FEATURE ARTICLE, OCTOBER 2006

HOW TO AVOID ACCIDENTALLY BECOMING A REGULATED ELECTRIC UTILITY IN TEXAS
Allen Nye Jr. and Kirk Rasmussen

For many years, public understanding of electric utilities typically began and ended with the content of an electric bill. Historically, incumbent electric utilities provided bundled electric services to customers in a particular geographic region. They generated the electric energy at power plants, delivered the electricity over power lines to end-use customers, and charged customers a regulated rate for the metered energy delivered. Beginning January 1, 2002, the Texas Legislature “unbundled” the retail electric market. As a result, traditional electric utilities were divided into separate corporate entities providing the three services that were previously supplied jointly by integrated electric utilities. Most electric consumers, particularly sophisticated developers and owners of major industrial and commercial enterprises, have developed an informed understanding of the portion of electric deregulation that impacts them most: the sale of electricity from a retail electric provider. Electric consumers are growing increasingly accustomed to searching the market for companies that provide retail electric products and services at a cost and in a manner that they desire. A limited number of consumers, however, understand the variety of legal regulations that govern the transmission and distribution wires over which retail electric service is delivered.

The deregulation of the Texas electric market has coincided with the expansion of the use of privately constructed, owned, and operated transmission and distribution facilities as consumers seek to minimize wire charges as a component of their retail electric bill or simply for other reasons of commercial expediency or convenience. For example, industrial facilities have constructed private transmission facilities from which they take electric service from the statewide electric grid. Likewise, industrial facilities, hospitals and shopping malls often take electric service at a distinct point of delivery and then distribute the electric energy to several different units, offices or buildings, some of which may be owned or operated by unaffiliated third parties (such as tenants). The owners of such private electrical facilities, however, may not understand that they may be unintentionally engaging in activities that can be highly regulated and carry potentially significant consequences if they do not comply with applicable laws and regulations. The following discussion will help businesses to avoid the possibility that someone, someday, may inform them that they have unintentionally become a regulated electric utility or retail electric provider and that they have violated Texas law applicable to such entities.

I. What are private electrical facilities?

In Texas, transmission facilities are generally considered to be electric conductor (wires) and associated structures and facilities operated at 60 kilovolts (kV) or above.1 As a practical matter, transmission lines usually appear on concrete or steel poles or lattice V-towers that generally range from 80 to 160 feet in height, although some lines may be constructed on smaller wooden pole or H-frame structures. Distribution facilities, in comparison, generally are constructed on shorter (approximately 30 feet tall) wood poles that carry conductor operated at less than 60 kV.

II. What State Law Applies to Private Electric Facilities?

Two major sets of laws and regulations apply to the ownership and operation of electric facilities and the retail sale of electricity. The Public Utility Regulatory Act (PURA)2 is the Texas statute that governs the electric market in Texas. PURA includes several hundred pages of technical legal directives that limit and govern participation and conduct in the Texas electric market. Fortunately, many of the sections of PURA apply to issues unrelated to the ownership of electric facilities and the retail sale of electricity. The second source of law governing electric facilities and the retail sale of electricity is the substantive rules of the Public Utility Commission of Texas (PUCT)3. In order to avoid unintentionally becoming regulated as an electric utility or a retail electric provider, an owner or operator of electric facilities should understand the relevant portions of both PURA and the PUCT substantive rules.

III. What is the Public Utility Commission of Texas?

The PUCT regulates participants engaged in the electric market in Texas, including owners and operators of electric facilities and those who make retail sales of electricity to end-use customers. The PUCT sits in Austin, Texas, and consists of three commissioners appointed by the governor with the advice and consent of the Texas Senate for 6-year terms. If an entity runs afoul of PURA or substantive rules by engaging in prohibited conduct, resolution of the issues associated with such conduct would be addressed by the PUCT.

IV. What is an Electric Utility?

Under Texas law, an electric utility is defined in relevant part to be a “person [. . .] that owns or operates for compensation in this state equipment or facilities to produce, generate, transmit, distribute, sell or furnish electricity in this state.”4 The term “person” is defined broadly and includes both individuals and corporate entities.5 Thus, effectively any person or corporate entity that owns or operates transmission or distribution facilities for compensation may be an electric utility. The designation is significant in that the remaining applicable provisions of PURA and the PUCT substantive rules govern and control the actions of electric utilities.

V. Are there any exceptions?

Notwithstanding the foregoing, ownership and operation of private electric facilities does not have to result in electric utility status and the attenuate implications. Both PURA and the PUCT substantive rules provide exceptions, that if properly considered when structuring the ownership and operation of private facilities, provide owners and operators with ample opportunities to avoid government regulation.

1. The Self-Use Exception. PURA § 31.002(6)(J) provides that an “electric utility does not include a person not otherwise an electric utility who: (i) furnishes an electric service or commodity only to itself [. . .] if that service or commodity is not resold to or reused by others.” This exception is commonly referred to as the self-use exception since entities are specifically allowed to provide services to themselves if, and only if, it is not resold or reused by others.

The self-use exception has been interpreted very narrowly. In the leading case interpreting this exception (Destec Energy, Inc. v. Houston Lighting & Power Company6), the Austin Court of Ap-peals determined that when electricity was transferred from a partnership to its partners, the partnership was not furnishing electricity to itself; rather, the electricity was moving “between distinct, separate entities”7 and would not qualify for the self-use exception.

Therefore, under the self-use exception, an owner of private electric facilities can avoid becoming an electric utility as long as it is providing service only to itself as such term has been interpreted by the Destec decision. Accordingly, determination of the applicability of the self-use exception is fact specific and may depend on a number of factors that should be carefully considered.

2. Exception for Electric Service as an Incident of Tenancy. A further exception to the general definition of electric utility service involves the provision of electric service from a landlord to its tenants as an incident of tenancy. PURA § 31.002(6)(J)(i) provides that the term electric utility does not include a person, not otherwise an electric utility, who “furnishes an electric service or commodity only to [. . .] its tenants as an incident of [. . .] tenancy, if that service or commodity is not resold to or used by others.” This exception was created to allow entities such as apartment houses and mobile home parks to submeter electricity to their tenants without becoming electric utilities under PURA. While entities such as apartment complexes and mobile home parks that provide electric services to their tenants may not be electric utilities, such entities are subject to regulations governing the provision of electric service to tenants.8 Among other things, such entities are prohibited from charging their tenants more for the electricity than they paid for it.9 Although the tenant exception has commonly been applied to apartment owners and mobile home parks, it may also apply to other landlord/ tenant relationships.

3. “For Compensation” Exception. Perhaps the simplest way for private owners or operators of electric facilities to avoid becoming an electric utility is to avoid meeting the definition altogether. Pursuant to PURA § 31.002 a person must own or operate electrical facilities for compensation. It is not enough simply to own or operate such facilities. The Commission confirmed this opinion in a recent case.10 In the Flint Hills Case, two industrial entities attempted to avoid the payment of certain fees through the use of jointly owned private transmission and distribution facilities connected directly to a generator and not interconnected to the electric grid. The Commission, in support of the underlying decision of the administrative law judge (ALJ) that heard the case, found that neither entity was an electric utility under PURA § 31.002(6) because they would not receive compensation from participation in the proposed joint ownership and operation of the line. The ALJ further found that the self-use exception applied because “neither entity would be using the other’s ownership interest to serve its own electricity requirements.” The Commission, however, declined to adopt the recommendation finding that it was unnecessary given their determination that the parties were not electric utilities.

Thus, an entity may avoid status as an electric utility if it provides electric service without receiving compensation for that service. In the Flint Hills Case, the PUCT defined compensation, an undefined term in PURA, as “generally understood to mean a payment for value received or services rendered.”11 The PUCT rejected arguments that reimbursement of construction costs and non-monetary benefits should be considered as compensation for purposes of finding electric utility status.12 Likewise, the definition of retail customer under PURA § 31.002(16) is “a separately metered end-use customer who purchases and ultimately consumes electricity.” (emphasis added). This definition implies that electric service is not retail electric service unless there is compensation for the service provided. However, other than the plain words of the statute and the PUCT’s interpretation in the Flint Hills Case, there is little precedent clarifying what constitutes “for compensation” in the definition of electric utility. Thus, although not certain, it is possible that owners of private facilities can avoid regulation as electric utilities by providing services to other third-parties without being compensated for such services.

VII. Retail Electric Service

Private electric facility owners can also unknowingly run afoul of the law by selling or reselling electricity to third party end-use customers. In Texas, only a registered retail electric provider (REP), a person that sells electric energy to retail customers in Texas13, can legally sell electric energy to retail customers. The PUCT substantive rules require that all persons who purchase, take title to, and resell electricity must register as a REP pursuant to the Commission’s rules and guidelines. Thus, where an entity acquires electric energy from a REP and provides some or all of that energy to a third party (such as a tenant or affiliated entity), the manner in which such electric energy is provided could result in a resale of electricity.

Accordingly, prudent owners and operators of private electric systems, that also provide retail electricity to third parties, should carefully consider the manner in which such arrangements are established so as to avoid providing a retail electric service that can only be provided by a certificated REP.

Although still in its infancy, many industry analysts consider the deregulation of the Texas retail electric market a resounding success. However, market participants that fail to pay attention to the manner in which the market is managed and regulated, can unexpectedly find themselves operating contrary to the governing statutory provisions and regulations. In contrast, owners and operators of private electric facilities that carefully consider and evaluate the regulations governing the Texas electric market, can avoid unnecessary regulation and place themselves in a favorable competitive position to best take advantage of the structure and efficiencies of the market.

Allen Nye Jr. is a partner and Kirk Rasmussen is an associate with Hunton & Williams in Dallas.

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