Public Utility Commission of Texas // City of Denton Operating as Denton Municipal Electric v. City of Denton Operating as Denton Municipal Electric // Cross-Appellee Public Utility Commission of Texas

ACCEPTED
15-25-00018-CV
FIFTEENTH COURT OF APPEALS
AUSTIN, TEXAS
8/25/2025 3:02 PM
NO. 15-25-00018-CV CHRISTOPHER A. PRINE
CLERK
IN THE COURT OF APPEALS FILED IN
15th COURT OF APPEALS
FOR THE FIFTEENTH JUDICIAL DISTRICTAUSTIN, TEXAS
AT AUSTIN, TEXAS 8/25/2025 3:02:07 PM
CHRISTOPHER A. PRINE
Clerk
PUBLIC UTILITY COMMISSION OF TEXAS,
Appellant/Cross-Appellee,

v.

CITY OF DENTON, OPERATING AS
DENTON MUNICIPAL ELECTRIC,
Appellee/Cross-Appellant.

On Appeal from the 459th Judicial Court,
Travis County, Texas
Cause No. D-1-GN-23-008974

REPLY BRIEF FOR CROSS-APPELLANT CITY OF DENTON

Jose E. de la Fuente
State Bar No. 00793605
Gabrielle C. Smith
State Bar No. 24093172
Jamie L. Mauldin
State Bar No. 24065694
Roslyn M. Warner
State Bar No. 24117520
LLOYD GOSSELINK
ROCHELLE &TOWNSEND, P.C.
816 Congress Avenue, Suite 1900
Austin, Texas 78701
(512) 322-5800
(512) 472-0532 (Fax)

ATTORNEYS FOR CROSS-APPELLANT
ORAL ARGUMENT REQUESTED
TABLE OF CONTENTS

TABLE OF CONTENTS ........................................................................... 2
INDEX OF AUTHORITIES ...................................................................... 4
GLOSSARY OF TERMS ........................................................................... 5
SUMMARY OF REPLY ARGUMENTS.................................................... 6
ARGUMENT AND AUTHORITIES ....................................................... 10
A. The Commission relied on an arbitrary ad hoc
standard to disallow recovery of DME’s 6% ROI
GFT component. .................................................................... 10
1. The Commission used a baseless standard to
justify the exclusion of DME’s 6% ROI GFT
component. ................................................................... 11
2. The Commission’s decision interferes with a
clear and established statutory right. ......................... 16
3. The Commission contravened Texas
precedent. ..................................................................... 18
B. The ROI GFT component is an unavoidable
expense DME is required to pay to the City......................... 21
C. The Commission disregarded the range of
reasonableness for the ROI GFT component
supported in the record. ........................................................ 24
1. The record supported a minimum ROI GFT
component of 3.5%........................................................ 25
2. The Commission’s restriction is inconsistent
with the fees other utilities pay to the City. ............... 27
D. DME’s appeal of the Commission’s order of an
interim rate proceeding is appropriate because the
capable-of-repetition-yet-evading-review
exception to mootness applies. .............................................. 29
CONCLUSION AND PRAYER ............................................................... 31

2
CERTIFICATE OF COMPLIANCE ........................................................ 34
INDEX OF APPENDICES ...................................................................... 35

3
INDEX OF AUTHORITIES
Cases Page(s)

Blum v. Lanier,
997 S.W.2d 259 (Tex. 1999) ................................................................ 30

Catholic Leadership Coal. of Tex. v. Reisman,
764 F.3d 409 (5th Cir. 2014) ............................................................... 30

City of Frisco v. Tex. Water Rights Comm’n),
579 S.W.2d 66 (Tex. App.—Austin 1979, writ ref’d n.r.e.)................. 13

Heckman v. Williamson County,
369 S.W.3d 163 (Tex. 2012) ................................................................ 30

San Antonio Indep. Sch. Dist. v. City of San Antonio,
550 S.W.2d 262 (Tex. 1977) .............................................. 17, 18, 19, 20

Tex. State Bd. of Pharm. v. Witcher,
447 S.W.3d 520 (Tex. App.—Austin 2014, pet. denied.) .................... 14

Statutes

Tex. Gov’t Code § 1502.057 ..................................................................... 22

Tex. Gov’t Code § 1502.059 ............................................................... 16, 17

Regulations

16 Tex. Admin. Code § 25.192 ................................................................. 23

4
GLOSSARY OF TERMS

Amended Application Amended Application of Denton Municipal
Electric to Change Rates for Wholesale
Transmission Service, PUC Docket No.
52715, December 1, 2022

Application Application of Denton Municipal Electric to
Change Rates for Wholesale Transmission
Service, PUC Docket No. 52715, November 1,
2021

AR Administrative Record

City City of Denton

Commission or PUC Public Utility Commission of Texas

DME Denton Municipal Electric

Final Order Order in PUC Docket No. 52715,
October 12, 2023

GFT General Fund Transfer

MOU Municipally Owned Utility

ROI Return on Investment

TCOS Transmission Cost of Service

5
SUMMARY OF REPLY ARGUMENTS

No rule, law, or Public Utility Commission of Texas precedent

authorizes the Commission to limit the inclusion of a reasonable General

Fund Transfer in Transmission Cost of Service rates. (RR at Ex. 1, AR

118 at 18:17–19.) The Commission’s only basis for prohibiting recovery

of the full amount of Denton Municipal Electric’s GFT is a novel, made-

up standard by which the Commission would unilaterally grant itself the

power to dictate the purpose of a City-mandated payment. But DME’s

full GFT is a required and unavoidable obligation, like any other routine

expense a utility recovers in rates. While the Commission may have the

discretion to evaluate whether expense amounts are appropriate, the

Commission cannot interfere with the City’s statutory right to require a

transfer for any purpose.

Consistent with the City’s designated purpose for the 6% Return on

Investment component of DME’s GFT, Texas law recognizes a city’s right

to earn a profit from its ownership and operation of a utility. Upholding

the Commission’s novel, arbitrary, and indeed nowhere-to-be-found

standard of requiring that each GFT component be tied to specific and

actual transmission costs would vitiate this standard and result in an

6
unrealistic and unjust result—i.e., unlike all other utilities, municipally-

owned utilities cannot recover a statutorily-required expense and thus,

must operate at a loss. The Commission’s decision conflicts with

unrebutted record evidence proving that any other utility operating

within the City would pay (and recover in rates, of course) a greater fee

to the City than the 5% franchise fee DME is limited to including in its

TCOS. Limiting DME’s ROI GFT component to 0% (that is, excluding

any GFT component above the 5% franchise fee component) is similarly

misaligned with the range substantiated in the record, which supports a

minimum ROI GFT component of 3.5%, an amount the Commission

approved in DME’s previous TCOS rate.

The Commission has a long history of properly deferring to a City’s

reasonable GFT amount as an expense within TCOS rates. The

Commission’s application of its own rules and in light of the statutory

grant of power to cities to set a GFT for any purpose has always been to

allow inclusion of a GFT within the “other associated taxes” category

under the applicable TCOS provision. The Commission has taken this

approach to approve inclusion in transmission rates of a total GFT as

high as 14%. Never before has the Commission subjected any other

7
MOU’s request for GFT recovery to the standard it claims to have relied

on in this case. There is a reason it hasn’t done so: the Commission can

trace this unprecedented “standard” only to the comments of a single

commissioner in an open meeting discussion that occurred after DME

had already filed its Application and Amended Application. The

“standard” discussed then, and upon which the Commission now relies,

has never been applied in any Commission decision and is not law.

The Commission’s made-up standard is a post-hoc pretext to try to

conceal the impermissible criteria actually underlying the decision—the

Commission wanted to penalize DME for alleged “overearning.” The

Commission on the one hand defends its consideration of this arbitrary

extra-legal factor by claiming it was only the “origin” of the proceeding

and not the basis for any of the ultimate conclusions, yet on the other

hand, in its briefing in this very appeal, repeatedly references that

contention and purpose to support its ultimate decision. The Commission

not only makes no secret of the fact that making up for purported past

“overearning” was a factor in multiple elements of its rate-setting, it

states so boldly. Many of the rules of this proceeding have continually

(and arbitrarily) changed, but one thing has remained constant—the

8
Commission’s insistence and pride in basing its decision on the legally

unrecognized and false premise of “making up for past overearning,” even

though DME has only ever charged Commission-approved TCOS rates.1

Once ingested, such legally impermissible poison has no antidote but

reversal of the Final Order into which it was introduced.

1 The Commission’s reliance on inappropriate factors is further demonstrated by
its continued emphasis on DME’s “failure” to provide a depreciation study (Cross-
Appellee’s Br. at 9.) The Commission mischaracterizes this dispute as a requirement
DME chose not to meet when it was an interpretive dispute in which an
Administrative Law Judge agreed with DME’s interpretation of the requirement.
(RR at Ex. 1, AR 29 at 3.). This is another example of the irrelevant factors and the
overarching and extra-legal motivation to punish DME as some sort of “bad actor”
that the Commission would have the Court rely on in evaluating the Final Order.

9
ARGUMENT AND AUTHORITIES

A. The Commission relied on an arbitrary ad hoc standard to
disallow recovery of DME’s 6% ROI GFT component.

In search of a rationale to justify imposing an artificially low TCOS

rate on DME by slashing its GFT recovery, the Commission looked not to

any actual rule or established law, but rather to the remarks of one

commissioner during an open meeting. Commission Staff then converted

those offhand remarks into a Commission-wide “standard” and crafted a

narrative that the Commission established that standard on that day.

But the “standard” can be found in only one place: this case. The

Commission only ever applied the “standard” to DME, even though no

such standard had even been introduced, much less adopted as a rule, at

the time DME filed the Application or the Amended Application.

The standard the Commission argues should apply is not only an

ad hoc creation but is also grounded in a misunderstanding of the statute

governing transmission rates and a reversal of the Commission’s

longstanding treatment of GFTs in TCOS rates. Moreover, the standard

contradicts the statutory powers of municipalities and established

precedent allowing cities to see a benefit from utility ownership. The

very fact that the Commission had to justify its decision by conjuring up

10
a new standard illustrates that the true justification was the improper

one the Commission has trumpeted through the entire case, including in

this appeal—the Commission wanted to punish DME for alleged

“overearning.” At the very least, if this Court finds the new “standard”

the Commission has imposed on DME to be valid and have the force of a

rule, the only appropriate course of action is to remand to provide DME

the opportunity to present evidence responsive to the standard, as the

“rule” was adopted after the case was well underway.

1. The Commission used a baseless standard to justify the
exclusion of DME’s 6% ROI GFT component.

From the inception of this case, the legal principles with which the

Commission has expected DME to comply have been a moving target.

The rationale behind the Commission’s complete disallowance of any

GFT beyond DME’s franchise fee component is no exception. The

Commission rejected recovery of DME’s 6% ROI GFT component in its

entirety using a “standard” never applied, or even mentioned, in its rules

or any TCOS precedent: the purpose of any requested transfer beyond a

franchise fee now must be directly related to the provision of

transmission service. The Commission latched on to this unfounded

standard after Commission Staff incorrectly treated it as an established

11
legal authority in testimony. However, this standard is not codified in

any rule or law governing recovery of GFT in rates and springs solely

from a single commissioner musing on the issues presented in a separate

case during the pendency of DME’s case.

In January 2023, after DME had filed both its Application and its

Amended Application, the Commission considered a proposed settlement

in another MOU’s TCOS application. See PUC Docket No. 52728,

Application of the City of College Station to Change Rates for Wholesale

Transmission Service, (final order) (Jul. 11, 2024). During consideration

of that settlement, one commissioner suggested an unprecedented

interpretation of how GFTs should be evaluated in TCOS proceedings by

stating that the MOU should only be allowed to recover GFT costs

“justified by a specific rationale” related to the “actual cost” of

transmission service. (RR at Ex. 1, AR 113 at 43:5−17.) While other

commissioners weighed in on a separate issue, no other commissioner

agreed with or commented on this interpretation, and no vote was held

to adopt any such standard or rule. After the discussion, the Commission

issued a remand order in that case, which addressed a different GFT

issue and did not in any way memorialize the “standard” invented by the

12
single commissioner. The standard was similarly absent from the final

order ultimately issued in that proceeding. In fact, without any

imposition or mention of the purported standard discussed, the

Commission approved a settlement allowing that MOU to begin

recovering a 9% GFT in its transmission rates. 2

The commentary of a single commissioner on the dais of course is

not binding precedent. “The thought processes or motivations of an

administrator are irrelevant in the judicial determination whether the

agency order is reasonably sustained…” City of Frisco v. Tex. Water

Rights Comm’n, 579 S.W.2d 66, 72 (Tex. App.—Austin 1979, writ ref’d

n.r.e.). Despite that long-established principle, the Commission Staff

witness evaluating DME’s GFT inclusion filed testimony relying on the

commissioner’s statement as if it created binding law. (See RR at Ex. 1,

AR 113 at 14:13−15:16.) The comments made did not even occur in

DME’s case but, somehow, it was the basis Commission Staff provided

for recommending complete disallowance of any GFT beyond the 5%

2 See PUC Docket No. 52728, Application of the City of College Station to Change
Rates for Wholesale Transmission Service, (Application at 44:10−17) (Nov. 3, 2021)
(explaining the requested 9% GFT); Uncontested Stipulation and Settlement
Agreement (Aug. 16, 2022); SOAH Proposal for Decision with Memorandum at 2
(Dec. 21, 2023) (explaining sole contested issue was a different GFT question; the 9%
was uncontested in the approved settlement).

13
franchise fee component. Using the oral statements of a single

commissioner in a separate case as binding law to bar all recovery of

DME’s ROI GFT component is extra-legal both because it relies on a

“standard” that is not a rule or precedent and because it actually serves

the Commission’s genuine (and extra-legal) basis for its decision—to

penalize DME for violating an artificial definition of overearning in the

past.

When DME filed the Application, it presented evidence related to

its GFT obligation without any notice or knowledge of the unprecedented

(and not-yet “established”) standard the Commission would employ to

evaluate that evidence. DME had no opportunity to include evidence in

its Application or Amended Application addressing this standard—

because the standard did not exist (of course, it still doesn’t). As a result,

the Commission unlawfully deprived DME from recovering a crucial

component of its GFT by creating and retroactively applying a new

burden of proof. Moreover, the “standard” the Commission relies on for

invalidating DME’s 6% ROI was never promulgated as a formal rule and

is therefore invalid. Tex. State Bd. of Pharm. v. Witcher, 447 S.W.3d 520,

527 (Tex. App.—Austin 2014, pet. denied.). Neither DME nor any other

14
impacted entity had notice that a single commissioners’ thoughts voiced

from the dais in another case would somehow become the “rule” to be

adopted and applied to MOU requests for inclusion of GFTs in all TCOS

proceedings moving forward.

Furthermore, the Commission’s rationale to impose its standard is

plagued by contradiction. The Commission first acknowledges that all

transfers are unique and should be evaluated on their own merit for

reasonableness but then imposes and defends a cut-and-dry standard: if

the transfer cannot be directly traced to transmission costs, it is

disallowed. What possible certainty can an MOU have in requesting

recovery of a GFT if the Commission is simultaneously promoting a strict,

unprecedented standard and asserting that transfers are permitted

under “some circumstances?” (Cross-Appellee’s Br. at 7.) Never mind

that the Commission does not and cannot explain or provide the legal

authority for what those circumstances may be. The Commission’s

baseless standard additionally sends the message that cities are expected

to own and operate utilities at cost, or less than cost, even if those cities

are contributing infrastructure to electricity users throughout the state

15
and assuming the associated risks of that contribution. This is a plain

disincentive for MOUs to serve as transmission providers.

2. The Commission’s decision interferes with a clear and
established statutory right.

The Commission’s new standard hinges on the concept that the

Commission has the authority to evaluate the stated purpose of a GFT

and deny inclusion in rates if the purpose is not tied to the exact costs of

providing transmission service. But it cannot be possible for this

authority—determination of and veto power over a GFT purpose—to rest

with the Commission because it would nullify municipalities’ existing

statutory rights. Cities, not the Commission, are statutorily vested with

the authority to make a transfer from an MOU to their general revenue

fund and to determine and declare the purpose(s) of the transfer. Tex.

Gov’t Code § 1502.059. The idea that the Commission has authority to

scrutinize the purpose of a reasonable GFT amount before allowing it to

be recovered in rates makes the Commission the maker of municipal

policy, effectively voiding this longstanding municipal power specifically

conferred on cities alone by the Legislature. DME’s GFT was properly

authorized by the City based on the City’s exclusive statutory authority.

16
Like any other expense included in rates under its jurisdiction, the

Commission has the authority to evaluate the reasonableness of the

amount of a GFT, but municipalities are explicitly and exclusively

empowered to determine the purpose of the transfer. And a city’s

statutory authority to do so is broad: by law, a GFT may be for any

“general or special” purpose. Tex. Gov’t Code § 1502.059. The law

likewise does not require that a GFT must be broken out into specific

line-items or tied to each specific service a city-owned utility is providing.

Such limitations would inhibit the rationale behind this statutory right

of cities: cities own utilities in a proprietary capacity. San Antonio Indep.

Sch. Dist. v. City of San Antonio, 550 S.W.2d 262, 264 (Tex. 1977). A city

that owns a utility has a right to receive a reasonable portion of that

utility’s revenue, regardless of whether each source of revenue is

distinctly identified. Further, a utility’s revenue is inherently generated

from the rates it charges for the services it provides. If the 6% of revenues

DME is required to pay to the City cannot come from rate revenue, then

the utility can never meet its obligation to the City, as DME does not

receive revenue from other sources. Either the City has the statutory

right to require a transfer for general or special purposes or the transfer

17
must be tied to the actual cost of providing transmission service (or any

other purpose-based requirement that the Commission conjures up on

the fly). Both cannot be true. And only one exists under the law as set

by the Legislature.

3. The Commission contravened Texas precedent.

The Commission’s attack on DME’s ROI GFT component as

“additional compensation” contradicts Texas precedent affirming a

municipality’s right to benefit from a reasonable amount of excess

revenues as compensation for utility ownership. San Antonio, 550

S.W.2d at 264. In the San Antonio case, the Court recognized that the

original version of the Texas Government Code provision giving cities the

authority to require transfers from utility revenues was written to

account only for service costs and payments consistent with taxes. Id.

The court then observed that the law was subsequently modified to allow

for more than only cost recovery to intentionally recognize a city’s right

to receive value from its utility ownership as well. Id. That is, the very

purpose-based restriction on GFTs that the Commission would impose

here was already stricken by the Legislature.

18
As the Commission stated in its brief, the only issue in the San

Antonio case was whether an MOU can recover a GFT in rates. (Cross-

Appellee’s Br. at 20.) The Commission misses the mark, however,

because the Court’s ruling was that MOUs can recover a GFT in rates.

Like DME’s ROI component, the City of San Antonio required a 14% GFT

that was transferred only after other specific categories were funded. Id.

at 263. The Court further acknowledged that part of the transfer

reimbursed the City in lieu of ad valorem taxes that otherwise would be

received if the systems were not municipally owned. Id. at 263−64. The

Court specifically noted that anything left was “all gain” to the City. Id.

at 264. The Court upheld these findings without scrutinizing whether

each part of the transfer was tied to specific utility services or whether

every penny could be traced to the same taxes or fees paid by all other

utilities, almost certainly because there was no need or legal basis for it

to do so.

The Commission misconstrues the application of the San Antonio

decision to DME’s case. The Court stated that “if the City’s return were

proved to be excessive or unreasonable, the courts could grant relief” as

to allegations of unreasonableness. Id. at 265 (emphasis added). Here,

19
the Commission used a made-up standard to support the

“unreasonableness” of DME’s ROI GFT component based entirely on its

purpose and then not only categorically disallowed any GFT above

franchise fee cost recovery but also unlawfully slashed DME’s return

calculation by imposing an incorrect Debt Service Coverage Ratio (again,

all of which was in service of the Commission’s stated, extra-legal goal of

making up for DME’s past “overearning”). The District Court recognized

the Commission’s unlawful action. Accordingly, DME’s return has not

been shown to be excessive or unreasonable. Additionally, the

Commission argues that since the San Antonio decision is: (1) old; and

(2) applies only to retail rates, it should not apply here. (Cross-Appellee’s

Br. at 20.) While those things may be true, the holding still applies—an

MOU is allowed a GFT in rates, for any general or special purpose, and

a city has the right to make a reasonable profit from its municipally-

owned utilities. The Commission stripped both DME and the City of the

right to make a reasonable profit by inappropriately limiting the Debt

Service Coverage Ratio and by creating and imposing another arbitrary

and impermissible standard related to GFT.

20
B. The ROI GFT component is an unavoidable expense DME is
required to pay to the City.

The Commission inaccurately characterizes the ROI component of

DME’s GFT as a discretionary payment when in fact it is a mandatory

financial obligation the utility must pay. Based on its statutory right to

do so, the City designated the purpose of the ROI component as a benefit

to the City and its citizens for utility ownership. (RR at Ex. 1, AR 176 at

56:3−11.) Under Texas law, designating this purpose is solely within the

City’s discretion. Transferring a reasonable portion of utility revenues to

the City’s general fund accomplishes this purpose by adding to the funds

available for important city services or projects. The existence of this

purpose does not interfere with or stack on top of the rate of return DME

receives on its utility infrastructure. Nor does this purpose detract from

the fact that the transfer is akin to any other expense DME is required

to pay. The Commission’s position mistakenly assumes that it has the

power to declare this municipally determined purpose inappropriate or

otherwise dictate what a correct purpose for a GFT would be.

In defending its prohibition of DME’s GFT as an expense, the

Commission relies on a statutory list of MOU expenses as if it were an

exclusive list when the plain language of that list itself is not exclusive.

21
Specifically, the Commission asserts that if general fund transfers were

recoverable, they would be included in the list of expenses found under

Tex. Gov’t Code § 1502.057. (Cross-Appellee’s Br. at 25.) Here again, the

Commission is inconsistent in its treatment of GFT. If this rationale

were accurate, then franchise fees (as just one example of an expense that

is not listed in the statute) would have to be disallowed in a GFT since

they are not specifically included in the list of expenses provided in Tex.

Gov’t Code § 1502.057. The Commission’s error in this argument is

demonstrated by the inconsistency of the Commission customarily

approving a portion of the GFT (franchise fee component) that is not

specifically listed in the statute. Additionally, the Commission’s

argument is contrary to the plain language of the statute. The section

does not create an exclusive list of recoverable expenses and only those

expenses; rather, it simply lists minimum expenses a city-owned utility

should be able to cover. The statute establishes that “[a] municipality

shall impose and collect charges for services provided by a utility system

in amounts at least sufficient to pay” the enumerated expenses. Tex.

Gov’t Code § 1502.057 (emphasis added). The term “at least” has a clear

meaning. If the list of permissible charges was intended to be exclusive

22
and exhaustive, the language would have stated so. Instead, it stated the

opposite. By using the phrase “at least sufficient to pay,” this list of

expenses was specifically intended to set the floor for what an MOU

should be able to fund through the rates it charges.

The Commission’s treatment of the ROI GFT component as an

unallowable expense is further shown to be improper by its own practice

and precedent of routinely approving GFTs in TCOS rates within an

established expense category. The Commission argues that the absence

of GFT references in the laws governing transmission rates effectively

means the Commission can prohibit recovery of GFTs in their entirety.

(Cross-Appellee’s Br. at 25.) However, the Commission’s longstanding

application of 16 Tex. Admin. Code § 25.192 is to approve inclusion of a

GFT within the explicitly stated category of “other associated taxes.” See,

e.g., PUC Docket No. 52728, Application of the City of College Station to

Change Rates for Wholesale Transmission Service, (Order on Rehearing

at Finding of Fact No. 47) (Jul. 11, 2024) (providing that GFTs are

typically included in the revenue requirement as a separate expense

item, most often appearing in the “other taxes” line item). There is also

record evidence in this case that credit rating agencies consider GFTs as

23
operating expenses when setting or reviewing credit ratings. (RR at

Ex. 1, AR 2 at 176:19−177:15.) The Commission has always approved

inclusion of a GFT within the “other associated taxes” category,

regardless of the City-designated purpose of the transfer. No MOU has

ever before been required to tie each aspect of its GFT to specific

transmission costs. Indeed, there has never been a “standard” that

requires it, nor is there a standard now that requires it. GFT is a

required utility expense, full stop.

C. The Commission disregarded the range of reasonableness
for the ROI GFT component supported in the record.

Perhaps the Commission could have crafted some evidentiary

justification for a ROI GFT component less than the 6% required by the

City. But the Commission’s decision to preclude ROI recovery altogether

and effectively allow DME 0% recovery lacks sufficient (or any) basis in

the record. The Commission provided no explanation for ignoring the

3.5−6% range for that component discussed in the evidence, and the

outright disallowance is at odds with the Commission’s own prior ruling

allowing DME’s ROI GFT component recovery in DME’s last full TCOS

rate case. The Commission additionally failed to address the undisputed

24
fact that any other utility operating in the City would make payments to

the City in an amount greater than just a 5% franchise fee.

1. The record supported a minimum ROI GFT component
of 3.5%.
The path the Commission took to impose its limitation on DME’s

GFT recovery was an improper one; to arrive at its conclusion, the

Commission not only had to ignore the evidence but actually had to act

in derogation of the evidence. In 2022, the City passed an ordinance

formally approving an ROI GFT component of 6% of gross revenues. (RR

at Ex. 1, AR 182.a at 198−99.) DME additionally provided evidence of

the City Charter, which requires a return on the net investment of the

utility system after other expenses have been paid. (RR at Ex. 1, AR 176

at 56:1−11.) The record showed that 3.5% is the ROI GFT component the

City requires of its water and wastewater utilities, and that percentage

was also the previous ROI GFT component required of DME (which was

allowed, with full disclosure of its purpose, in DME’s prior TCOS rate).

(RR at Ex. 1, AR 90 at 192; AR 176 at 371.) The only rationale for

ordering a 0% ROI GFT component requires disregarding all record

evidence, instead relying on the one-off commissioner statements and

applying a standard for evidentiary support that does not exist.

25
Accordingly, the Commission’s permissible, evidence-based universe for

evaluating inclusion of an ROI GFT component was a range between

3.5% and 6%.

Out of thin air and with no grounding in the record beyond the

artificial standard discussed above, the Commission arbitrarily selected

a 0% ROI GFT component. In contrast, what the Commission has done

before, under the same law, as to the same party, and as to the same type

of GFT component, shows the Commission’s error here. Not only was

there no reasonable support in the record in this case for a 0% ROI GFT

component, the Commission itself previously approved recovery of a 3.5%

ROI GFT component in DME’s transmission costs, applying a statutory

and rule-based standard that has not changed since then. See PUC

Docket No. 30358, Application of Denton Municipal Electric to Change

Rates for Wholesale Transmission Service, (final order) (Jun. 16, 2005).

When the Commission approved inclusion of the 3.5% ROI component in

DME’s previous application, it did not impose any requirement and

conducted no analysis as to whether that percentage was specifically tied

to transmission costs. The Commission did not examine each element of

DME’s GFT or override the purpose of the transfer as set by the City.

26
That is because, of course, there was no basis in any statute or rule to do

so. Instead, the Commission evaluated the evidence and found a 3.5%

ROI to be reasonable. Without any attempt to conceal its real motive of

penalizing DME for alleged overearning, the Commission ignored the

3.5% floor supported by the evidence, arbitrarily and punitively set

DME’s ROI GFT component recovery at 0%, providing no explanation at

the time for doing so other than its brand-new purpose-based standard.

2. The Commission’s restriction is inconsistent with the
fees other utilities pay to the City.

If DME were not a city-owned utility, it would pay more than a mere

franchise fee to the City. This was proven in the record without dispute

or rebuttal. And yet, the Commission inexplicably gave this unrebutted

evidence no weight before rejecting DME’s 6% ROI GFT component.

DME’s evidence explained that the 6% ROI component provides

cost recovery to the City of revenue streams DME would otherwise have

to pay to the City as a stand-alone utility if not for the fact that it is a

business unit of the City. (RR at Ex. 1, AR 176 at 55:14−17.) Witnesses

for DME, Commission Staff, and the Office of Public Utility Counsel all

agreed that other electric utilities operating in the City would pay taxes

or additional fees beyond only a franchise fee. (AR 118 at 18:22−19:2; 168

27
at 70:7−23, 82:12−83:6.) At a minimum, other utilities would pay a

franchise fee and ad valorem taxes on property they own within the City.

If DME is limited to only the 5% franchise fee, it is indisputably at a

disadvantage compared to all other utilities operating in the City. The

Commission’s decision effectively forces the City to lose money by owning

its own utility.

The Commission argues (again, after-the-fact and outside of any

record evidence) that DME should have provided specific dollar amounts

for the ad valorem amounts other utilities pay to the City and that, by

titling the transfer “Return on Investment,” there is no possible way the

transfer can be commensurate with ad valorem taxes or other fees the

City charges to utilities. (Cross-Appellee’s Br. at 19.) However, it is

firmly established that MOUs may refer to a GFT using a wide array of

terms. (RR at Ex. 1, AR 113 at 10:23−11:4.) And of course, municipalities

have the authority to name the transfer that they require. It is

undisputed that if DME were not owned by the City, it would pay the

City additional fees for its operations beyond a franchise fee. To limit the

percentage of revenues DME transfers to the City to a value known to be

lower than any other utility operating in the City is facially

28
discriminatory. Regardless of the nomenclature of the transfer, the City

has an established statutory right to require a reasonable sum of

revenues from DME for any purpose. The Commission cannot abrogate

this right by creating new evidentiary standards for MOUs to have the

revenues necessary to fund a reasonable GFT, and likewise cannot

disregard the only, unrebutted evidence on the point establishing that

any other utility operating in the City would pay to the City an amount

greater than just the 5% franchise fee GFT component.

D. DME’s appeal of the Commission’s order of an interim rate
proceeding is appropriate because the capable-of-
repetition-yet-evading-review exception to mootness
applies.

DME’s initial Appellant’s brief explained why the Commission’s

order of an interim rate proceeding was beyond the Commission’s

authority. The Commission’s primary response (asserted for the first

time in its Response brief in this appeal) seems to be that, as that interim

rate proceeding ordered by the Commission’s Final Order went forward

and is now concluded, the question is moot. However, because the

Commission maintains that it has the right to continue to order such

proceedings in the future, including as to DME, the capable-of-repetition-

yet-evading-review exception to mootness applies.

29
This exception applies where a party shows that (1) “the challenged

act is of such short duration that the appellant cannot obtain review

before the issue becomes moot,” and (2) “a reasonable expectation [exists

that] the same action will occur again if the issue is not considered.”

Blum v. Lanier, 997 S.W.2d 259, 264 (Tex. 1999) (cleaned up). Regarding

the second factor, the issue is “whether the controversy [is] capable of

repetition,” so a complaining party need not show the illegality will

reoccur with “mathematical precision,” but simply “‘a reasonable

expectation’ that the challenged illegality will reoccur.” Catholic

Leadership Coal. of Tex. v. Reisman, 764 F.3d 409, 422 (5th Cir. 2014)

(emphasis added) (cleaned up). The exception “generally applies only if

the plaintiff can show that the claim is available as to him.” Heckman v.

Williamson County, 369 S.W.3d 163, 164 (Tex. 2012).

There is no question that the interim rate proceeding was of short

duration; from start to finish took a mere 54 days. See PUC Docket

No. 56102, Application of Denton Municipal Electric for Interim Update

of Wholesale Transmission Rates (Mar. 4, 2024) (the application was filed

on January 10, 2024, and the Notice of Approval was issued on March 4,

2024). Second, it is reasonable to expect that DME in particular (along

30
with all other MOUs with transmission systems, for that matter) will

experience the same wrongful conduct by the Commission. DME will

continue to file TCOS rate cases when it deems them to be necessary and

appropriate, and if those proceedings take any material length of time,

the Commission is likely to repeat its pattern of ordering an immediate

interim rate filing (as it has boldly claimed it has every right to do).

Therefore, this question is not moot and, for the reasons stated in DME’s

initial Appellant’s brief, the Court should reverse the Commission’s Final

Order provision ordering that DME file an interim rate proceeding within

90 days.

CONCLUSION AND PRAYER

The Commission’s categorical denial of DME’s 6% ROI GFT

component—resulting in an allowance of zero GFT recovery above the 5%

franchise fee component—is based on both an unlawful ad hoc standard

and conscious disregard for the evidentiary record, all of which is more

egregious and extra-legal in light of the Commission’s consistent

admitted inappropriate goal of setting an artificially low TCOS rate to

make up for past “overearning.” This Court should reverse the Final

Order as to the complete disallowance of DME’s 6% ROI GFT component

31
and as to its requirement of an immediate interim rate proceeding and

remand the case to the Commission for further proceedings consistent

with its ruling.

32
Respectfully submitted,

LLOYD GOSSELINK ROCHELLE
& TOWNSEND, P.C.
816 Congress Avenue, Suite 1900
Austin, Texas 78701
(512) 322-5800 Phone
(512) 472-0532 Facsimile

By: /s/ Jose E. de la Fuente
JOSE E. de la FUENTE
State Bar No. 00793605
jdelafuente@lglawfirm.com
GABRIELLE C. SMITH
State Bar No. 24093172
gsmith@lglawfirm.com
JAMIE L. MAULDIN
State Bar No. 24065694
jmauldin@lglawfirm.com
ROSLYN M. WARNER
State Bar No. 24117520
rwarner@lglawfirm.com

ATTORNEYS FOR APPELLEE/
CROSS-APPELLANT

33
CERTIFICATE OF COMPLIANCE

I, Jose E. de la Fuente, attorney for Appellee/Cross-Appellant the
City of Denton, operating as Denton Municipal Electric, certify that this
document was generated by a computer using Microsoft Word 365, which
indicates that the word count of this document is 5,520 per Tex. R. App.
P. 9.4(i).

/s/ Jose E. de la Fuente
Jose E. de la Fuente

34
INDEX OF APPENDICES

App. A Tex. Gov’t Code § 1502.057

35
APPENDIX A
Tex. Gov’t Code § 1502.057

Sec. 1502.057. Charges for Services.

(a) A municipality shall impose and collect charges for services provided by a utility
system in amounts at least sufficient to pay:
(1) all operating, maintenance, depreciation, replacement, improvement, and interest
charges in connection with the utility system;
(2) for an interest and sinking fund sufficient to pay any public securities issued or
obligations incurred for any purpose described by Section 1502.002 relating to the
utility system; and
(3) any outstanding debt against the system.
(b) The rates charged for services provided by a utility system must be equal and
uniform. A municipality may not allow any free service except for:
(1) municipal public schools; or
(2) buildings and institutions operated by the municipality.
(c) The board of trustees having management and control of a utility system located in a
county contiguous to the Gulf of Mexico and bordering the United Mexican States may
impose and collect the charges authorized under this section for services provided by the
utility system.

History

Enacted by Acts 1999, 76th Leg., ch. 227 (H.B. 3157), § 1, effective September 1, 1999; am.
Acts 1999, 76th Leg., ch. 1064 (H.B. 3224), § 22, effective September 1, 1999 (renumbered
from Sec. 1502.059); am. Acts 2013, 83rd Leg., ch. 341 (H.B. 2105), § 2, effective June 14,
2013.

Texas Statutes & Codes Annotated by LexisNexis®
Copyright © 2025 All rights reserved.

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Envelope ID: 104810147
Filing Code Description: Brief Requesting Oral Argument
Filing Description: Reply Brief for Cross-Appellant City of Denton
Status as of 8/25/2025 3:10 PM CST

Case Contacts

Name BarNumber Email TimestampSubmitted Status

Katherine Coleman 24059596 kcoleman@omm.com 8/25/2025 3:02:07 PM SENT

Jamie Mauldin 24065694 jmauldin@lglawfirm.com 8/25/2025 3:02:07 PM SENT

Gabrielle Smith 24093172 gsmith@lglawfirm.com 8/25/2025 3:02:07 PM SENT

David Laurent david.laurent@oag.texas.gov 8/25/2025 3:02:07 PM SENT

John RHulme John.Hulme@oag.texas.gov 8/25/2025 3:02:07 PM SENT

Jose E.de la Fuente jdelafuente@lglawfirm.com 8/25/2025 3:02:07 PM SENT

Amy Hoffee amy.hoffee@cityofdenton.com 8/25/2025 3:02:07 PM SENT

Chris Ekoh chris.ekoh@opuc.texas.gov 8/25/2025 3:02:07 PM SENT

Justin Swearingen justin.swearingen@opuc.texas.gov 8/25/2025 3:02:07 PM SENT

Jordan Pratt Jordan.Pratt@oag.texas.gov 8/25/2025 3:02:07 PM SENT

Colton Halter colton.halter@oag.texas.gov 8/25/2025 3:02:07 PM SENT

John Hubbard jhubbard@omm.com 8/25/2025 3:02:07 PM SENT

Christiana Segura 24143396 christiana.segura@opuc.texas.gov 8/25/2025 3:02:07 PM SENT

James ScottMcCarley scott.mccarley@oag.texas.gov 8/25/2025 3:02:07 PM SENT

Devin Alexander devin.alexander@cityofdenton.com 8/25/2025 3:02:07 PM SENT

Roslyn Warner rwarner@lglawfirm.com 8/25/2025 3:02:07 PM SENT

Michael McMillin mmcmillin@omm.com 8/25/2025 3:02:07 PM SENT

Sharbel Sfeir sharbel.sfeir@opuc.texas.gov 8/25/2025 3:02:07 PM SENT

Marcella Lunn marcella.lunn@cityofdenton.com 8/25/2025 3:02:07 PM SENT

Michael Martinez michael.martinez@opuc.texas.gov 8/25/2025 3:02:07 PM SENT