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

Affirmed and Opinion filed June 4, 2026

In The

Fifteenth Court of Appeals

NO. 15-25-00018-CV

APPELLANT PUBLIC UTILITY COMMISSION OF TEXAS // CROSS-
APPELLANT, CITY OF DENTON OPERATING AS DENTON
MUNICIPAL ELECTRIC

V.
APPELLEE CITY OF DENTON OPERATING AS DENTON
MUNICIPAL ELECTRIC // CROSS-APPELLEE PUBLIC UTILITY
COMMISSION OF TEXAS

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

OPINION

This is an administrative appeal from an order by the Public Utility
Commission of Texas (the Commission) setting the wholesale transmission rates of
Denton Municipal Electric (Denton Electric). Denton Electric is a utility owned by
the City of Denton providing electric transmission service. The Commission issued
a Final Order setting the rates and ordering Denton Electric to file an interim
proceeding. Denton Electric sought judicial review of the order, and the trial court
reversed in part and affirmed in part. Both Denton Electric and the Commission
challenge the trial court’s order in this Court. We affirm the district court’s
judgment in full.

BACKGROUND

I. Commission Proceedings

The Legislature enacted the Public Utility Regulatory Act (PURA) to protect
the public interest in the rates and services of electric utilities. Tex. Util. Code §
31.001(a). The Act established a comprehensive and adequate regulatory system to
assure just and reasonable rates and operations. Id.

“There are three principal components to the electricity industry: ‘generation
of power; transmission of that power on high-voltage lines over long distances; and
distribution of power over shorter distances to the ultimate consumer.’” TXU
Generation Co., L.P. v. Pub. Util. Comm’n of Tex., 165 S.W.3d 821, 827 (Tex.
App.—Austin 2005, pet. denied) (quoting City Pub. Serv. Bd. of San Antonio v.
Pub. Util. Comm’n, 9 S.W.3d 868, 870 (Tex. App.—Austin 2000), aff’d, 53
S.W.3d 310, 312 (Tex. 2001)). This case involves only the transmission element.
Utilities in Texas have voluntarily interconnected their transmission systems
forming a single grid known as the Electric Reliability Council of Texas (ERCOT).
City Pub. Serv. Bd. of San Antonio, 53 S.W.3d at 312. Under PURA, all
transmission-owning utilities are required to provide “open access” to their
transmission facilities for wholesale transmission. Id. at 312–13; see Tex. Util.
Code § 35.004.

The Commission has authority over utilities providing wholesale

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transmission service within the ERCOT market. Tex. Util. Code § 35.005. This
includes jurisdiction over municipally owned utilities to regulate their wholesale
transmission rates. Id. § 40.004(1). The Commission calculates transmission rates
based on a utility’s transmission cost of service which “includes all reasonable and
necessary expenses, plus a reasonable return on investments, associated with
owning and operating its transmission network.” Pub. Util. Comm’n of Tex. v. City
Pub. Serv. Bd. of San Antonio, 109 S.W.3d 130, 132 (Tex. App.—Austin 2003, no
pet.); Tex. Util Code § 35.004(d); 16 Tex. Admin. Code § 25.192(c). The
Commission notified the City of Denton that it was conducting an inquiry into the
reasonableness of Denton Electric’s wholesale transmission rates and ordered it to
file a rate filing package. On November 1, 2021, Denton Electric filed an
Application to Change Rates for Wholesale Transmission Service with the
Commission.

As for a return on investments, under Commission rules, a municipally
owned utility can choose to calculate its rate of return based on its debt service
coverage ratio which includes the utility’s actual debt service and a reasonable
coverage ratio. 16 Tex. Admin. Code § 25.192(c)(3). At the time Denton Electric
filed its application, the Commission’s instructions for filing a rate filing package
(the instructions are referred to as the “RFP”) provided that a return based on the
transmission service provider’s “debt service coverage levels stated in the
[transmission service provider’s] most recently issued bond and debt covenants
plus additional coverage of 0.25 for municipal utilities and river authorities shall
be presumed reasonable.” Denton Electric sought to use a 1.75x debt service
coverage ratio which reflected 0.50x added to the City’s required 1.25x debt
service coverage for the City’s utilities.

On October 6, 2022, while Denton Electric’s application was pending, the

3
Commission held an open meeting at which it considered another transmission
service provider’s application for changes to its wholesale transmission service
rates. During that meeting, the commission voted to modify the language in the
RFP and eliminate the language that additional coverage of 0.25x would be
presumed reasonable.

On December 1, 2022, Denton Energy filed an amended application and
continued to seek to use a 1.75x debt service coverage ratio. Denton Electric also
requested to include in its transmission revenue requirement an 11% general fund
transfer. Under the Texas Government Code, a municipal owned utility may
transfer funds from the utility to the city’s general fund, referred to as a “general
fund transfer.” Tex. Gov’t Code § 1502.059. Denton Electric claimed it paid the
City as a general fund transfer a franchise fee (5% of its gross revenues) and a
return on investment component (6% of its revenues).

After a hearing on the merits at the State Office of Administrative Hearings,
the Administrative Law Judges (ALJ) issued a proposal for decision. The
Commission issued a final order (the “Commission Order”) mostly consistent with
the ALJ’s findings. As relevant here, the order (1) found the 6% return on
investment component of the general fund transfer was not sufficiently
substantiated, (2) found that the debt service coverage ratio should be set at 1.25x,
and (3) required Denton Electric to file an interim transmission cost of service
proceeding within 90 days of the final order. Denton Electric filed a motion for
rehearing which was overruled by operation of law.

II. Judicial Review

Denton Electric filed a petition for judicial review in the Travis County
District Court. Denton Electric claimed the Commission improperly excluded the
6% return on investment component from Denton Electric’s general fund transfer,
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improperly limited Denton Electric’s debt service coverage ratio to 1.25x, and
impermissibly required Denton Electric to file an interim transmission cost of
service proceeding within 90 days. After holding a hearing on the merits, the trial
court held that the Commission’s decision to set Denton Electric’s debt service
coverage ratio at 1.25x “was arbitrary and capricious and was improperly based on
a Rate Filing Package that was modified in violation of state law (the Texas Open
Meetings Act) and Commission Rule, thus constituting a violation of both a
statutory provision and required procedure, and is hereby reversed.” The trial court
denied all other relief. Both Denton Electric and the Commission appealed the
judgment.

ANALYSIS

The Commission asserts that substantial evidence supports its conclusion
that a DSCR of 1.25x provides Denton electric with a reasonable rate of return. In
two issues, Denton Electric challenges the Commission’s (1) exclusion of the 6%
return on investment component of its general fund transfer and (2) requiring
Denton Electric to file an interim transmission cost of service application.

I. Standard of Review

Under PURA, judicial review of the Commission Order is under the
substantial evidence standard. Tex. Util. Code § 15.001. Under substantial
evidence review, “a court may not substitute its judgment for the judgment of the
state agency on the weight of the evidence on questions committed to agency
discretion.” Tex. Gov’t Code § 2001.174. However, a court

shall reverse or remand the case for further proceedings if substantial
rights of the appellant have been prejudiced because the
administrative findings, inferences, conclusions, or decisions are:
(A) in violation of a constitutional or statutory provision;
(B) in excess of the agency’s statutory authority;
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(C) made through unlawful procedure;
(D) affected by other error of law;
(E) not reasonably supported by substantial evidence
considering the reliable and probative evidence in the record as
a whole; or
(F) arbitrary or capricious or characterized by abuse of
discretion or clearly unwarranted exercise of discretion.

Id. § 2001.174(2). Each of these grounds presents “a question of law subject to de
novo review.” Save Our Springs All., Inc. v. Tex. Comm’n on Env’t Quality, 713
S.W.3d 308, 320 (Tex. 2025).

II. The District Court Properly Reversed the Commission’s Decision to set
Denton Electric’s Debt Service Coverage Ratio at 1.25x Because the
Commission’s Decision in Reliance on the Modified RFP was Arbitrary.
In its sole issue, the Commission contends that the trial court erred in
reversing its decision to set Denton Electric’s debt service coverage ratio at 1.25x
because the RFP was properly modified and, regardless of which RFP is used, the
Commission’s decision is supported by substantial evidence. “Fundamentally, a
public utility’s rates must be just and reasonable.” Cities for Fair Util. Rates v.
Pub. Util. Comm’n of Tex., 924 S.W.2d 933, 935 (Tex. 1996) (internal quotation
marks and citation omitted); see Tex. Util. Code § 31.001 (providing that PURA
was enacted to, among other things, assure rates “that are just and reasonable”).
But a utility is entitled to rates that “provide a return on the invested capital
included in its rate base . . . .” Id.; City Pub. Serv. Bd., 109 S.W.3d at 132
(explaining that a utility’s transmission cost of service includes a reasonable return
on investments).

A municipally owned utility may calculate its return using one of four
methods: cash flow, debt service coverage ratio, times interest earned ratio, and
rate of return. Denton Electric filed an application to change its rates for wholesale
transmission service in November 2021 and calculated its return using the debt
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service coverage method. Under Commission rules, this rate of return may be
determined based on the utility’s actual debt service and a reasonable coverage
ratio. 16 Tex. Admin. Code § 25.192(c)(3). The Commission considers the utility’s
debt service payments (principal and interest) during a historical test year. 1 At the
time Denton Electric filed its initial application, the RFP instructions provided that
“[a] return based on the [transmission service provider’s] debt service expenses as
of the end of the Historic Year, and the debt service coverage levels stated in the
[transmission service provider’s] most recently issued bond and debt covenants
plus additional coverage of 0.25 . . . shall be presumed reasonable.” Denton
Electric cited the presumption in its application and sought to use a 1.75x debt
service coverage ratio, explaining it was based on a 1.25x debt service coverage
plus 0.50x to address other circumstances, including a planned change to the City’s
debt service policy to require a 1.50x debt service coverage. Six months after
Denton Electric filed the Application, the Commission ordered Denton Electric to
file a depreciation study with its application.

On October 6, 2022, before Denton Electric filed an amended application,
the Commission considered in an open meeting the application of another
transmission service provider for changes to its wholesale transmission service
rates. During that meeting, one commissioner expressed discomfort with the
language in the RFP creating the presumption of reasonableness. He expressed
concern that it could lead to “tens if not hundreds of millions of dollars of
transmission that can just be presumed to be reasonable and that money disappears
out of ratepayers’ pockets with no explanation of where it goes.” The Commission
then voted at that meeting to modify the language in the RFP and eliminate the
language that created the reasonable presumption. The language now reads “[a]

1
Denton Electric’s application was based on a test year ending September 30, 2020.

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requested return may be based on the [transmission service provider’s] debt service
expense as of the end of the Historic Year and the debt service coverage levels
stated in the [transmission service provider’s] most recently issued bond and debt
covenants.” 2

Denton Energy filed an amended application on December 1, 2022 and
again requested to use a 1.75x debt service coverage ratio. It based this request on
a resolution from the City ratifying that Denton Electric would seek to maintain a
debt service coverage of 1.50x on future bond indentures plus 0.25x. The parties
presented conflicting evidence regarding whether the 1.75x debt service coverage
ratio was reasonable. The Commission’s Order noted that the modified RFP
removed the rebuttable presumption regarding the reasonableness of the debt
service coverage in the transmission service provider’s most recently issued bond
covenants plus additional coverage of 0.25x. The Commission ultimately
concluded that a debt service coverage ratio of 1.25x in this case was reasonable.

Denton Electric filed a petition for judicial review and as relevant to this
issue, asserted that the Commission erred in relying on the amended RFP because
the RFP changes (1) were not properly noticed under Commission rules and the
Open Meetings Act (Tex. Gov’t Code § 551.042), and (2) were erroneously
applied retroactively to Denton Electric’s application. Denton Electric also asserted
that the record supported a debt service coverage ratio of at least 1.50x. The trial
court concluded that the Commission’s decision to set Denton Electric’s debt
service coverage ratio at 1.25x “was arbitrary and capricious and was improperly
based on [an RFP] that was modified in violation of state law (the Texas Open

2
The RFP also provides that an applicant can request an additional 0.25x to the debt
service coverage ratio if it shows that it had utilized short-term debt financing as an alternative to
long-term debt financing in a cost-effective manner. Denton Electric did not seek an additional
0.25x under this provision.

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Meetings Act) and Commission Rule, thus constituting a violation of both a
statutory provision and required procedure . . . .”

Under substantial evidence review a court “shall reverse or remand the case
for further proceedings if substantial rights of the appellant have been prejudiced
because the administrative findings, inferences, conclusions, or decisions are . . .
arbitrary or capricious,” Tex. Gov’t Code § 2001.174(2)(F), which is what the
district court found occurred here. “Arbitrariness is a distinct ground for reversal.
An agency acts arbitrarily or abuses its discretion if it fails to consider a mandatory
factor, considers an irrelevant factor, considers appropriate factors but reaches a
completely unreasonable result, or fails to follow its own regulations.” Save Our
Springs, 713 S.W.3d at 320.

In this Court the Commission claims that it properly modified the RFP under
Commission rules as the change to it was not “significant.” But the Commission
also asserts that even if the RFP was improperly modified, its conclusion to set
Denton Electric’s debt service coverage ratio at 1.25x was not arbitrary and
capricious because it was supported by substantial evidence under either RFP.
Denton Electric responds that the RFP was amended in violation of Commission
rules so the Commission’s reliance on the modified RFP was reversible error.
Denton Electric additionally asserts that the 1.25x debt service coverage ratio is not
supported by substantial evidence because no party rebutted the presumption that a
0.25x adder was reasonable. We first consider whether the RFP was modified in
violation of Commission rule.

A. The Commission Failed to Follow its Required Procedure When It
Made a Significant Change to the RFP.
At the time Denton Electric filed its application, the unmodified RFP
provided that “[a] return based on the [transmission service provider’s] debt

9
service expenses as of the end of the Historic Year, and the debt service coverage
levels stated in the [transmission service provider’s] most recently issued bond and
debt covenants plus additional coverage of 0.25 shall be presumed reasonable.”
The Commission’s own rule required it to publish notice in the Texas Register for
any “significant change” to an RFP: “Prior to the implementation of any . . .
significant change to an existing form, the change . . . shall be referenced in the ‘In
Addition’ section of the Texas Register for public comment.” 16 Tex. Admin.
Code § 22.80 (amended 2026). A year after Denton Electric filed its application,
the Commission amended the RFP to omit the “plus additional coverage of 0.25”
portion of the equation. If this change to the RFP was “significant,” then the
Commission failed to provide the requisite notice required by its rule.

The Commission admits the RFP revision was a “change,” but it argues that
this change to the RFP was not “significant” and therefore it was not required to
publish the revision in the Texas Register. Agency rules, such as the one requiring
notice of a significant change, have the force and effect of a statute. Rodriguez v.
Serv. Lloyds Ins. Co., 997 S.W.2d 248, 254 (Tex. 1999). Courts must therefore use
“the same principles we apply when construing statutes.” Tex. Comm’n on Env’t
Quality v. Maverick Cnty., 642 S.W.3d 537, 544 (Tex. 2022) (quoting Patients
Med. Ctr. v. Facility Ins. Co., 623 S.W.3d 336, 341 (Tex. 2021)). And, as with a
statute, the “starting point is the rule’s plain text.” Id. We must interpret terms used
in an agency rule based on their common meaning unless they are ambiguous or
such an interpretation would lead to absurd results. TGS-NOPEC Geophysical Co.
v. Combs, 340 S.W.3d 432, 439 (Tex. 2011). With these principles in mind, we
turn to the plain meaning of the term “significant.”

“Significant” is defined in Merriam Webster’s Collegiate Dictionary as
“having or likely to have influence or effect: IMPORTANT.” Significant,

10
MERRIAM WEBSTER’S COLLEGIATE DICTIONARY (11th ed. 2006); see also Coplin v.
Mann, 622 S.W.3d 586, 590 n.3 (Tex. App.—Texarkana 2021, no pet.) (employing
that definition). “Significant” is also defined in Black’s Law Dictionary as “1.
Embodying or bearing some meaning; having or expressing a sense. 2. Standing as
a subtle sign of something; expressive of some hidden or obscure meaning. 3. Of
special importance; momentous, as distinguished from insignificant.” Significant,
BLACK’S LAW DICTIONARY (12th ed. 2024).

A commissioner’s comments when the Commission changed the RFP belie
the contention that the change was not significant. During the meeting when the
Commission decided to omit the 0.25x adder, a commissioner expressed concern
over the language creating the presumption of reasonableness, noting that it could
lead to “tens if not hundreds of millions of dollars of transmission that can just be
presumed to be reasonable and that money disappears out of ratepayers’ pockets
with no explanation of where it goes.” 3 These comments, recognizing that the
0.25x adder would result in tens of millions of dollars added to transmission rates,
demonstrate that the revision was “significant” based on the common and legal
meanings of that term. The Commission did not follow its own rule in making a
significant change to the RFP that, as a commissioner explicitly recognized, would
directly and substantially impact the method used to calculate a provider’s rate.

The Commission additionally asserts that a “significant change” is one that
only impacts the “filing requirements” and that the modifications to the RFP did

3
We recognize the general proposition that “[i]t is immaterial what a commissioner may
have said or thought in the process of arriving at his decision.” City of Frisco v. Tex. Water
Rights Comm’n, 579 S.W.2d 66, 72 (Tex. Civ. App.—Austin 1979, writ ref’d n.r.e.). This is
because “[t]he thought processes or motivations of an administrator are irrelevant in the judicial
determination whether the agency order is reasonably sustained by appropriate findings and
conclusions that have support in the evidence.” Id. But here, we do not consider the
commissioner’s statements as evidence to support the Commission’s order. Rather, we consider
them to demonstrate the impact of the RFP modification on the calculation of a provider’s rate.

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not change any filing requirements. The Commission explains that the RFP
outlines the information utilities are required to submit with a transmission rate
application and also includes instructions for how the Commission processes an
application. Here, the only difference under the modified RFP, the Commission
claims, is the instructions for how the Commission weighs evidence. But the
Commission’s assertion that the change to the RFP was not significant because it
did not modify the filing requirements is not supported by the language of the
Commission rule requiring that significant changes be published. The rule provides
that “[p]rior to the implementation of any . . . significant change to an existing
form,” the change shall be posted in the Texas Register. 16 Tex. Admin. Code §
22.80 (amended 2026) (emphasis added). The rule does not specify that only
changes to the filing requirements in an existing form are considered significant or
must be posted. Accordingly, we disagree that section 22.80 only requires posting
a change to a form when the change is to the filing requirements. See Maverick
Cnty., 642 S.W.3d at 544 (explain that the starting point for interpreting an agency
regulation is the plain text).

Because the Commission did not follow the required procedure for
amending the RFP, the Commission’s decision to set Denton Electric’s debt
service coverage ratio without applying the presumption in the unmodified RFP
was arbitrary and capricious. See Rodriguez, 997 S.W.2d at 255 (“If the
Commission does not follow the clear, unambiguous language of its own
regulation, we reverse its action as arbitrary and capricious.”). 4

4
Denton Electric also complains that the Commission’s modification of the RFP also
violated the notice provision of the Texas Open Meetings Act, but we need not reach that issue.

12
B. The Commission’s Conclusion to set Denton Electric’s Debt Service
Coverage Ratio at 1.25x was not Supported By Substantial Evidence.
The Commission next asserts that regardless of which RFP was used, it
would have come to the same conclusion to set Denton Electric’s debt service
coverage ratio at 1.25x because the presumption that the 0.25x adder was
reasonable was rebutted by evidence in the record. Denton Electric counters that no
party presented rebuttal evidence so the Commission was required to presume that
a 0.25x adder was reasonable. A presumption is “a rule of law requiring the trier of
fact to reach a particular conclusion in the absence of evidence to the contrary.”
Temple Indep. Sch. Dist. v. English, 896 S.W.2d 167, 169 (Tex. 1995). In other
words, the effect of a presumption “is to shift the burden of producing evidence to
the party against whom it operates.” Gen. Motors Corp. v. Saenz, 873 S.W.2d 353,
359 (Tex. 1993). Accordingly, we consider whether the Commission presented
evidence to rebut the presumption at issue here.

Not once in the record before the Commission did any witness mention the
presumption that a 0.25x adder is reasonable or the need to rebut that presumption.
That makes sense—after all, the Commission believed Denton Electric’s
application was subject to the revised RFP, which contained no such presumed
adder. But the Commission claims that it rebutted the presumption by putting
forward evidence that a debt service coverage ratio of 1.5x was unreasonable. To
accept the Commission’s position, we must assume the Commission countered
Denton Electric’s proposed rate with substantial evidence under the new RFP and,
with the same evidence, rebutted a presumed 0.25x adder that is no longer part of
the RFP. We disagree. The Commission merely provided evidence of an
appropriate rate under the new RFP, not that a 0.25x adder was unreasonable.

The Commission also asserts that the record evidence supported the
Commission’s conclusion that a debt service coverage ratio of 1.25x was a
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reasonable coverage ratio. But under the applicable RFP, because the
reasonableness of the 0.25x adder was not rebutted, a debt service coverage ratio
that did not include that adder was not supported. See Horton v. Kansas City S. Ry.
Co., 692 S.W.3d 112, 141 (Tex. 2024) (explaining that a presumption is a “legal
rule that requires the court to reach a particular conclusion absent contrary
evidence”) (first emphasis added).

The Commission further claims that Denton Electric’s requested coverage
ratio of 1.75x based on the City of Denton’s policy that Denton Electric would
seek to maintain a debt service coverage of 1.50x on future bond indentures plus
the 0.25x adder was unsupported because the unmodified RFP provided that an
additional 0.25 of coverage is to be added a provider’s “most recently issued bond
and debt covenants,” and not a ratio in a city policy or ordinance. But regardless of
which initial debt service coverage level should have been used as a starting
point—1.25x or 1.50x—the Commission failed to rebut the presumption of adding
0.25 to that level.

C. Denton Electric’s Substantial Rights Were Prejudiced by the
Commission’s Arbitrary Decision.
Under substantial evidence review, we reverse the Commission’s order only
upon a showing that the “substantial rights of the appellant have been prejudiced
. . . .” Tex. Gov’t Code § 2001.174(2). The Commission claims that Denton
Electric’s substantial rights were not prejudiced by its failure to publish the change
to the RFP in the Texas Register because Denton Electric was aware of the change
before it filed its amended application. But we look to whether Denton Electric’s
substantial rights have been violated by the action being challenged as arbitrary
and capricious. See id. § 2001.174(2)(F) (providing that a court shall reverse and
remand “if substantial rights of the appellant have been prejudiced because the
administrative . . . decisions are . . . arbitrary or capricious”); Fay-Ray Corp. v.
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Tex. Alcoholic Beverage Comm’n, 959 S.W.2d 362, 365 (Tex. App.—Austin 1998,
no pet.) (“The agency order may not be reversed unless the agency record
demonstrates that appellant’s substantial rights have been prejudiced by the
Board’s committing one of the errors listed in section 2001.174(2)(A)–(F) of the
APA.”). Denton Electric consistently challenged the Commission’s decision to
limit its debt service coverage ratio to 1.25x based on the improperly amended
RFP as being arbitrary and capricious. Accordingly, we look to whether the
substantial rights of Denton Electric have been prejudiced by the Commission’s
decision to set Denton Electric’s debt service coverage ratio at 1.25x in reliance on
the modified RFP.
There has been no claim that Denton Electric’s substantial rights were not
prejudiced by the Commission’s failure to apply the presumption of an additional
0.25x to its debt service recovery ratio under the unmodified RFP. Denton Electric
requested $61,587,692 of debt service before any additional coverage. Multiplying
this amount by a debt service coverage ratio resulted in Denton Electric’s rate of
return. A debt service coverage ratio that did not include the 0.25x adder reduced
Denton Electric’s rate of return by tens of millions of dollars, a prejudice to Denton
Electric’s substantial rights.
Because the Commission acted arbitrarily when it failed to apply the
presumption in its unmodified RFP and Denton Electric’s substantial rights were
violated by that arbitrary action, we overrule the Commission’s issue.

III. The Commission’s Exclusion of Denton Electric’s 6% Requested
Return on Investment Component of its General Fund Transfer was
Authorized and Supported by Substantial Evidence.
In its first issue on cross appeal, Denton Electric asserts that the Commission
unlawfully denied inclusion of Denton Electric’s requested return on investment
component of its general fund transfer. In Denton Electric’s Application, it sought

15
to include a general fund transfer in its transmission cost of service rates. That
amount totaled 11% of its revenues made up of a 5% franchise fee component and
a 6% return on investment component. In its final order, the Commission found
that Denton Electric had established the reasonableness of the 5% franchise fee,
but it failed to sufficiently substantiate the 6% return on investment component for
inclusion in its transmission rates. Denton Electric claims that the Commission has
unlawfully denied inclusion of a material component of its general fund transfer,
causing Denton Electric to charge a rate that does not recover all its required
expenses. The Commission responds that Denton Electric may only recover
expenses through its transmission rates that are reasonable and necessary for
providing transmission service, and the 6% return on investment component is not
a reasonable and necessary cost. We agree with the Commission and conclude that
the Commission had authority to exclude the 6% return on investment component
and that its decision to exclude it is supported by substantial evidence.

A. The Commission had Authority to Exclude Denton Electric’s
General Fund Transfer.
The Commission calculates a utility’s transmission rates using all reasonable
and necessary expenses, plus a reasonable return on investments. City Pub. Serv.
Bd., 109 S.W.3d at 132. Denton Electric argues that the Commission “robbed”
Denton Electric of its right to earn a reasonable rate of return. But Denton Electric
does not explain how it was entitled to an additional category of a return on
investment above its debt service coverage. And in its application, Denton Electric
requested the 11% general fund transfer as a tax other than income tax. See 16 Tex.
Admin. Code § 25.192(c) (providing that federal income taxes are considered an
expense when calculating the transmission cost of service). Accordingly, we
review the Commission’s decision to exclude the 6% return on investment
component of the general fund transfer as a decision to disallow an expense and

16
not as a component of a return on investment.

To establish just and reasonable rates, the Commission must consider a
utility’s “reasonable and prudent operating expenses.” Pub. Util. Comm’n of Tex.
v. Hous. Lighting & Power Co., 748 S.W.2d 439, 441 (Tex. 1987). PURA
explicitly provides that the Commission “shall ensure” that a utility providing
wholesale transmission service “recovers the utility’s reasonable costs . . . .” Tex.
Util. Code § 35.004(c). But not all a utility’s expenses are considered reasonable
for ratemaking purposes. Hous. Lighting & Power, 748 S.W.2d at 441.
Accordingly, the Commission possesses “the discretionary authority to disallow
those operating expenses which are not prudently or actually incurred by a utility.”
Id.; Suburban Util. Corp. v. Pub. Util. Comm’n of Tex., 652 S.W.2d 358, 362 (Tex.
1983) (“The [Commission’s] ratemaking power includes the discretion to disallow
improper expenses.”).

Despite the Commission’s authority to consider the reasonableness of a
utility’s expenses, Denton Electric first claims that the Commission has no
authority to exclude general fund transfers as they are permitted by statute. Under
the Government Code, a municipally owned utility may transfer funds from the
utility to the general fund of the municipality:

[A] municipality and its officers and utility trustees may transfer to
the municipality’s general fund and may use for general or special
purposes revenue of any municipally owned utility system in the
amount and to the extent authorized in the indenture, deed of trust, or
ordinance providing for and securing payment of public securities
issued under this chapter or similar law.
Tex. Gov’t Code § 1502.059. Denton Electric claims that under this statute the
Commission may not disallow a general fund transfer because such a decision
invalidates the exact scenario authorized by the statute by “overrul[ing] and
effectively nullify[ing] the authority granted to the City . . . .” We disagree with
17
Denton Electric’s interpretation of section 1502.059.

Looking to the language of section 1502.059, it permits general fund
transfers but says nothing about whether those general fund transfers are
recoverable expenses. It is also silent regarding the Commission’s discretion to
determine whether as expenses they are reasonable and are therefore recoverable.
See Hous. Lighting & Power, 748 S.W.2d at 441. Further, under Denton Electric’s
construction, a municipally owned utility could charge its ratepayers any amount to
then be transferred to the municipality without any oversight. See City of Fort
Worth v. Rylie, 602 S.W.3d 459, 467 (Tex. 2020) (“We will not construe a statute’s
language to produce ‘patently nonsensical results’ . . . .” (quoting Combs v. Health
Care Servs. Corp., 401 S.W.3d 623, 630 (Tex. 2013))). Accordingly, we reject
Denton Electric’s claim that the Commission’s decision to exclude certain general
fund transfers is prohibited by section 5102.059. See Cadena Comercial USA
Corp. v. Tex. Alcoholic Beverage Comm’n, 518 S.W.3d 318, 326 (Tex. 2017)
(explaining that when reading a statute, “we take statutes as we find them and
refrain from rewriting the Legislature’s text.”).

Denton Electric claims that because it is mandated to make a general fund
transfer totaling 11% through city charter, an ordinance, and a financial memo, the
general fund transfer should be included in Denton Electric’s wholesale
transmission rates under Utility Code section 35.004 which requires the
Commission to ensure a utility recovers its reasonable costs. But Texas
Government Code section 1502.057 sets out expenses that must be included in a
municipally owned utility’s rates, and it does not require that general fund
transfers be included (whether required by ordinance or otherwise). Tex. Gov’t
Code § 1502.057(a)(1) (providing that rates shall include “all operating,
maintenance, depreciation, replacement, improvement, and interest charges in

18
connection with the utility system”). Further, Denton Electric’s claim that the
general fund transfer must be included because it is required by the City ignores
the statutory language requiring the Commission to ensure that a utility recovers its
“reasonable costs,” and the Commission’s discretion to determine what costs are
reasonable. Tex. Util. Code. § 35.004(c) (emphasis added); Hous. Lighting &
Power, 748 S.W.2d at 441.

Denton Electric next claims that the Commission’s exclusion of the 6%
return on investment was arbitrary and capricious because it was not based on any
legal authority. Denton Electric claims that “the Commission insists on creating
and applying—for the first time ever, without reference to any existing authority—
a standard that a transfer must be ‘directly tied’ to the costs of providing
transmission service.” Denton Electric focuses much of its argument on this
claimed requirement that a transfer be “directly tied,” claiming that this
“unfounded standard” arose from a commissioner’s statement in an unrelated rate
hearing that the municipally owned utility “should only be allowed to recover
[general fund transfer] costs that can be ‘justified by a specific rationale’ related to
the ‘actual cost’ of the provision of service.” But the Commission’s Order does not
use the phrase “directly tied.” Nor does the Commission argue in this Court that its
order was proper because the transfer was not directly tied to the costs of providing
a transmission service. To the contrary, in its findings of fact regarding the general
fund transfers in the Commission’s Order, the Commission stated that “[r]equiring
a utility to substantiate all its transfers to the general fund that are included in
transmission rates falls within the Commission’s discretion to ascertain the
reasonableness of such costs.” The Commission also found that “[t]he City
provided no explanation or justification for reasonableness of the increased 6%
[return on investment] rate . . . .”

19
Denton Electric points to the testimony of a Commission staff witness who
testified regarding Denton Electric’s general fund transfer as support for its claim
that the new standard was the basis for the Commission’s decision. The staff
witness pointed to the commissioner’s statement referenced above, noting the
“concern that the municipal utility . . . should only be allowed to recover [general
fund transfers] that can be justified by a specific rationale related to the actual cost
of the provision of service and not just [general fund transfers] as additional
compensation.” But the witness also testified that in addition to this concern,
Denton Electric “has not provided support for the reasonableness of an additional
return amount that is over and above the return dollars provided to” Denton
Electric using the debt service coverage method. We disagree with Denton
Electric’s characterization that the Commission created and applied a new standard
when it excluded Denton Electric’s 6% return on investment component. 5 Hous.
Lighting & Power, 748 S.W.2d at 441 (requiring the Commission to consider a
utility’s “reasonable and prudent” operating expenses).

Denton Electric also argues that by prohibiting it from recovering a rate of
return in its cost of service, “the Commission is denying the City its established
right to earn a reasonable profit for its ownership of Denton Electric.” Relying on
San Antonio Independent School District v. City of San Antonio, Denton Electric
asserts that a municipality may receive a profit from its ownership of a utility. 550
S.W.2d 262, 264 (Tex. 1976) (“The general rule is that the city is entitled to make

5
As support for its claim that the Commission created and applied the “directly tied”
standard, the City points to the Commission’s statement in its brief in the district court that
“[u]nder the Commission’s rules and authorizing statute, the Commission is required to review
Denton’s requested inclusions to determine whether they are directly tied to the actual cost of
providing transmission service and whether they are reasonable.” But the Commission went on
to argue, consistent with its argument in this Court and the conclusions in the Commission
Order, that Denton Electric “did not sufficiently substantiate the reasonableness of including the
[return on investment] component of its Fund Transfer in its transmission rates.”

20
a reasonable profit from its own utility system.”). We agree with the general
proposition that the City may make a profit from its ownership of Denton Electric.
The Commission has set out the methods that a municipal utility may use for
determination of its revenue requirements: cash flow, debt service coverage ratio,
times interest earned ratio, and rate of return. Denton Electric based its requested
return on a debt service coverage method (discussed above) but fails to explain
how it is entitled to recover additional profit not covered by that method.

We further recognize that while the Court in City of San Antonio permitted
the fund transfer in that case, the Court expressly noted that the reasonableness of
the rates were not at issue. Id. at 265. “Upon proper pleading and record, if the
City’s return were proved to be excessive and unreasonable, the courts could grant
relief.” Id. The Court’s recognition that a city’s rate of return must be reasonable is
consistent with Texas Utility Code section 35.004(c) (enacted after the Court’s
decision) which authorizes the Commission to review the reasonableness of rates.

Finally, Denton Electric points to prior cases in which it claims the
Commission granted inclusion of “comparable or higher” general fund transfers
without inquiring into whether the requested percentage was “directly tied” to
transmission costs. The Commission responds that in the cited cases, utilities were
permitted to recover “fund transfers that resulted from settlement agreements or
were otherwise uncontested. In those prior settlement agreements, the Commission
has approved, excluded, or not addressed fund transfers at all.” But regardless of
what the Commission did in other unrelated cases, that does not impact the
Commission’s authority to act here. The Commission was authorized under PURA
to address the reasonableness of the general fund transfer.

21
B. Substantial Evidence Supports the Commission’s Decision to exclude
the 6% Return on Investment Component.
Turning to whether the Commission’s decision that Denton Electric’s 6%
return on investment component was not a reasonable and necessary cost, we look
to the evidence to determine whether the evidence as a whole is such that
reasonable minds could have reached the same conclusion. See Suburban Util.
Corp., 652 S.W.2d at 364. We further note that “[i]f the expense can be shown to
be actual, necessary and reasonable it should be allowed.” Id. at 363.

Denton Electric claims that the 6% return on investment component was
supported by testimony that if an investor-owned utility were to serve the City, it
would pay the City more than only franchise fees. According to Denton Electric,
this demonstrates that the 6% return on investment component provides cost
recovery to the City of revenue that Denton Electric would otherwise have to pay if
it were not municipally owned. Denton Electric points to testimony from
Commission staff that a non-municipal utility would pay ad valorem taxes if it
owned property within the City. She agreed with the statement that “if a utility is
operating within a city and it pays some sort of taxes or fees beyond the franchise
fees that the city would actually receive more than just the five percent franchise
fee from that utility,” answering, “[t]hat’s correct.” And a witness for the Office of
Public Utility Counsel testified that the City would receive more than a 5%
franchise fee from a non-municipal utility if that utility “paid five percent franchise
plus other taxes.” The ALJ rejected this testimony as evidence of reasonableness of
the 6% return on investment, noting that Denton Electric provided no information
related to the amount of ad valorem or other taxes paid by other utilities that would
support a claim that the 6% component was comparable to those other utilities’

22
expenses. 6

Denton Electric also claims that the return on investment component is akin
to dividends an investor-owned utility pays to its shareholders. But this analogy
was rejected by the Commission. A witness for the Office of Public Utility
Counsel testified to the contrary, explaining that an investor-owned utility would
receive all of its earnings (which would be used to pay dividends) through its
authorized return. Here, Denton Electric elected to use the debt service coverage
method to calculate its rate of return. See 16 Tex. Admin. Code § 25.192(c)(1), (2)
(providing multiple methods for a municipally owned utility to calculate its rate of
return). Denton Electric’s requested return on investment component is additional
requested compensation above the debt service coverage return that is already
included in Denton Electric’s rates and is accordingly not analogous to a dividend
payment.

Denton Electric also argues that the records supports a minimum return on
investment component of 3.5%. Denton Electric points to evidence that the City
requires its water and wastewater utilities to pay a 3.5% return on investment
general fund transfer. The record also showed that a 3.5% return on investment
general fund transfer was allowed in Denton Electric’s prior transmission cost of
service rates.7 But Denton Electric fails to point to any evidence or argument
before the Commission that a 3.5% rate was reasonable. Based on all the evidence,
we conclude that the Commission’s decision that Denton Electric had not
6
In contrast, the Commission approved the 5% franchise fee component of the general
fund transfer, concluding Denton Electric had established it was reasonable. Denton Electric
presented evidence that the 5% fee was consistent with the franchise rates charged to other
utilities operating in the City.
7
In 2020, the City Council passed an ordinance raising the return on investment portion
of Denton Electric’s general fund transfer from 3.5% to 6% in response to the impacts from
COVID-19. The increase was intended to be temporary, but a subsequent ordinance made the
change permanent.

23
established the reasonableness of its 6% return on investment fee was supported by
substantial evidence. That is, reasonable minds could have reached the same
conclusion as the Commission.

Finally, Denton Electric also challenges the Commission’s decision on the
ground that it was meant to “punish” Denton Electric for its purported
“overearning” in prior years. But this is not consistent with the Commission’s
Order. The Order does not reflect that the 6% return on investment GFT was not
allowed based on Denton Electric’s prior “overearning.” Rather, the order
explained that Denton Electric failed to justify the requested GFT, and as discussed
above, this conclusion is supported by substantial evidence. Additionally, even if
the Commission had stated in its order that it was punishing Denton Electric, “a
reviewing court is not bound by the reasons given by an agency in its order,
provided there is a valid basis for the action taken by the agency,” which we have
concluded there was. Cent. Power & Light Co./Cities of Alice v. Pub. Util.
Comm’n of Tex., 36 S.W.3d 547, 559 (Tex. App.—Austin 2000, pet. denied). We
overrule Denton Electric’s first issue.

IV. Denton Electric’s Challenge to the Commission’s Order Requiring it to
File an Interim Transmission Cost of Service Application is Moot.
The Commission Order required Denton Electric to file an interim
transmission cost of service proceeding within 90 days after the order was filed.
Denton Electric claims that this order has no basis in law and its rights have been
prejudiced by being subjected to a proceeding that was impermissibly ordered. In
response, the Commission asserts that the issue is moot because Denton Electric
has already complied with the order by filing an application for an interim update
of its wholesale transmission rates. We agree with the Commission that this issue
is moot.

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A court cannot decide a case that has become moot, meaning there is no
longer “a justiciable controversy between the parties—that is, if the issues
presented are no longer ‘live,’ or if the parties lack a legally cognizable interest in
the outcome.” Heckman v. Williamson Cnty., 369 S.W.3d 137, 162 (Tex. 2012)
(quoting Williams v. Lara, 52, S.W.3d 171, 184 (Tex. 2001)). “Put simply, a case
is moot when the court’s action on the merits cannot affect the parties’ rights or
interests.” Id. Denton Electric asserts that the order requiring it to file an interim
rate proceeding should be reversed, but Denton Electric already filed the
application, and the Commission has already issued a Notice of Approval
addressing it. Accordingly, there is no action by this Court that would affect
Denton Electric’s rights or interests regarding the requirement that it file an interim
proceeding.

Denton Electric claims that review of the Commission’s Order is still
appropriate because the capable-of-repetition-yet-evading-review exception to
mootness applies here. This exception “applies only in rare circumstances” and
applies when a plaintiff proves “(1) the challenged action was too short in duration
to be litigated fully before the action ceased or expired; and (2) a reasonable
expectation exists that the same complaining party will be subjected to the same
action again.” Tex. Dep’t of Fam. & Protective Servs. v. Grassroots Leadership,
Inc., 717 S.W.3d 854, 884 (Tex. 2025) (quoting Williams, 52 S.W.3d at 184).

Denton Electric argues that “it is reasonable to expect that [Denton Energy]
in particular (along with all other [municipally owned utilities] with transmission
systems, for that matter) will experience the same wrongful conduct by the
Commission.” It simply claims that Denton Energy will continue to file rate cases
“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

25
boldly claimed it has every right to do).” But Denton Electric has not pointed to
evidence of a “pattern” of Commission actions, nor has it otherwise supported its
claim that the Commission is “likely” to order an interim filing in the future. As for
whether a reasonable expectation of the same action exists, “a ‘mere physical or
theoretical possibility’ is insufficient to invoke the capable-of-repetition
exception.” Id. at 885 (quoting Murphy v. Hunt, 455 U.S. 478, 482 (1982) (per
curiam)). Denton Electric has failed to demonstrate more than a mere theoretical
possibility that it will be required to file an interim transmission cost of service
application in the future.

Additionally, Denton Electric’s claim that it is reasonable to expect that
other municipally owned utilities will experience the Commission’s wrongful
conduct is unavailing. Denton Electric must prove that it, and not another party,
will be subjected to the same action in order to show that the exception applies. See
Tex. Dep’t of Fam. & Protective Servs., 717 S.W.3d at 884; Williams, 52 S.W.3d at
184-85 (holding that the exception did not apply where former inmates failed to
prove they would be subjected in the future to the jail program they were
challenging when they had already been released from jail). Whether other
municipally owned utilities might be required to file such an application is
immaterial to whether Denton Electric will be subjected to the same action.

Because this issue is moot, we have no jurisdiction to render the judgment
Denton Electric seeks.

CONCLUSION

Having overruled the Commission’s issue and the City of Denton’s issues,
we affirm the judgment of the district court reversing and remanding the
Commission’s decision to set Denton Electric’s debt service coverage ratio at
1.25x and upholding the remainder of the Commission’s order.
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/s/ April Farris
April Farris
Justice

Panel consists of Chief Justice Brister and Justices Field and Farris.

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