Glenn E. JohnsonKelly Hart & Hallman LLP

301 Congress Ave.Suite 2000

Austin, Texas 78701(512) 495-6423

glenn.johnson@kellyhart.com

Summary of Railroad Commission Sunset Process The Railroad Commission issued its report to the Sunset Commission in September 2009. The Sunset Commission recommended establishing the Texas Oil and Gas Commission,

governed by a single, elected Commissioner, to assume the regulatory role currently served by the Railroad Commission.

Senate Bill 655, as passed by the Senate, included all of the Sunset Commission’s recommendations, as well as a provision to suggest that the first Governor-appointed Oil and Gas Commissioner be the last elected Railroad Commissioner.

The House amended S.B. 655, maintaining many of the Sunset Commission’s recommendations, but significantly modifying the provisions relating to governance. Notably, the House altered the bill to maintain a three-member, elected commission and establish an elected chairman. The House also removed the provisions in the bill that transferred certain hearings to SOAH, and added a number of provisions, including limiting campaign contributions and requiring a commissioner to resign before seeking another elected office.

The bill went to conference committee, but the committee did not come to an agreement regarding the bill’s provisions. As a result, the Legislature did not pass S.B. 655.

Senate Bill 652, 82nd Legislature, Regular Session, continues the agency until 2013, and provided for the Sunset Commission to re-examine the Railroad Commission in full and make recommendations to the 83rd Legislature regarding its continuation and functions.

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MICHAEL L. WILLIAMS (succeeded Carole Keeton Rylander)

January 4, 1999 to March 31, 2011

VICTOR G. CARRILLO(succeeded Tony Garza)

February 19, 2003 to January 3, 2011

ELIZABETH AMES JONES (succeeded Charles R. Matthews)

February 9, 2005 to February 28, 2012

DAVID PORTER (succeeded Victor G. Carrillo)

January 5, 2011 to Present

BARRY T. SMITHERMAN(appointed by Gov. Perry to succeed Michael L. Williams)

July 8, 2011 to Present

BUDDY GARCIA(appointed by Gov. Perry to succeed Elizabeth Ames Jones)

April 16, 2012 to Present

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Recent Commissioner Changes

Tara Partners, Ltd.v.Centerpoint Energy Resources Corporation

Court of Appeals of Texas,Houston (1st Dist.)April 19, 2012

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Tara Partners sued “CenterPoint Energy” for breach of contract, alleging

CenterPoint billed Tara Partners for more natural gas than it actually used.

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Tara Partners Case

Basis of Suit

CenterPoint plea to the jurisdiction was that the trial court lacked jurisdiction

because Texas Utilities Code established a regulatory scheme that confers exclusive jurisdiction for claims

regarding rate disputes and refunds for overcharges on the Railroad Commission

or on the municipality involved.

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Plea to the Jurisdiction

Tara Partners Case

Tara Partners attempted to file a complaint with the Railroad

Commission, which dismissed the complaint.

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Railroad Commission Action on Complaint

Tara Partners Case

Railroad Commission advised that “consumer bill complaints [are handled] through the Market Oversight Section's

consumer complaint function,” but it concluded, “Since the dispute is the subject of a lawsuit, the matter has

proceeded beyond this Division's ability to facilitate a resolution.”

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Railroad Commission Action on Complaint

Tara Partners Case

The statutory description of GURA as “comprehensive” demonstrates

Legislature's intent that GURA encompass all or virtually all pertinent considerations involving gas utilities operating in Texas.

Sections 102.001 and 103.001 grant “exclusive original jurisdiction” over the

rates and services to the municipality or to the Railroad Commission when no

municipality is involved.

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Legislative Intent

Tara Partners Case

Tara Partners' claim that CenterPoint incorrectly charged for natural gas falls under the statutory definitions of “rate”

or “service” over which the municipality or Railroad Commission has exclusive original jurisdiction.

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Claim is a Rate Issue

Tara Partners Case

Tara Partners was required to exhaust all administrative remedies before

seeking review of the agency's action in the district court.

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Administrative Remedies not Exhausted

Tara Partners Case

Tara Partners argued that GURA does not apply to its private contract claim.

However, the plain language of GURA defines a “rate” over which the

municipality or Railroad Commission has exclusive original jurisdiction as including

a “contract affecting the compensation, tariff, charge, fare, toll, rental, or

classification” charged by a gas utility.

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Holding: Suit on gas utility charges is a rate and not a contract matter

Tara Partners Case

Atmos Energy Corporationv.The Cities of Allen, et al., and Railroad Commission of Texas

Supreme Court of Texas,353 S.W.3d 156 (MRH filed)November 18, 2011

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Cities filed declaratory judgment action against Railroad Commission, seeking declaration

that rule promulgated by Commission governing gas utilities' filings for interim rate adjustments under Gas Utility Regulatory Act (GURA) was void to extent it prohibited cities from intervening and obtaining an evidentiary

hearing on appeals to the Commission from cities' denials of filings. Gas utilities

intervened in support of validity of rule.

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Atmos Energy Case

Declaration Sought on Validity of GRIP Rule

In 2003, the Texas Legislature amended the Gas Utility Regulatory Act (GURA) to allow gas utilities an opportunity to recover capital

investments in Texas' gas pipeline infrastructure made during the interim period

between rate cases. The amendment and rules became known as the Gas Reliability

Infrastructure Program (GRIP).

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Statutory Background

Atmos Energy Case

The GRIP statute permits a gas utility to file a new tariff adjusting its base rates

to recover the costs of new capital investment made in the preceding

calendar year, without the necessity of filing a rate case.

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Statutory Background

Atmos Energy Case

After passage of the GRIP statute, Atmos Energy Corporation (“Atmos”) filed interim rate adjustments, or GRIP

filings, with the Commission and several municipalities to charge adjusted rates. The Commission approved Atmos' GRIP

filings, but numerous municipalities denied Atmos' filings.

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Filing of Atmos

Atmos Energy Case

Atmos appealed the Cities' denials to the Commission.

Cities sought to intervene in the appeals and to require the Commission to hold contested case proceedings in the appeals.

Commission denied interventions and requests for evidentiary hearings on the ground that neither the GRIP statute nor the GRIP rule authorizes contested case proceedings in GRIP filings.

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Appeal to Railroad Commission

Atmos Energy Case

Because 102.001(b) purports to give the Commission “exclusive appellate

jurisdiction” to review the matter and the Cities could not appeal the Commission's

rulings because they were not parties, the Cities did not believe they had a way

to appeal the Commission's rulings.

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Declaratory Judgment

Atmos Energy Case

Fifty-one Texas cities then pursued a declaratory judgment action in district

court against the Commission, challenging the validity of Commission

Rule 7.7101, the GRIP rule.

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Declaratory Judgment Action

Atmos Energy Case

The trial court issued a final judgment denying the Cities' request for declaratory relief, but issued findings of fact and conclusions of law stating that subsections 7.7101(g)(2)(B) and (g)(2)(C) of the Commission's GRIP rule were void.

The trial court held that the Legislature did not intend to authorize municipalities to conduct a substantive review of GRIP filings, only a “ministerial review of the compliance with basic requirements.”

The trial court held that the Cities have no authority to deny utilities' interim filings under section 104.301(a).

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Trial Court

Atmos Energy Case

The trial court also held that a utility does not have the authority to appeal an

improper denial to the Railroad Commission because the Legislature did not provide an

appellate mechanism in the GRIP Amendment (section 104.301(a)), and the Railroad Commission does not have the authority to apply its Rule 7.7101 to the

action of a city.

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Trial Court

Atmos Energy Case

The court of appeals affirmed the judgment of the trial court, holding that a ministerial

review for compliance “is all that is required.” The court of appeals also affirmed that GRIP rule subsections 7.7101(g)(2)(B) and (g)(2)(C) are only void to the extent the Commission attempts to reject a GRIP filing over which it holds regulatory authority for any reason other than failure to comply with

the statutory requirements.

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Court of Appeals

Atmos Energy Case

The court of appeals also held that appellate review by the Commission is “not available when a municipality denies a GRIP filing after conducting a ministerial review for

compliance with the statute” because there is “no indication that a municipality's denial

of a GRIP filing for failure to comply with the statutory requirements is considered ‘an

order or ordinance of a municipality’ as contemplated by section 102.001.”

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Court of Appeals

Atmos Energy Case

1) Commission had appellate jurisdiction over municipal denials of gas utilities' requests for interim rate increases, and

2) Commission's appellate jurisdiction was limited to review of utilities' filings for compliance with GURA and applicable administrative rule.

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Supreme Court

Atmos Energy Case

Section 102.001(b) of the Texas Utilities Code provides: “The railroad commission

has exclusive appellate jurisdiction to review an order or ordinance of a

municipality exercising exclusive original jurisdiction as provided by this subtitle.” This grant of appellate authority clearly

gives the Commission jurisdiction to review the Cities' denials of the interim

rate increases.

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Atmos Energy Case

Supreme Court

The view that the Legislature had withheld appellate jurisdiction in this

case from the Commission could frustrate GRIP's purpose. The

Legislature designed GRIP to incentivize gas utilities to expand infrastructure

and empowered them to file interim rate adjustments in between rate cases.

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Atmos Energy Case

Supreme Court

The Legislature intended a streamlined process, and an evidentiary review beyond a compliance

check could frustrate that purpose.

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Atmos Energy Case

Supreme Court

Legislature implemented protections for the ratepayers when a utility makes a

GRIP filing. A utility may not avail itself of the interim rate adjustment unless

that utility brought a rate case pursuant to Chapter 104, Subchapter C, within the two years prior to its GRIP filing.

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Atmos Energy Case

Supreme Court

A utility that makes interim rate adjustments is also required to undergo another rate case within five years and six months after implementing its first

amended tariff or rate schedule.

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Atmos Energy Case

Supreme Court

A gas utility seeking to implement an interim rate adjustment must

electronically file with the Commission an annual earnings monitoring report as

part of the application describing the investment projects completed and

placed in service.

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Atmos Energy Case

Supreme Court

Any amounts collected as interim rate adjustments are subject to a full refund

to the extent the interim recovery of infrastructure investments are later

disallowed at the next rate case.

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Atmos Energy Case

Supreme Court

Under GURA the Commission or a municipality retains authority to institute a proceeding, either on its own or at the complaint of a party, to determine if a utility's rates are unreasonable or in

violation of the law. A municipality could file a rate case on its own motion

whenever it perceives the need after a GRIP filing.

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Atmos Energy Case

Supreme Court

We conclude that the Railroad Commission has appellate jurisdiction under section 102.001(b) of the

Texas Utilities Code over municipalities' orders or ordinances concerning interim rate adjustments, limited to the review of the Utilities' filings for

compliance with the GRIP statute, section 104.301, and the GRIP rule, section 7.7101 of 16 Texas

Administrative Code. This review involves examination of the statutory requirements for

processing a utility's application to amend its tariff or rate schedule under the GRIP statute and rule, and

whether the GRIP filing satisfies those requirements. We affirm the judgment of the court of appeals.

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Atmos Energy Case

Supreme Court

The Railroad Commission of Texasv.Texas Coast Utilities Coalition

Court of Appeals of Texas, Austin357 S.W.3d 731October 27, 2011Motion for Rehearing OverruledDecember 21, 2011

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Whether the Legislature's statutory delegation of authority to the Railroad Commission to

regulate the “rates” of gas utilities empowers it to approve or impose a rate schedule that includes a mechanism for annually adjusting

customer charges based on the utility's actual operating expenses, return on investment,

and franchise tax payments without the need or requirement to initiate a subsequent rate

proceeding.

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Texas Coast Case

Issue

Disagreeing with the Commission's view of its authority, the district court reversed

the Commission's order approving CenterPoint's rate schedule. CenterPoint

and the Railroad Commission appeal.

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District Court

Texas Coast Case

Commission findings relating to expenses paid to affiliated companies were inadequate and that it had exceeded its authority in adopting the COSA clause. The “Commission did not

have statutory authority to impose [the COSA] on the [TCUC] cities with original

jurisdiction ... [or] ... to adopt the COSA in [the environs].”

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District Court

Texas Coast Case

CenterPoint and the Railroad Commission each brought a single issue asserting

that the district court erred in concluding that the Commission lacked authority to adopt or impose the COSA clause within

either the environs or the TCUC municipalities.

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Court of Appeals

Texas Coast Case

With the express goal of reducing volatility of cost risks and the need or impetus for “full-blown” rate proceedings in the event such

risks came to fruition, the Railroad Commission approved, as part of

CenterPoint's rate schedule, a version of a “cost-of-service-adjustment” (COSA) rate schedule or clause that CenterPoint had

requested.

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Court of Appeals

Texas Coast Case

While we acknowledged that GURA does not explicitly mention PGA clauses, we

concluded that the act's broad definition of “rate” nonetheless

encompassed and contemplated this sort of adjustment mechanism.

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Court of Appeals

Texas Coast Case

We agree with appellants that GURA section 104.001—“The [R]ailroad

[C]ommission is vested with all the authority and power of this state to

ensure compliance with the obligations of gas utilities in [GURA]”—represents an extraordinarily broad delegation of

authority to the Commission in regard to rate regulation.

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Court of Appeals

Texas Coast Case

This discretion provides sufficient flexibility to enable the Commission to

effectuate the ultimate goal of “just and reasonable” rates through the use of

variable or formula rates and not merely fixed charges.

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Court of Appeals

Texas Coast Case

The COSA clause would, all other things being equal, come within GURA's definition of “rate,” as it is “a rule,

regulation, [or] practice ... affecting the compensation, tariff, charge, [or] fare”

imposed by CenterPoint.

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Court of Appeals

Texas Coast Case

We conclude that the Railroad Commission's delegated authority under GURA encompasses the power to adopt or impose the COSA clause in both the Texas Coastal Division environs and the

TCUC municipalities. We sustain appellants' sole issue on appeal.

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Court of Appeals

Texas Coast Case

Rate Treatment of Pension and Post-Employment Benefit Costs

Proposed Amendment to16 Tex. Admin.Code § 7.501

November 11, 2011

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The Railroad Commission of Texas (Commission) proposed to amend §7.501 to

implement a new section of the Texas Utilities Code, §104.059, which purportedly

required gas utilities to establish reserve accounts to track changes in pension and

post-employment benefit costs, and required the Commission to allow recovery

of those costs as the Commission deems reasonable and necessary.

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Rule 7.501

Rulemaking Proposal

The effect of the rule was to change the treatment of certain pension and post-

employment benefit costs from a test year expense to an accrual-accounting-based

investment. Heretofore, pension and post-employment benefit costs were treated as a

test year expense, rather than as an amortized investment.

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Rulemaking Proposal

Rule 7.501

The Commission proposes new subsection (b) to be effective on and after January 1, 2013, one year after the establishment of reserve accounts on January 1, 2012, as

required by Texas Utilities Code, §104.059. Proposed new subsection (b)

authorizes a gas utility to request recovery of pension and post-employment benefits

costs in the context of a general rate proceeding.

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Rulemaking Proposal

Rule 7.501

Atmos Energy Corporation claimed that the statute gave a simple straightforward and discretionary process to establish reserve accounts to track changes in pension and post-employment benefit costs. However, the proposed rule conflicts with the plain language of the statute and imposes significant and unnecessary compliance costs ultimately to be borne by the customers.

The provisions of the statute are discretionary, yet the rule imposes mandatory requirements to establish reserve accounts as a prerequisite to recovery of any pension or post-employment benefit costs.

The proposed rule establishes disallowances not imposed or contemplated under the statute.

The proposed rule impermissibly limits recovery of pension and post-employment benefit costs to general rate proceedings.

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Atmos Energy Comments

Rule 7.501

The rule erroneously claims that the statute eliminates the need for gas utilities to recover test year expenses.

The proposed rule would increase rate case expenses.The proposed rule creates inconsistencies among Atmos’

utility operating divisions with a mandated amortization period that is based on timing between rate case filings.

The rule establishes a “best available evidence” standard that is undefined

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Atmos Energy Comments cont’d

Rule 7.501

Centerpoint Energy CommentsThe proposed amendments make statutory provisions

mandatory.The rule impermissibly limits consideration of reserve

accounts to proceedings after January 1, 2013.The rule required utilities to record only test year amounts

and reserve accounts that is contrary to the statute.The rule requirement that affidavits and actuarial opinions is

contrary to the statute and unnecessary.The rule impermissibly requires establishing separate reserve

accounts for post-employment benefits as of January 1, 2012.The rule establishes a factor for determining reasonableness

and necessity not supported by the statute.

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Rule 7.501

Texas Gas Service CommentsDisagreed with the rule mandating that a natural gas utility

establish reserve accounts.Disagreed with the rule requiring reserve accounts be

established by January 1, 2012.The rule requirement for attestation would increase rate

case expenses.Disagreed that the rule should set out items that will be

excluded from recovery through rates.The term “test year amounts” is ambiguous.

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Rule 7.501

Comments of Atmos Cities Steering Committee and City of Houston

The cities disagreed with the rule in that it gave the Commission the right to determine matters using best available evidence if the information in a general rate proceeding is insufficient.

The cities disagreed that the cap on the pension and post-employment benefit cost recovery should be capped at $500,000 for individuals rather than its suggested amount of $200,000.

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Rule 7.501

Proposed amended §7.501, published in the November 11, 2011, issue of the Texas

Register (36 TexReg 7631), is withdrawn. The agency failed to adopt the proposal within six

months of publication. (See Government Code, §3001.027, and 1 TAC §91.38(d).

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Railroad Commission Response

Rule 7.501

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Conclusion

Uncertainty at the Railroad Commission due to Sunset review and adjustment of new commissioners will continue.

The Railroad Commission has broad discretion in fashioning rates.

The Railroad Commission staff efforts to expand upon legislative enactments in the face of industry opposition were not acceptable to the Commissioners.