificate on the recipient of the certificate and on any public utility of the same kind already serving the proximate area, and on such fact­ors as community values, preservation of recreational areas, parks historical and aesthetic values, of the estate environmental inte­grity, and the probable improvement of service or lowering of cost to consumers in such area ·resulting from the granting of such certi­ficate. 

(b) 
When an application for a certificate of public convenience and necessity is filed, the commission shall give public notice of such application to all interested parties as provided for in Sec­tion 5.01 of this Act, and, if requested, shall fix a time and place for a hearing and give notice of the hearing as provided in that section. Any person interested in the application may parti­cipate at the hearing. 

(c) 
In reaching its decision, the conunission may make any inquiries, physical examinations, valuations, and investigations and may require any plans, specifications, and estimates of costs that it considers necessary. 


257 
"(d) The conunission shall grant applications and issue certi­ficates on the bases of the need for the service, acconunodation, convenience, or safety of the public. The commission may is.sue the certificate as asked for, refuse to issue it, or issue it for the construction of a portion of the contemplated system or facili­ty or extension thereof, or for the partial exercise of the right or privilege. 
(e) 
The conunission may attach to the exercise of the rights granted by a certificate such terms and conditions, including provisions for the acquisition by the public of the franchise· or permit and all rights acquired thereunder and all facilities con­structed or maintained by authority thereof, as in its judgment the public convenience and necessity requires. 

(f) 
If an application f0r a certificate of convenience and necessity is accompanied by a request for an alteration of certi­fied service area, the request shall be considered in accordance with Sections 7.06 and 7.07 of this Act, and if such request is granted, the amended certificate of service shall be attached to the certificate of convenience and necessity. 

(g) 
Decisions made by the commission under this section shall be filed as an order of the conunission. 


Section 7.06. Assigned Service Areas. 
(a) 
The commission shall issue certificates of service to pub­lic utilities to allocate to them assigned service areas in which they are to provide retail utility service. The allocation of service areas shall be designed to encourage the orderly develop­ment of coordinated statewide retail public utility service, avoid wasteful duplication of facilities, avoid 'unnecessary encumbering of the landscape of the State of Texas, prevent the waste of mater­ials and natural resources, and minimize disputes between retail public utilities which may result in inconvenience, diminished efficiency, and higher costs in serving the consumer. 

(b) 
To the extent that it is not inconsistent with the pur­poses stated in subsection (a) of this section, the boundaries of each assigned service area, outside of incorporated municipalities, shall be a line of equitable division between the distribution lines of adjacent public utilities as they exist on the effective date of this Act; provided that these boundaries may be modified by the conunissian to take account of natural and other physical barriers, and shall be modified to take account of the contracts provided for in Sectin 7.09 of this Act, ~d provided fu7th~r that at anytime after the effective date of this Act the commission may, 


on its own or at the request of a public utility or any interested party make changes in the boundaries of the assigned service areas, but only after public notice to all interested parties and hearings as provided in Article v of this Act. 
(c) 
In the event there is any conflict or overlapping of claimed service areas on the maps filed by retail public utilities or in the event any retail public utility protests a certification by the commission within 60 days after issuance of the map of a service area by the commission, the commissi0n shall have the power, after hearing, to resolve such conflict and to revise or vacate any c~rtification or portions thereof. In such hearing the commission shall consider the following factors as they existed on the effec­tive date of this Act or such later date as may be relevant: 

(1) 	
the proximity of existing distribution lines to an area under conflict.; 

(2) 	
the adequacy and dependability of existing dis­tribution lines and facilities to provide the · required service; 

(3) 	
the existepce of excess capacity the utiliza­tion of which will be beneficial to consumers; 

(4) 	
which utility was first furnishing service in the area, and the duration of such service; 

(5) 	
the elimination and prevention of duplication of facilities supplying such area; 

(6) 	
the preference of customers; 

(7) 	
any other factors affecting the ability of the public utility economically to furnish adequate service to fulfull customers' requirements; 

(8) 	
preservation of recreational, park, scenic, and natural areas, historical and aesthetic values of the State and protection of the environmental integrity of Texas. 



(d) 
In those areas where the commission determines that the existing distribution lines of two or more retail utilities are so intertwined or located that Subsection (b) of this section cannot reasonably be applied, the commission shall, after notice, and hearing if requested, certify the service area or areas for the utilities in accordance with the provisions of Subsection (c) of this section. The commission may grant both utilities certi­ficates to serve the entire area in conflict subject to the pro­visions of Subsection (e) of this section. Nothing in this sec­tion shall deprive any public utility of the right to continue to serve all customers being served by it on the effective date of this Act. 

(e) 
In any area where two or more public utilities are granted certificates of public convenience and necessity for the same ser­vice, a public utility may not construct Qr extend its facilities, or furnish or offer to furnish its service to any premises that are already receiving the same service from another public utility, or to any premises not receiving the same service, unless its existing service facilities are located in closer proximity to the premises to be served than the closest service facility of any other public utility, except with the written concent of the other public utility. This subsection shall not preclude any public utility from extending its service to its own property and facili­ties. 


259 
Section 7.07. Service to Municipalities. Where a single public utility provides retail utility service within a municipality on the effective date of this Act, that entire municipality shall constitute a part of the assigned service area of the retail utility in question, except where, upon h~aring after notice, clae and convincing evidence has established to the commission's satisfaction that under the r.riteria of Subsection (c) of Section 
7.06 of this Act, unnecessary and grossly wasteful duplication of facilities will result or be required; in such case, the commission shall apply the provisions of Subsections (b) and (c) of Section 
7.06 of this Act, with due regard for the state official opinion of the governing body of the municipality and the difficulties with regulating more than one retail public utility within a municipality, and not in contravention of any constitutional rights. Where two or more utilities provide retail utility service of the same kind in a municipality on the effective date of this Act, the boundaries of the assigned service area shall conform to those contained in municipal franchises with the utilities on the effec­tive date of this Act. In the absence of a franchise, the bound­aries of the assigned service areas within a municipality shall be established by the commission in accordance with the provisions of Subsection (b) and '(c) of Section 7.06 of this Act. 
Section 7.08. Effect of Annexation and Incorporation. 
(a) 
If an area has been or shall been or shall be included within the boundaries of a city, town, or village as the result of annexation, incorporation, or otherwise, all public utilities certified or entitled to certification under this Act to provide service or operate facilities in such area prior to the inclusion shall have the right to continue and extend service in its certi­fied service area within the annexed or incorporated area, pursuant to the rights granted by its certificate and this Act. 

(b) 
Notwithstanding any other provision of law, a public utility shall have the right to continue and extend service within its certified service area and to utilize the roads, streets, high­ways, alleys, and public property for the purpose of furnishing 


such retail utility service, subject to the authority of the gov­erning body of a municipality to require any public utility, at the expense, of the public utility, to relocate its facilities to permit the widening or straightening of streets by giving to the public utility 30 days' notice and specifying the new loca­tion for the facilities along the right-of-way of the street or 
streets. 
Section 7.09. Contracts for Allocation of Service Areas. Contracts between retail public utilities designating service areas and customers to be served by those utilities, when approvedby the commission, shall be valid and enforceable and shall be incorporated into the appropriate assigned service areas. The commission shall approve a contract if it finds that the contract will eliminate or avoid unnecessary duplication of facilities, provide adequate utility service to all areas and customers affected, and promote the efficient and economical use and develop­ment of the facilities of the contracting utilities. 
Section 7.10. Duty to Exercise Authority. 
. .-: 
(a) 
Unless the authority granted by a certificate is exer­cised within the period designated by the commission, the certi­ficate is void. The period for exercising the authority under a certificate shall not include delay due to an order of a court. 

(b) 
The good faith commencement of construction of a plant or system and prosecution of the construction with reasonable dili­gence in proportion to the magnitude of the undertaking constitutes an exercise of the authority granted by the certificate. 


Section 7.11 Discontinuance. 
(a) 
No public utility shall abandon or discontinue any ser­vice without first having secured the approval of the commission. In granting its approval, the commission may impose such terms, conditions or requiremet-s as in its judgment are necessary to protect the public interest. 

(b) 
The commission shall have the power by order to author­ize or require any public utility to curtail or discontinue service to a certified service area or part thereof to the extent such action is required by the convenience and necessity of the public and for the efficient and economical operation of the public utility. 

(c) 
If a public utility threatens to discontinue or abandon service or discontinues ·or abandons service without commission approval, any person may file a complaint with the commission as provided for in Article 5 of this act or the commission may enjoin the public utility from the discontinuance or abandonment. 


261 
Section 7.12 Assignability. If the commission determines through public hearings as prescribed in this Act that a purchase, assignee, or lessee is capable of rendering adequate service, a public utility may sell, assign, or lease a certificate of public convenience and necessity or any rights obtained under the certificate. The sale, assignment, or lease shall be on the conditions prescribed by the commission and subject to the approval of the commission. 
Section 7.13 Complaints. Any interested party may file a com­plaint with the commission under this article subject to the provisions as prescribed in Article V of this Act. 
Section 7.14. Interfering with Another Utility. 
(a) Notwithst~ndingthe provisions. of tbis -Act or any other provisions of law, no public utility may furnish or offer to furnish service in any area certificated by the commission for the same service to another public utility nor may any public utility attempt to serve any consumer presently receiving service from another pub­lic utility. 
(b) If a public utility in constructing or extending its lines, plant, or system interferes or attempts to interfere with the operation of a line, plant, or system of any other public utility, the commission shall issue an order taking immediate effect pro­hibiting the construction or extension of the offending lines, plant, or system; and revoking the certificate of convenience and necessity and service. The commission shall referain from issuing such an order if the offendinq public utility agrees to meet all terms and conditions prescribed for locating the lines, plant, or system set by the commission. 
Section 7.15. Improvement and Extension of Service; Transfer of Calls and Metropolitan Area Service. 
(a) 
After notice and hearing as provided in Article V, the commission shall: 

(1) 	
Order a retail public utility to provid service in a given area, if it is reasonable to require that such service be provided; 

(2) 	
Order a public utility to provide specified im­provements its service in a defined area, if service in such area is inadequate or is substan­tially inferior to service in a comparable area and it is reasonable to require the company to provide such improved service; 

(3) 	
Order two or more public utilities to establish specified facilities for the interconnecting ser­vice if it is reasonable to require such service; 

(4) 	
Order a telephone company or telephone companies to provide extended area toll-free service within a specified metropolitan area where there is a sufficient community of interest within the area and such service can reasonably be provided. 



(b) 
Any order entered by the commission under the provision of this section shall provide reasonable time limits for compli­ance with its terms. 

(c) 
Parties to a proposed sale, lease, acquisition, consoli­dation, or merger shall submit to the commission a written a writ­ten petition containing: 

(1) 	
Copies of all documetns pertaining to the merger; 

(2) 	
A concise statement of the proposed transaction; 

(3) 	
The reasons for the proposed transaction; and 

(4) 	
All other information required by the commission or the consumer counsel. 



(d) 
After a petition is filed under Subsection (a) of this section, the commission shall investigate the transaction and shall give notice and hold a hearing as prescribed in Article V of this Act. 

(e) 
The commission shall approve the petition if the proposed transaction does not violat~ any existing law and is consistent with the public interest and legislative intent as stated in this Act. 


262 
Section 7.17. Revocation or Amendment of Certificate. The ~ommission at any time after notice and hearing shall revoke or amend any certificate if it finds: 
(1) 	
That the certificate holder has failed to comply with an order made under the provi­sions of Section 7.15 hereof; 

(2) 	
That the certificate holder is no longer pro­viding service in the area, or part of the area, covered by the certificate; 

(3) 	
That the certificate holder has committed a sub­stantial violation of any of the provisions of this Act, or any law of the state of Texas or of the United States of America, or of any rule, regu­lation, or order of the commission. (b) When the certificate of any public utility is revoked or amended, the commission shall require one or more public utilities to provide service in the area in question and to acquire on such terms and con­ditions as the commission shall prescribe so much 


263 
so much of the systems and facilities of the public utility holding the revoked or amended certificate as the commission finds useful in providing such service for the public good an general welfare of the people of the state of Texas. 
264 

Section 7.01 
Pro 
The effective regulation of all public utilities requires that their activities be certified as being of public "conveninece and riecessity." Under this certificate would come the construction, instal­lation, extension or operation of new, as well as old, facilities. 
Subsection (b) removes the rights any public utility possessed prior to the passage of this act. This allows the commission to exercise its powers and duties with­out the interfernece of other gov­ernmental bodies. 
The one year period after the effective date of this act allows 'the commission time to organize and build a staff with the e~per­tixe to deal with the fall imple­mentation of this section. This one year period also allows the utility industry need time to prepare all the needed documents and ' expertise to deal with the new Public Service Commission requirements. 
Subsection (c) prevents unnecessary competition and stab­alizes the conditions of all public utility companies within Texas. This subsection also ex­tends and ties the need for certi­ficate of convenience and neces­sity to the legal requirement for a certificate of service. 
Section 7.02 
Pro 
The workload of the commission 
is cut by allowing public utilities 
the right to build extensions within their assigned service areas without first obtaining a certificate of convenience and neces$ity. No exclusive rights are here granted to utilities. 
265 
Con 
The one year period after tlle effective date of. this Act allows the .utility industry a year in which. it will be unregulated in this vital area. The utility companies would begin hasty and unwise construction projects with­out recourse for the commission 
Subsection (b) disrupts previous legal working relation­ships between public utilities and municipalities. It totally removes local decision making authority in favor of central­ized state control. 
Con 
This section does allow the unsupervised extension of ser­vice with a utilities assigned area of service. This excemption from the need for a certificate could weaken the overall certi­ficate authority of the commissicn. 
Subsections (b) and (c) 
Section 7.02 Pro 
The connnission retains the power 
to review all extensions of ser­vice as an oversight function when needed. 
Subsection (c) covers the possibility that a utility company could construct a major utility facility in increments as separ­ate extension projects in an at­tempt to get around the certifi­cate section. 
Section 7.03 
Pro 
In order for the connnission to make an informed and accu~rate decision regarding the assigned service areas it is necessary for it to obtain the detailed informa­tion required of all public utility companies by this section. · 
The utilities are required to update this information so that the commission records will be accurate. 
Section 7.04 
Pro 
The commission is given the authority to certify the public con­venience and necessity of all facil­ities in operation or under construc­tion by subsection (a). This allows the commission · to determine the pur­pose of these facilities and asserta­tion whether they are in compliance with this Act and such rules and re­gulations as the commission may promulagate under this Act. 
Subsection (b) specifies the information to be included in certificates of service issued by the commission. This insures the uniformity of the certificate. for easy comparisons. 
266 
Con 
limit the extension of service definition to a point where the utility company has no inde­pendent judgment to exercise in the extension of service within its service area. This is an inhibition upon the management of the utility industry. 
Con 
Public utility companies may find it difficult to produce information required of them in the necessary form within the 90 day period allowed by this section. 
1 The continued updating of this information once a service area has been defined serves no useful purpose and is a waste of the funds of the utility. 
Con 
The commission's power to issue certificates of conven­ience and necessity after a re­view of existing facilities and those now under construction could penalize public utility cou panies for compliance with pre­vious legal reguirements. This section grants the commission power to disrupt the continued operation of existing facilities. 
Section 7.05 
Pro 
The commission is given a basis and measure for its de­cisions to grant certificates of convenience and necessity by sub­section (a). This specificity tells the commission and all other concerned parties what criteria should be considered before a certificate may be issued by the commission. 
Other subsections are de­signed to give the commission the necessary authority to in­sure public notice of application for a certificate, make all ne­cessary investigations and attach such conditions to a certificate as it deems necessary to a certi­ficate prior to issuance~ This allows the commission a maximum amount of flexibility within the basic guides set forth in this section. 
Section 7.06 
Pro 
This section provides for control and oversight of the development of utility services within Texas. These guidelines are given to the commission to insure their consideration in regards to the overall develop­ment of utility service. 
The commission is qrantedthe necessary power to deal with specific problems concerning service areas which were unfor­seen by the general provision of this section. 
~n 
The guidelines set forth 
restrict the commission's de­
cision making authority. Such 
restrictions are open to wide 
interpretations and invite 
judicaial appeals by utilities 
as well as the consumer and 
environmental interest groups. 
This over concern with 
these specific considerations 
could be detrimental to the ef­
ficient operation of utilities . and provision of services to the 
consumers, present and future. 
Con 
The commission is ordered to consider so many factors prior to issuing a certificate that any decision made is bound to be contraversial and invite judicial appeal. 
Subsection (b) does not allow the commission the power to consider the capacity of a utility company to provide service for the certificated area. 
267 

Section 7.07 
Pro 
Municipalities are assured continued stable utility service from existing sources. The utility industry is protected from wasteful duplication of facilities and need­less competition within a service area. 
The official opinion of local governmental bodies are to be con­sidered to insure that public in­put is made for the decision making process. 
Section 7.08 
Pro 
The legal right of way is given to utilities so that they will not be hampered in their provision of services by the need to appear before the commission for minor. matters. 
Service area integrity is insured to prevent local annexation activity from interfering with util~ ity _services. 
Section 7.09 
Pro 
This section establishes stan­dards for the commission to consider in granting contracts between public utility companies. 
Cooperation between utilities are allowed to ensure economy and efficiency in the provision of utility services to the consumer. Elimination and avoidance of un~ necessary duplication of facili­ties is also encouraged by the section. 
Con 
Con 
The rights of municipali­ties may be infringed on by granting a legal right of way to utilities without first re­ceiving the approval of the local governing body. 
Con 
Section 7.10 
Pro 
This section prevents utili-· ties from obtaining a certificate to serve an area but not actu­ally complying with the terms of the certificate. A burden is thereby placed upon public utili­ties to serve all those within a designated service area. 
Section 7.11 
Pro 
Discontinuance or abandon­ment would cause serious negative effects if consumers were still dependent upon the utility ·ser­vice·• . Even if the public utility is. experiencing financial diffi­·culties, discontinuance or aban­donment would not be the best all round solution. Yet this section does recognize that discontinuance is necessary under certain condi­tions in order to prevent economic disruption to the utility company in cases such as non use or non payment. Other reasons for discon­tinuance might be emergency situ­ations such as war or shortage of fuel. This section gives the com­mission the authority to decide what events are worthy of having the utility service discontinued or abandoned. 
Section 7 .12 
Pro 
The conunission is granted the authority to oversee and approve the relations between utilities in matters concerning all certi­ficates issued by the conunission to prevent their sale by a public 
Con 
Subsection (b) is left much too vague for effective enforce­ment of its intent. 
Con 
If a utility company is experiencing serious difficul­ties, and feels it necessary to discontinue service inunediately, the utiltiy company would not be able to do so. Results from this would be a deteriation of the quality of service. Bankruptcy leading to possible state control of the utility is also a possi­bility and is always the case whenever government regulations and controls interfere with the free market. 
Con 
This section interfers with managerial business perog­atives to a point of restrict­ing the free exercise of busi­ness between public utilities. 
269 

utility. This does not prohibit 
the alteration of assigned certi­
ficates, but allows for the maxi­
mum business management flexibil­
ity and discretion within the li­
mits of adequate regulation. 
Section 7.13 
Pro 
Refer to Article V 
Section 7.14 
Pro 
This section requires the com­mission to deal with problems relat­ing to certificates of service. Public utilities are restricted to operating their assigned service areas only to insure each utility's service intergrity. This also de­monstrates the intent of this bill to protect the industry by prevent­ing encroachment of one utility upon the assigned service area of anol;her. 
Section 7.15 
Pro 
The conunission is here require to maintain the continued improve­ment and extension of public utility services as the public convenience and necessity demands. The quality of service is protected and main­taned by subsection (a) (2). This subsection would make it the com­mission responsibility to insure a standard quality of service for all areas of the state according to similar conditions. 
Con 
Con 
This section restrains the possibility of free and open competition between util­ities which might improve ser­vice on lower the rate struc­ture. ! 
Con 
This section does not allow complete discretion for service maintenance by the management of public utilities. This allows the conunission to directly interfer within the area of a public utilities com­petency. The conunission may not have the technical compe­tency to deal with this com­plex problem on a state wide basis. 
270 

Section 7.16 
Pro 
Public utilities are allowed to take advantages of the "econo­mies of scale" oversight of the commission to insure the benefit of such actions to the industry as a whole and consumers specifically. Subsection (b) allows utilities to conduct the normal minor business activites necessary while prevent­ing the commission from being over­wheimed with the. need to approve minor s~les. 
Section 7.17 
Pro 
The commission is here required to revoke a certificate if there is substancial non-compliance with its directives or the violation of any law. This puts the ultimate sanc­tion against a public utility into the lands of the commission and orders its use if any of the spe­cified criteria are met. This is designed to insure the ultimate autho+ity of the commission to en­force its decisions and carry out its duties. 
Con 
This section creates un­necessary regulation while inter­fering with minor business prac­tices of public utility managers. 
Con 
This section forces a public utility to comply with orders it feels are agianst its interests or it will lose its rights under certificates issued by the commission. The commission in here granted power to force a public utility out of a business for non­compliance with commission de­cision a power possibly sub­ject to great abuse. 
271 

ARTICLE VIII. CERTIFICATE OF ENVIRONMENTAL COMPATIBILITY 
Section 8.01. Certificates. The commission shall upon advise­ment from the Office of Environmental and Energy Planning, issue certificates of environmental compatibility. 
Section 8.02. Certificate required for construction of a ma'or utility facility. a No person may connnence to construct a major utility facility in the state without first obtaining a · certificate of environmental compatibility, hereafter in this article called "certificate," issued with respect to such facility by the connnission with due consideration to the recom­mendations of the office of environmental and energy planning. Any facility which requires a certificate shall be constructed, operated, and maintained in conformity with the certificate and any terms, conditions, and modifications contained therein. It shall be the duty of the office of environmental and energy planning to insure compliance by the public utility with the provisions of the certificate issued by the commission. A certi­ficate of environmental compatibility may only be issued pur­suant to this article. 
(b} A certificate may be transferred, subject to the appro­val of the commission, to a person who agrees to comply with the terms, conditions, and modifications contained therein. 
(c} A certificate may be amended as ' provided in Section 8.05 of this article. 
(d) Any major utility facility for which, prior to the effec­tive date of this Act, an application for the approval of same has been made to any federal, state, regional, or local govern·-·, · ment agency which possesses the jurisdiction to consider the matter prescribed for finding and determination in subsection (a} of Section 8.08 of this Act is subject to review and modification, . consistent with this Act, by the commission. ~he commission shall also review and enforce regulation applicable to the con­struction already approved by such agency. 
Section 8.03. Application for a Certificate. (a) An applicant for a certificate shall file with the connnission an application, in such form as the commission may prescribe, containing the following information: 
(1) 
a description of the location and of the major utility facility to be built ·thereon; 

(2) 
a summary of all studies which have been made of the environmental impact of the facility; 

(3) 
a detailed statement explaining the need for the facility; 

(4) 
a description of any reasonable alternate loca­tion or locations for the proposed facility, a description of the comparative merits and detriments of each location submitted, and a statement of the reasons why the primary proposed location is best suited for the facility; and 

(5) 
such other information as the applicant may consider relevant or as the commission may by rule or order require. 

(b) 
A copy or copies of the studies referred to in paragraph 

(2) 
of subsection (a) of this section shall be filed with the commission and the consumer counsel and shall be available for public inspection. 

(c) 
An application shall be accompanied by proof of service of a copy of the application on the chief executive officer of each municipality and the head of each government agency charged with the duty of protecting the environment or of planning land use in the area in which any portion of the facility is to be located, both as primarily and as alternatively proposed. The copy of the application shall be accompanied by a notice speci­fying the date on or about which the application is to be filed. 

(d) 
The application shall also be accompanied by proof that public notice thereof was given to persons residing in the municipalities entitled to receive notice under subsection (c) of this section, by the publication of a summary of the application and the date on or about which it is to be filed, in such news­papers as will serve substantially to inform such persons of the application. 

(e) 
Inadvertent failure of service on, or notice to, any of the municipalities, government agencies, or persons identified in subsections (c) and (d) of this section may be remedied pur­suant to orders of the commission designed to afford them adequate notice to enable their effective participation in the proceeding. In addition, the commission shall after filing, require the appli­cant to serve notice of the application or copies thereof or both upon such other persons, and file proof thereof, as the commission deems appropriate. 

(f) 
An application for an amendment of a certificate shall be in the form and contain the information the commission prescribes. Notice of an application shall be given as set forth in subsections 

(c) 
and (d) of this section. 


273 
Section 8.04. Hearin on Ap lication for a Certificate; Amendment. a) Upon the receipt of an application complying with section 
8.04 of this Act, the commission shall fix a date for the commence­ment of a public hearing in accordance with Article V of this Act, but not to commence before 20 days after the date of filing. 
(b) 
On an application for an amendment of a certificate, if the proposed change in the facility would result in any material increase in any environmental impact of the facility or a sub­stantial change in the location of all or a portion of such facility other than as provided in the alternates set forth in the application, the commission shall hold a hearing in the same manner as ·a hearing is held on an application for a certificate. 

(1) the applicant; 

(2) 
each municipality and governmental agency entitled to receive service of a copy of the application under subsection 

(c) 
of Section 8.04 of this Act; 

(3) 
any person residing in a municipality entitled to receive service of a copy of the application under subsection (c) of Section 8.04 of this Act; 

(4) 
any domestic organization or interest group; 

(S) 
the consumer counsel. 



(b) 
The parties to a certificate proceeding shall file with the commission notice of intervention with the exception of sub­section (a) (1) and (a) (5). 

(c) 
The commission may, in extraordinary circumstances for good cause shown, grant a petition for leave to intervene as a party to participate in subsequent phases of the proceeding filed by a municipality, government agency, person, or organization that is identified in subsection (a) of this section, but who or which failed to file a timely notice of intervention. · 

(d) 
Prior to the hearings, the office of environmental and energy planning shall present to the commission its opinion on the . environmental impact of all major utility facilities proposed. 



Section 8.06. Conduct of the Hearin • Conduct of the hearing s a 1 be in accordance with the provisions set forth under Article V of this Act. 
274 

Section 8.07. Decisions. (a) The commission shall render a decision upon the record either granting or denying the appli­cation as filed, or granting it upon such terms, conditions, or modifications of the construction, operation, or maintenance of the major utility facility as the commission may deem appropriate. The commission may not grant a certificate for the construction, operation, and maintenance of a major utility facility, either as proposed or as modified by the commission, unless it finds 
and determines:  
(1)  the basis of the need for the facility;  
(2)  the nature of the probable environmental impact;  
(3)  that the '. facility represents the minimum adverse  

environmental impact, considering the state of available technology and the nature and economics of the various alternatives and other pertinent considerations; 
(4) 
in the case of an electric transmission line, what p:art, if any, of the line shall be located underground; that such facility is consistent with regional plans for expansion of the electric power grid of the electric systems serving the state and interconnected utility systems; and that such facilities will serve the interests of electric system economy and reliability; 

(5) 
that the location of the facility as proposed con­forms to applicable state and local laws and regulations issued thereunder, except that the conunission may refuse to apply any local law or regulation or part thereof if it finds that, as applied to the proposed facility_, such law or regulation is unreasonably restrictive in view of the existing technology, or of factors of costs or economics, or of the needs of consumers whether located inside or outside of the directly affected government subdivisions; and 

(6) 
that the facility will serve the public interests, convenience and necessity. 

(b) 
If the commission determines that the location of all or part of the proposed facility should be modified, it may condition its certificate upon such modification, provided that the munici­palities and persons residing therein affected by the modification are given reasonable notice thereof. 

(c) 
A copy of the decision and any opinion issued therewith shall be served upon each party an~ filed with the consumer counsel. 


275 

Section 8.09 Rehearing, Judicial Review. Any appeal of the conunission's decisions shall be filed and adjudicated in accor­dance with Article XII of this Act. 
Section 8.10 . . . Prior Construction. Major utility facilities already constructed shall be sUbject to certification by the commission. The conunission shall require rules and regulations regarding pollution standards established by existing state and federal agencies to be met and shall require additional con­struction or modifications in present facilities to achieve these standards. 
Section 8.11. Forecasts of Loads and Resources. Each public utility shall annually furnish a report to the conunission for its review containing a 10-year forecast of loads and resources. The report shall describe the major utility facilities which, in the judgment of the utilityJ will be required to supply system demands during the forecast period. The forecast shall cover the 10-year period following the date of the report, and shall be made avail­able to the public and furnished upon request to municipalities and government agencies charged with the duty of protecting the environment or of planning and use. The report shall be in the form and shall contain the information prescribed by the conanission. 
276 

Section 8.01 
Pro 
The Office of Environ­
mental and Energy Planning 

. has as its functions basic research related to the impact made on the environment due to the implementation of policies by utility companies and the impact upon the availability, beth in the short run and long run, of various energy resources given certain practices by the utility companies. This office is to advise the commission on better alternatives to be followed by the public utili­ties. This office is to develop plans which depict the imple­mentation of various policies . over a ten year, twenty year and fifty year period. The -commissioners cannot be ex­pected to perform all of this necessary research adequately themselves and therefore must depend upon this office. 
Se.ction 8. 02 
Pro 
This section grants the power to the Office of Environ­mental and Energy Planning to do what is necessary to insure that the provisions of the certificate are being met. 
By requiring public utili­ties to have a certificate be­fore commencing to construct a major utility facility is to insure by force of law that the environment be taken into con­sideration and protected. 
The commission has the authority to review construction being carried out at any time and includes that begun prior to the effective date of this Act. 
Con 
This office potentially has the ability to become too environmentally oriented to the degree of threatening the operation and the provision of service by the utility company. 
Since this office is only advisory, it has no authority and possibly no effect. 
Con 
The power of the office is too vague and needs to be spelled out in detail in order to avoid conflicts between the office, other regulatory bodies and the public utilities. 
Procedural delays in obtaining a certificate could cause time and cost difficul­ties for both the commission and the public utilities which could affect rate regulation, not to mention the placing of pressure on the commission to modify strong environmental provisions. 
277 

Pro 
To deny the commission this 
authority is to ratify the 
existence of major utility 
facilities which threaten 
the environment and to ne­
gate the intended effect of 
this article. 
Section 8.03 
Pro 
This section enables the Office of Environmental Energy Planning to have made avail­able to it various environmental information which it can study and respond to and also compare to its own studies. This process provides for the best possible flow of information needed to weigh the alternatives involved with the construction of a major utility facility. 
By providing the Consumer Counsel with copies of the studies a check can be made on the commission and its policies. Public attention can be brought to these policies and the inten­tion of the public utility to commence construction by giving public notice to the people re­siding in the municipalities effected by the construction and by giving an application to the chief executive officer of each municipality and environ­mental agencies. 
Again, the purpose of this publicity and exposure is to have various inputs added to the decision-making process so that the probability of biased decisions being made will be minimized. 
Con 
This article lacks pro­visions to protect utility companies from undue burdens resulting from certification. 
Con 
The cost and elabora­tion of the proposed studies could be prohibitive causing the public utilities to com­promise in the accuracy of these studies which would make them useless to the conunis­sion for analytical considera­tions of alternatives. 
As in any matter which becomes more public, time delays may occur which would result in increased expenses for both the commission and the public utility and pro­bably not any different results if such public notice was curtailed. There is no point of clarifi­cation of which newspapers will serve substantially to inform; 
such vagueness may lead to abuse. 
278 

Section 8.03 
Pro 
The goal of maximum feasible participation is guaranteed by law. The parties to a certification proceeding may include industry, con­sumers, government and environ­mental and public interest groups. 
This section is designed to allow the commission to kriow in advance who will participate in the hearing, allows any party to partici­pate with a minimum of red tape, allows any party who failed to file to participate in later hearings with good cause. 
Subsection (c) ·of this section clearly demonstrates the intent of this legislation to make as part of the public record all information necessary to arrive at a decision compati­ble with environmental protection. 
', ,. 
Section 8.05 
Pro 
This section is intended to provide for internal consistency in this legislation for the con­duct of hearings and to comply with standard administrative procedures. 
Section 8.06 
Pro 
Even though input into the decision-making process may come from many parties, the decision is made by one party, the commission. And to hold the 
279 
Con 
The ability of the parties to participate in any or every hearing increases the possibility for delay in hearings and construction plans. A commission in it­self should be able to make the necessary decisions as quickly as possible, so as not to unduly interfere with business. 
Con 
Requiring eligible parties to notify the commission of their intention to participate is unnecessary, expensive, and could limit the participants to the hearing. Prior notifi­cation may mean that parties intending to intervene would be harassed. 
Pro 
commission accountable, it must delineate the reasons upon which its decision was based. Realizing that there will be come environmental impact of an undesirable nature, this impact will be minimized by the decision of the commission and by the balancing advantages achieved by having the major utility facility constructed. 
Section 8.07 
Pro 
By expressing clearly the order and reasons for the action taken, the commission is opening itself to review by any interested party. This high degree of account­ability insures, as far as possible, honest and unbiased decisions in­tended to benefit. all parties. With the reasons stated both p parties can be informed abOut informaton necessary in an appeal. 
Section 8.08 Pro This section maintains the internal consistency of the Act. 
Con 
The time at which the opinion stating the reasons is to be presented is not clear. This flexibility could work to the disadvantage of the goal of accountability. 
No clarification is given for resolving conflicts be­tween the cormnission and muni­cipalities. 
This authority to require modifications in location or construction may place un­necessary burdens on the util­ity industry resulting in higher costs due to changes in location and facility design resulting in higher costs to the consumer. 
280 

Section 8.09 
Pro 
This section provides· 
for internal consistency for 
the Act. 

Section 8.10 
Pro 
In order to achieve the 
goals of this section; i.e. 
environmental compatibility, 
it is necessary to give the 
commission the authority to 
enforce rules and regulations 
regarding pollution standards 
on existing public utilities. 

· Without this authority, con­tinued environmental pollution coming from existing facilities will continue. 
Section 8.11 
Pro 
The commission is to con­cern itself with long run pro­jections of utility needs. Only by doing this can both rate regulation and environmental concerns be placed in their proper perspective and make possible the achievement of these goals in a manner con­sistent with both consumer and industry goals. 
This encourages long range planning by the public utility industry in conjunction with the commission. 
~ 
The cost of changing old facilities would have to be figured into the rates charged to customers and this could result in bitterness and pro­test by the customers. Retro­actively applying standards may also be unfair to utility companies who had complied with previous laws. 
Con 
There are many variables which cannot be predicted over a· long period of time and .to formulate policy in relation to predictions could cause many problems that are elimi­nated by prediction of needs and supplies. 
281 

ARTICLE IX. SECURITIES; SALE OF PROPERTY AND MERGERS 

Section 9.01. Definitions. For the purposes of this article; 
{a) "Security" means any note, stock, treasury stock, bond debenture, evidence of indebtedness, assumption of any obligation or liability as a guarantor, endorser, surety, or otherwise in the security of another person, certificate of interest or participation in any profit sharing agreement, collateral trust certificate, pre­organization certificate or subscription, transferable shares, in­vestment contract, voting trust certificate, certificate of deposit for a security, certificate of interest or participation in an oil, gas or mining right, title, or lease, or in payments out of produc­tion under such a right, title, or lease, or, in general, any in­terest or instrument commonly known as a security, or any certificate for, receipt for guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. 
{b) "Capital structure" means the total capitalization of the public utility including, but not limited to, all outstanding common stock, preferred stock, and the permanent financing of said public utility represented by long-term debt, and shall further include re­tained earnings and paid-in surplus in excess of par values. 
Section 9.02. Approval Required for Offer, Sale, or Encumbrance. 
{a) It shall be unlawful for any public utility organized and operating under the laws of this state to offer or sell any security or, if organized under the laws of any other state or foreign country, to subject property in this state to an encumbrance for the purpose of securing the payment of any indebtedness unless the capital struc­ture of said public utility shall first be approved by the commission. Approval by the commission shall be by order. 
(b) Upon the application of a public utility for approval of ­its capital structure prior to the issuance of any security or the encumbrance of any property for the purpose of securing the payment of any indebtedness, the commission may make such inquiry or inves­tigation, hold such hearings, and examine such witnesses, books, papers, documents, or contracts, as in its discretion it may deem necessary. Prior to approval the commission shall ascertain that the amount of securities of each class which any public utility may issue shall bear a reasonable proportion to each other and to the value of the property, due consideration being given to the nature of the business of the public utility, its credit and prospects, the possibility that the value of the property may change from time to time, the effect which such issue shall have upon the management and operation of the public utility, and other considerations which the commission as a matter of fact shall find to be relevant. If 
282 

the commission shall find that the proposed capital structure is reasonable and in the public interest and will not be detrimental to the interests of the conswners and patrons affected thereby, the commission shall by written order grant its permission for the pro­posed public financing. 
(c) The provisions of this section shall not apply to coopera­tive corporations. 
Section 9.03. Authorization for Transfer of Property, Merger or Consolidation. No public utility shall sell, acquire, lease, or rent any plant as an operating unit or system in this state for a total consideration in excess of $100,000 or merge or consolidate with another public utility operating in this state without first being authorized so to do by the commission. Upon the filing of an application for the approval and consent of the commission thereto the commission shall investigate the same with or without public hearing, and if it shall find that the proposed action is consistent with the public interest it shall give its consent and approval by order in writing. In reaching its determination the commission shall take into consideration the reasonable value of the property, facili­ties, or securities to be acquired or disposed of, or merged and con­solidated. The provisions of this section shall not be construed as applicable to the purchase of units of property for replacement or to the addition to the facilities of the public utility by con­struction. 
Section 9.04. Stock Purchase. No public utility shall purchase any security issued by any other public utility doing business in. Texas without first having made application to and received the consent of the commission by order. 
Section 9.05. Approval of Loans. Except with the consent and ap­proval of the commission first had and obtained, no public utility shall loan moneys, stocks, bonds, notes or other evidences of indebt­edness, to any corporation or person owning or holding directly or indirectly any stock of said public utility. 
283 
Article IX. 
Pro Con 
Control over the capital struc­Such regulation may be ture of, and the financial inter­more than is necessary for relationships between, public util­effective rate regulation. ities is essential for effective rate regulation 
284 

ARTICLE X • . RELATIONS WITH AFFILIATED INTERESTS 
Section 10.01. Jurisdiction of Commission. The commission 
shall have jurisdiction over affiliated interests having trans­
actions with public utilities under the jurisdiction of the 
commission. Such jurisdiction shall extend to access to all 
accounts and records of such affiliated interests relating "t;:o 
s.uch transactions, including but not limited to accounts and 
records of joint or general expenses, any portion of which may 
be applicable to such transactions; and to the authority to 
requir,e such reports to be submitted by such affiliated interests 
as the commission may prescribe. 
Section 10.02. Transactions with Affiliated Interests. (a) No contract or arrangements providing for the furnishing of manage­ment, supervisory, construction, engineering, accounting, legal, financial, or similar services, and no contract or arrangement for the purchase, sale, lease, or exchange of any property, .right, or thing, or for the furnishing of any service, property, right, 
o.r thing, other than those above enumerated, made or entered into af.ter the effective date of this Act between a public utility and any affiliated interest shall be valid or effective unless and until the contract or arrangement has been approved in writing by 
. the commission. It shall be the duty of every public utility to file with the commission a verified copy of the contract or arrangement, entered into prior to the effective date of this Act and in force and effect at that time. 
All unwritten contracts or arrangements shall, ori the effective date of this act, take the form of a written contract or arrange­ment and shall be submitted to the commission for its approval within such a period of time as the commission shall determine. The commission shall approve any contract or arrangement made or entered into after that date only if it shall be in written form and clearly appear and be established upon investigation that it is reasonable and consistent with the public interest. No contract or arrangemetn shall receive the commission's approval unless satisfactory proof is submitted to the commission of the cost to the affiliated interest of rendering the services or of furnishing the property or service described herein to each public utility. No proof shall be satisfactory within the meaning of the foregoing sentence unless it includes the original or verified copies of the relevant cost records and other relevant accounts of the affiliated interest, or an abstract or summary as the com­mission may deem adequate, properly identified, and duly authenti­cated; provided, however, that the commission may, where reason­able, approve or disapprove the contracts or arrangements without the submission of cost records or accounts. The burden of proof to establish the reasonableness of the contract or arrangement shall be on the public utility. 
285 
(b) 
The provisions of this section requiring the written approval of the commission shall not apply to transactions with affiliated interests where the amount of consideration involved is not in excess of $10,000 or five percent of the capital equity of the utility, whichever is smaller: provided, however, that regularly recurring payments under a general or continuing arrangement which aggregates a greater annual amount shall not be broken down into a series of transactions to come within the aforesaid exemption. Such transactions shall be valid or effective without commission approval under this section. How­ever, in any proceeding involving the rates or practices of the public utility, the commission may exclude from the accounts of such public utility any payment or compensation made pursuant to the transaction unless the public utility shall establish the resonableness of the payment or compensation. The commission shall determine what constitutes a general or continuing arrange­ment. 

(c) 
In any proceeding, whether upon the commission's own motion or upon application or complaint, involving the rates or practices of any public utility, the commission may exclude from the accounts of the public utility any payment or compensation to an affiliated interest for any services rendered or property or service furnished, as above described, under existing contracts or arrangements with the affiliated interest unless the public utility shall establish the reasonableness of the payment or compensation, in accordance with the provisions of 4.05 (d) (5) of this Act. 

(d) 
The commission shall have continuing supervisory control over the terms and conditions of the contracts and arrangements herein described so far as necessary to protect and promote the public interest. The commission shall have the same jurisdiction over the modifications or amendment of contracts or arrangements herein described as it has over such original contracts or arrangements. The fact that the commission shall have approved entry into such contracts or arrangements as described herein shall not preclude disallowance or disapproval of payments made pursuant thereto, if upon actual experience under such contract or arrangement it appears that the payments provided for or made were or are unreasonable, in accordance with the provisions of Section 4.05(d) (3) of this Act. 

(e) 
Whenever the commission shall find upon investigation that any public utility has given effect to any such contract or arrangement without such contract or arrangement having received the commission's approval as required by this section, the com­mission shall issue a summary order directing the public utility to cease and desist from making any payments or otherwise giving any effect to the terms of such contract or arrangement, until such contract or arrangement shall have re·ceived the approval of the commission. 


286 
The circuit court of Travis county is authorized to enforce 
such order to cease and desist by appropriate process, including 
the issuance of a preliminary injunction, upon the suit of the 
commission. 

(f) Whenever the commission shall find upon investigation that any public utility is making payments to an affiliated in­terest, although such payments have been disallowed and dis­approved by the commission in a proceeding involving the public utility's rates or practices, the conunission shall issue a summary 
· order directing the public utility to cease and desist. from making such payments. A circuit of Travis county is authorized to en­force such order to cease and desist by appropriate process includ­ing the issuance of a preliminary injunction, upon the suit of the conunission. 
Section 10.03. Disclosure of ownership. The commission shall 
require the disclosure of the identity of respective interests of 
· every owner of any substantial interest in the voting securities of any public utility or its affiliated interest. One percent or more is a substantial interest within the meaning of this section. 
287 
Section 10.01 
Pro 
Jurisdiction over the utilities relations with affiliated interests is essential for effective , regulation both for cornpre­hensive planning by the commisison and to assure that costs and profits are not being transferred beyond the commissions purview. 
Access to accounts and records of relevant trans­actions is a regulatory imperative. 
Section 10.02 
Pro 
This section (a) details the transactions covered, with an emphasis on written agree­ments after the effective date of this Act, (b) sets the transactions to be exempted as those involving less than $10,000 or 5% of capital equity, (c) gives the commission discretion in the handling of payments made under existing contracts, (d) gives the commission continuing super­visory control over contracts including the option to dis­approve payments made pursuant to such a contract, and (e) in­cludes cease and desist pr9vi­sions in the event of non­compliance. 
The types and exceptions of transactions included in the com­mission's jurisdiction are fairly standard. The discretionary treatment of payments in both prior contracts and those pursu­ant to the Act frees the commission from legal constraints and allows 
Con 
The extension of juris­diction to affiliated interests brings the government into still another realm of private enterprise, involving the regu­lation of businesses outside those dealing primarily with utility services simply on the basis of their associations with utilities. It includes commission jurisdiction to areas the commissioner has no expertise in and also involves increased record-keeping for both the businesses and the commission. 
Con 
The discretion in the commission's handling of pay­ments under both previously made contracts and those made pursuant to the Act bring into question the validity to the managerial usefulness of the contracts to the utility com­pany and the affiliated in-. terest. It also provides an authority which could greatly debilitate a utility in the event of a biased commission. 
The cease and desist provision makes concrete and indisputable the authority of the commission and the govern­ment's move into this realm of private enterprise. 
Might possibly allow affiliated interest to under bid for a contract, then after eliminating competition approach the commission for an adjust­ment based on actual experience. 
288 

it to adjust its decisions to changing conditions with a minimum of procedural effort. 
The cease and desist pro­visions provide for immediate relief to the consuming public until further legal action can be taken preventing any undue or unjust profits to the utility or the affiliated in­terest in the intervening period. 
Section 11. 03 
Pro 
The identity of owners in voting securities is essential to 'the effectiveness and com­prehensiveness of the above provisions. · 
· To avoid profit arrangements outside of the purview of the conunission. 
'' 
Con 
This represents further intrusion by the government ·and more unnecessary and costly record keeping. 
289 
ARTICLE XI. JUDICIAL REVIEW 
Section 11.01. Institution of Proceedings. (a) Any party to a contested case before the commission shall be entitled to seek judicial review of a commission decision or order. 
(b) Such proceedings shall be in compliance with the Administrative Procedures and Texas Register Act of 1975, ex­cept to the extent further delineation is provided herein. 
Section 11.02. Standing for Participation in Review. The commission, the consumer counsel, and all parties to the pro­ceeding before the commission shall be entitled to participate in the review proceedings. The court may permit other interested parties to intervene. 
Section 11.03. Attorney's Fees, Costs. Any party represented by counsel who alleges that rates approved by the commission are excessive and who is the prevailing party in proceedings for review of a commission decision or order, may in the course of such action recover against the regulation fund reasonable fees for attorneys and expert witnesses and other such expenses as the court may allow. The court shall not allow any such expenses in the event it finds that the action brought under this article was groundless, brought in bad faith, or for the purpose of harassment. 
Section 11.04. Court Proceedings. All proceedings before a court on appeal from the commission shall be based on the sub­stantial evidence rule. If any new evidence becomes available at any time during the appeal process the court shall render the evidence to the commission for its further consideration. The court shall refrain f ran acting during the new hearings of the commission. 
290 

Section 11.01 
Pro 
Provides a check on possible commission abuses by allowing any party to a co~ission proceeding to seek judicial review of a commission decision or 
or.der. 
secti,on IL 02 
Pro 
Allowing the commission, the consumer counsel, all parties to the initial pro­ceedings, and any other court approved party standing to participate in the jud~cial review, perm.its the court to make its decisions on the basis of a wide variety of evidence. 
Section 11.03 
Pro 
Provides a further check against commission abuses by making it financially feasible for a non-moneyed party repre­sented by counsel to become involved in the process. Court determinations prevent abuses of this provision. 
Con 
This section could con­tribute to the over-crowding of court dockets causing un­necessary delay. 
This section could result in the review process being as, if not more, time consuming than the earlier commission pro­ceedings being reviewed. 
The review process could be more time consuming than the initial commission proceedings. 
Con 
Such a provision may be an unnecessary, expensive means of providing oversight of com­mission proceedings. 
291 

Section 11.04 
Pro 
This section enhances the power of the commission in its hearings process. Parties to a hearing are more likely to present all of their evidence to the com­mission if they know that it· can not be brought up later in a court appeal without being sent back to the commission. 
Con 
By requiring that if new evidence becomes available the conunission rehear a case you increase the commission's work­load. You also decrease the power of a court. The evidence may not become available until after the appeals process is well underway causing great expense to the commission and the litigants. 
292 

ARTICLE XII. VIOLATIONS AND PENALTIES 

Section 12.0l. Injunctive Relief. Whenever it shall appear . 
to the commission that any public utility or any other person or corporation is engaged in, or is about to engage in, any act in violation of this Act or of any order, rule, or :i:-egula­
tioh of the commission entered or adopted under the provisions· 
of this Act, or that any public utility or any other person1 or 
corporation is failing to comply with the provisions of this Act or' with any such rule, regulation, or order, the att:orney general, on his own initiative or on request of the commission, 
shall br~ng an action in a court of competent jurisdiction 
against such public utility .or other person or corporation to 
enjoin.the commencement or continuation of any such act,. or to. require compliance with this Act, rule, regulation, or order 
issued thereunder. 
Section 12.02. Violations. (a) Any public utility or affiliated 
interest which violates a provision of this Act, fails to per~ 
form; a duty imposed On it, Or fails 1 neglects I Or refUSeS •to 
obey an order, rule, regulation, direction, or requirement of 
the commission or decree or judgement of a court, shall be sub­
ject to a civil penalty of not less than $1000 nor more than 
$10,000 per violation per day. 
(b) Ariy member of the commission, or any officer or director of a public utili'ty or an affiliated interest, shall be subject to a civil pen.alty of not less than $500 nor more than $1000 per violation per d,ay of this Act. 
I· . .. . 
(c) 
Any person, other than an officer or director of a public utility or affiliated interest or a member of the commission, shall be subject to a civil penalty of $500 for each and every violation per day of this A~t. 

(d) 
Any member, officer, or employee of the commission found in any action by a preponderance of the evidence to have violated any provision of Section 2.05 of this Act shall be removed from his or her office or employment. 


Section 12.03. Other Violations. (a) Any person or corporation who or which violates any provision of this Act or fails to cemply with or obey any lawful order, rule, regulation, direction, or requirement of the commission made under this Act, for which no penalty is otherwise provided by this article, shall be subject to a civil penalty of not less than $100 nor more than $10,000 per violation per day. 
(b) Any person or corporation who or which solicits, encour­ages, aids, or attempts to aid another in violation of this Act, with intent to promote or assist in the commission of the viola­tion, shall be subject to the same penalty or punishment as is provided in this article for commission of the violation. 
293 
Section 12.04. Criminal Penalties. Any person that violates any provision of this Act shall be guilty of a Class A mis­demeanor. 
Section 12.05. Institution of Suit. The attorney general shall institute suit on his own initiative or at the request of, in the name of, and on behalf of the conunission, in a court of competent jurisdiction to recover the penalties provided unqer Section (12.02), Subsections (a}, (b}, and (c}, and Section (12.03), Subsections (a) and (b) of this article. 
Seqtion 12.06. Contempt. If any person fails to comply with any lawful order of the commission or with any subpoena or subpoena duces tecum or if any witness refuses to testify about any· matter on which he or she may be lawfully interrogated, the commission may apply to any court of competent jurisdiction to compel obedience by proceedings for contempt. 
Section 12.07. Cumulative Actions and Penalties. Penalties provided under this article are cumulative ' in nature. No pro­vis~on of this Act shall exclude any other remedy available at 
law or equity to an aggrieved party. 
Section 12.08. Disposition of Fines and Penalties. Fines and penalties collected under this Act shall be paid to the cOllDllission and paid by the conunission to the state treasury to be placed in the general revenue fund. 
Section 12.09. Venue. Suits for injunctions or penalties under the provisions of this Act may be brought in Travis County, in any county where such violation is alleged to have occurred, or in the county of residence of any defendent. 
Section 12.01 
Pro 
The power to enjoin ~he commencement or con­tinuation of an action in violation of this Act or any rule, regulation or order used thereunder is an effective, standard means of insuring compliance with the Act. 
The value of injunctive power lies in the fact that it provides immediate relief. The fact than an injunction is flexible in that it may be either permanent or temporary, and as such may be applied in a manner commensurate with t the violation, also adds to its utility. 
The provision allowing the attorney general to seek injunctive relief independent of the commission affords some protection against a commission that is slow to act, or that refuses to take such action. 
Section 12.02 
Pro 
The range provided for civil penalties allows penal­ties to be assessed according to the magnitude of the vio­lation. The assessment of penalties on a per violation, per day basis is an effective means of encouraging prompt compliance on the part of any offending party. 
Con 
Of course there is no long term assurance that the attorney general will be in­cl·ined to use such a pqwer except upon the request of the commission. 
The ability of the Attor­ney General to act independent of the commission could possibly result in poorly coordinated action and diminished informal communications between the commission and the utility in­dustry. 
Con 
There is no assurance that penalties imposed will be in accordance with the severity of the violation provided by this section. 
295 

Section 12.04 
Pro 
Provision of a cri­minal penalty provides a further deterrent against violations of the Act. 
Section 12.05 
Pro , 
See discussion of in­dependence of the attorney general (comment on Injunc­tive Relief Section of this article). 
Section 12.06 
Pro 
This section provides the necessary "teeth" without which the subpoena and certain other powers of the commission would be unenforceable. 
Section 12.07 
Pro 
I 
This provision indicates that any or all appropriate remedies provided in this Act may be sought simultaneously. It also permits a broad range of remedies by stating that nothing in this Act excludes any other appropriate remedy pro­vided for outside this Act. 
Con 
Criminal penalties are generally considered inappro­priate for the majority of the ciolations delineated in this Act,-and as such, are unlikely to be used. 
296 

Section 12.08 
Pro 
This insures the commis­sion itself has no monetary stake in a fine or penalty. 
Section 12.09 
Pro 
This section allows for flexibility in suits and does not require undue travel or expense for individual litigants. 
297 

ARTICLE XIII. COSTS AND EXPENSES OF THE COMMISSION 

Section 13.01. Method of Reimbursement. (a) The persons and corporations performing public utility services subject to regulation under this Act shall each contribute, by way of assessments, sufficient funds to the state to reimburse the state for the reasonable cost of regulating them. The conunis­sion shall keep records of the costs incurred in connection with the administration and enforcement of this Act. The commission shall also keep a record of the manner in which it shall have computed the amount assessed against every public uti~ity. Such records shall be open for inspection by the general public. 
(b) The determination of such costs and assessments by the commission, and the records and data upon which the same is made, shall be considered prima facie correct; and in any pro­ceeding instituted to challenge the reasonableness or correct­ness of any assessment under this article, the party challenging the same shall have the burden of proof. 
Section 13.02. Payment of Costs and Expenses. (a) All costs and expenses of the commission shall be paid pursuant to appro­priation in the first year from the state treasury, on the 
certification of the chairman of the commission and upon the 
audit and warrant of the comptroller. 
{b) The chairperson of the commission shall estimate prior to the start of each state fiscal year the total costs and ex­penses of the commission, including the compensation and exPenses of its officers, agents, and employees, including the cost of fringe benefits required or allowed to be paid by the state for the -personnel of the commission, and including the costs and expenses for research pertaining to particular utility problems and all other items of maintenance and operation expenses and all other direct and indirect costs. Based on such estimate, the chairman shall determine the amount to be paid by each public utility and a bill shall be rendered to each public utility. 
(c) 
The bill for each public utility shall be rendered on or before September 1 of each year beginning September 1, 197 , and shall be for the amount equal to the product of the estimated costs and expenses of conducting the total operations of the commission during the ensuing state fiscal year multiplied by the proportion which compares the gross operating revenues for that utility derived from intrastate utility operations in the last preceding calendar year, or other 12-month period as determined by the commission, to the total of the gross operating revenues de­rived from intrastate utility operations for all utilities in the state which are assessed under this article over the same period. 

(d) 
The amount of such bill so rendered shall be paid by such public utility to the commission on or before November l; provided, however, that a utility may elect to make partial payments · for such costs and expenses on a quarterly basis. .Each such partial payment shall be 'a sum equal to 25 percent of t}1e estimate of costs and expenses to be assessed against such utility rindEfr ·the provisions of this article. During the course o~ any state fiscal year,. the chairperson -may increase or decr·ease the estimate of costs and expenses of the commission. In such. case, revised bills shall be sent to each public utility which has 


298 

•elected to make partial payments, and such increase or decrease shall be equally apportioned against the remaining payments for such fiscal year. On or before October 15 of each year, the chairperson shall compute the actual costs and expenses of the. commission for the preceding· state fiscal year and shall, on or before November 15, send to each public utility affected a state­ment setting forth the amount due and payable by, or the amount st~nding to the credit of, the utility. 
(e) The total amount which may be charged to any public utility under authority of this article for any state fiscal year shall not exceed one percent of such public utility's gross operating revenues derived from intrastate utility operations in the last preceding fiscal year. Where pursuant to this subsection, 
' costs are incurred within any fiscal year, which are in excess of one percent of such gross operating revenues, the excess costs· shall not be chargeable as part of the remainder under subsection 
(2) but shall be paid out of the general appropriation to the 
public service commission. Nothing herein shall prevent the 
commission from rendering bills in one calendar year for costs 
incurred with the previous year. 

Section ·13. 03. Refusal to Pay Bills of the Commission. ·rf .any 
public ut~lity against which a bill has been rendered within 30 
days after the rendering of such bill shall (a) neglect or 
refuse to pay the same, or (b) shall faii to file objections to 
said bill with the commission, as provided hereinafter,· it shall 
be the duty of the conunission forthwith to transmit to the state 
treasurer a certified copy of said bill, together with notice of 
neglect or refusal to pay said bill, and on the same day the 
commission shall mail by registered mail to the public utility 
against which said bill has been rendered a copy of said notice 
which it has transmitted to the state treasurer. Within 10 days 
after the receipt of such notice and certified copy of such bill 
·the state treasurer shall proceed forthwith to levy' the amount 
stated on such bill to be due, with interest, by distress and 
sale of any goods and chattels, including stocks, securities, bank 
accounts, evidences of debt, and accounts receiyable belonging to 
such delinquent public utility. 
299 

Section 13.04. Objections to Bills of the Commission. (a) Within 30 days after the date of the mailing of any bill the public util­ity against which such bill has been rendered may file with the commission objections setting out in detail the grounds upon which said objector regards said bill to be excessive, erroneous, unlawful or invalid. The commission, after notice to the public utility shall proceed forthwith to hold a hearing upon such objec­tions. If after such hearing the commission finds any part of said bill to be excessive, erroneous, unlawful or invalid it shall rec6rd its findings upon its minutes and transmit to the objector by registered mail an amended bill, in accordance with such findings. Such amended bill shall have in all ways the same force under this section as an original bill. 
(b) 
If after such hearing, the cononission finds the bill un­lawful or invalid it shall notify the public utility by registered mail of such determination, in such a case said bill shall be deemed null and void. 

(c) 
If after such hearing, the commission finds that the bill as rendered is neither excessive, erroneous, unlawful or invalid either in whole or in part it shall record such findings upon its minutes, and transmit to the public utility by registered mail notice of such finding. 

(d) 
If any bill against which objections have been filed shall not be paid within ten days after notice of a finding that such objections have been overruled and disallowed by the commission has been mailed to the public utility as herein provided, the commission shall give notice of such delinquency to the state treasurer and to the objector, in the manner provided in section 


13.03. The state treasurer shall then proceed to collect the amount of said bill as provided in section 13.03. If an amended bill is not paid within ten days after a copy thereof is mailed to the objector by registered mail, the cononission shall notify the state treasurer and the objector as in the case of delinquency in the payment of the original bill. The state treasurer shall then proceed to collect the amount of said bill as provided in the case of an original bill. 
Section 13.05. Primar Incontestibilit of Bill of the Commission. 
a) No suit or proceeding shall be maintained in any court for the purpose of restraining or in any way delaying the collection or payment of any bill rendered under this section. Every public utility shall pay the amount thereof, and after such payment may in the manner herein provided, at any time within two years from the date the payment was made, sue in an action at law to recover the amount paid. Upon the ground that said assessment was excessive, erroneous, unlawful or invalid in whole or in part. If it is final­ly determined in such action that any part of the bill for which payment was made was excessive, erroneous, unlawful or invalid, the state treasurer shall make a refund to the claimant as directed by the court, which shall be charged to the appropriations to the commission. 
300 
(b) No action for recovery of any amount paid pursuant to this section shall be maintained in any court unless objections have been filed with the conunission as herein provided. In any action for recovery of any payments made under this section the claimant shall be entitled to raise every relevant issue of law, but the commission's findings of fact -made pursuant to 
· this section shall be prima facie evidence 0f the facts therein stated. · 
(c) The following shall be deemed to be findings of fact of the conunission, within the meaning of this section: (1) Deter­minations of fact expressed in bills rendered pursuant to this section: (2) determinations of fact set out in those minutes of the conunission which record the action of the conunission . in 
.passing u~on said bills, and in passing upon objections thereto. 
Section 13.06. Other Remedies and Procedures. The procedure by this. section providing for determining the lawfulness of bills and the recovery of payi:nents made pursuant to such bills shall be exclusive ·of all ·other remedies and procedures. 
Section 13.07. Initial Appropriations. The legislature shall 
appropriate the necessary amount for the organization and other 
initial expenses of the commission for the period September 1, 
197 to August 31, 197 • 
301 

Section 13.01 
Pro 
With the growth of utility services, the nmnber of ~ompanies, and the amount of resources these companies can invest in a single rate case, the work load and responsibility for state commissions has dramatically increased. 
Yet despite the link which exists between the adequacy of commission financing and the effectiveness of regulation, most commissions operate under very limited budgets. Funds to support utility regulation typically recei"ve low prior.;.. ity despite the indirect return on investment. 
Assessments are often favored for four reasons: 1) They remove commissions from complete reliance on general taxation and the whims of legislatures, 2) they charge the costs of regulation to the beneficiaries, be they utility stockholders or consumers, 3) they accommodate the ex­pansion or contraction of commissioner's budgets as more or less regulation is under­taken, and 4) they provide the utility with an incentive to avoid undue proceedings since it must stand the cost. 
Records open to the public reinforces the principle of accessibility of information, whether to the consUil,ler, to the utility, or to the commission. This helps to assure the over­sight of all concerned parties. 
Con 
Open records allow for acute scrutiny by the public and by utility interests of the commission's computations, possibly inviting dilatory disputes simply to consume the time and energy of the commis­sion. 
One pitfall to the assess­ment method, is that in some states, statutes have provided that any excess funds coming from assessments be put into the general revenue. 
Section 13.01 & 13.02 
Con 
Alternatives to the assess­
ment method of funding the commission are: 1) appropria­tions, which is the most common method nation-wide, with fif­teen states receiving all of their general funds frOilllegis­lative appropriations; and 2) the charging of fees, sell­ing of license, or otherwise charging for specific regula­tions. Since 1930, commission funds have come increasingly from fees and charges imposed on the companies under their jurisdiction. Forty-one commissions receive a portion or all of their general funds in this manner. 
Section 13.02 -13.06 
Pro 
These sections provide 
the commissi·on with detailed 
and substantive authorization 
for the billing, collection, 
and enforcement procedures 
for reimbursement of its 
costs. 
The .maximum amount of the 
fee has been determined to. be 
one percent of gross operating .revenue, a relatively high 
percent, to assure quality 
consistent with the intent of 
this Act. 
The benefit of quarterly 
payments is that liquid assets 
of· the public utilities are 
not drained at one time. 

The act further provides 
that, in the event that costs 
exceed this one percent, the 
conunission shall draw the 
difference from the generai 
land fund. 
This disallows the transfer 
of costs to another year and . 
disallows an upper limit on the 
costs of commission functions. 
The Act also provides for specific and defininte enforce­ment procedures and hearings procequres. 
Section 13.07 
Pro 
The appropriation allows the commission to begin its organizati.on and operations with a minimum of budgetary inconvenience and hopefully with a contribution to its initial strength. 
303 
Con 
The procedures so speci­fically delineated may prove to be. inflex.i,ble and constrain­ing to the conunission in its actual operation. 
An administrative objec­tion to the. asse~sment is the adjustment of bills through­out the fiscal period as esti­mations of costs to the commis­sion are readjusted. This necessitates more recordkeeping on the parts of both the util­ity company and the commission than would have been required in the appropriations of fee or license method. 
Lastly, of course, is the financial objection to the one percent maximum assessment fee designate~ and to the dis­allowance of a specific upper limit on the budget of the commission. 
Con 
This amount will be an initial distress to the tax­payers rather than placing the burden upon the public utilitier. 
ARTICLE XIV. MISCELLANEOUS PROVISIONS 
Section 14.01. Schedule for Transition and Assumption of 
Regulatory Authority. (a) The conunission shall assume juris­
diction and all powers and duties of regulation under this Act 
on January 1, 197 except as provided in Subsection (b) of 
this section. 
(b) The commission shall assume jurisdiction over rates and service of the respective utilities as defined in the refer­enced sections of this Act according to the following schedule: 
(1) 	
Section (telephone utilities): January 1, 197 

(2) 	
Section (electric utilities): January 1, 197 

(3) 	
Section (gas utilities): January 1, 197 

(4) 	
Sections and {water, sewage, ands~~ utilities): July 1, 197 

(S) 	
Section (cable television): January 1, 197 


Section 14.02. Effective date. This Act shall become effective on September 1 , 197 , and the commission shall thereupon begin 
organization and the gathering of information as provided in 
this Act. 
Section 14.03. Severability. If any provision of this Act or the 
application thereof to any person or circumstance is heFd invalid, such invalidity shall not affect other provisions or applications of the Act which can be given effect without the invalid provision or application, and to this end the provisions of this Act are 
declared to be severable. 
Sect~on 14.04. Interpretation. This Act shall be construed 
liberally to promote the effectiveness and efficiency of regula­
tion of public utilities, to the extent that such construction preserves the validity of this Act and its provision. The pro­visions of this Act shall be construed to apply so as not to con­flict with any authority of the United States. 
Section 14.05. Repealer. All laws of the State of Texas and parts of such laws in conflict with this Act, are repealed in accordance with the transition schedule in Section 14.01 of this Act. 
Section 14.06. Applicability. (a) The provisions of this Act shall be applicable and take precedence notwithstanding any other provision of law or conflict therewith. 
(b) This Act does not apply to rates, services and facili­ties to the extent that they are regulatea or are subject to regulation by any agency. of the federal go:vernment. 
Section 14.07. Emer<J'ency. The importance of this legislation and the crowded condition of the c.alendar in both houses. creates an emergency and. an imperative public necessity tha,t the· consti­tutional rule requiring bills to be read on three several aays in each house be suspended, and the rule is hereby suspended.· 
305 

Section 14.01 
Pro 
The gradual implementa­tion of this Act, provides for orderly handling of regulatory duties in the initial stages of the commission's development. This also allows for the gradual development of expertise by the commission. 
Such structured implemen­tation does not overwhelm the commission at its inception, yet provides definite dates by which assumption of these functions is to be realized. 
The order in which the regu­lation of the various utilities is to be conunenced was determined by priorities of conswner relief from present unregulated condi­tions. 
Section 14.02 
Pro 
A clause regarding the effective date is used in in­stances when it is desirable to provide for an effective date other than 90 days after adjourn­ment of the session, or for an earlier date other than 90 days after adjournment of the session if the act is passed as an emer­gency, which this one is. 
In this case, Sept. 1, 197 was chosen to allow the conunis­sion to begin its organization as soon as possible in order to be prepared to assume its regu­latory functions of the telephone utilities on January 1, 197 • 
Mention of this date may be included in the caption if desired. 
306 
Con 
As indicated by the dates herein, final comprehensive · regulation will not be under­taken until January 1, 197 . 
Con 
By not allowing the gas regulatory function to be im­plemented with the rest of the regulatory functions the commis­sion loses the already developed expertise of the Railroad Conunission staff. 
Section 14.03 
Pro 
The severability clause in sn unnecessary provision in simple bills but is advisable in longer bills such as this one if particular provisions are likely to raise constitu­tional questions. This severability clause allows nullification of sections of this Act without the possibility of voiding the entire act. 
Section 14.05 
Pro 
The repealing section is used when the bill is intended to replace or supercede other existing statutes. Of the two types of repealing sections (general and specific) the general type was chosen so as to be as inclusive as possible. 
Section 14.06 
Con 
There are two alterna­tives to general repeal. One is the amending of the offend­ing laws thus negating the need for any repeal and another is the specific repeal. While this process would involve considerable complexity it would be more comprehensive. 
The other alternative is the specific repeal of all laws in conflict with this one. This would have been techni­cally as inclusive as the specific repeal. 
Con 
This section should list any laws which this bill would take precedence over to avoid any legal questions and clearly express legislative intent. 
307 

Section 14.07 
Pro 
The emergency clause serves as a basis for an earlier effective date than 90 days and for suspension of the Constitutional rule (Article III) that requires bills to be read on 3 different days in each House. 
308