Full opinion text
ON MOTION FOR REHEARING OPINION David Puryear, Justice We grant the motion for rehearing filed by Oncor, withdraw our opinion and judgment dated August 6, 2014, and substitute the following opinion in its place solely for the purpose of rendering judgment on the university-discount issue rather than remanding it to the Commission. See Tex. R. App. Proc. 43.4. We dismiss the motions for rehearing filed by the Public Utility Commission, the Steering Committee of Cities Served by Oncor, and State of Texas’ Agencies and Institutions of Higher Education, and we dismiss the motions for en banc reconsideration filed by Oncor and State of Texas’ Agencies and Institutions of Higher Education. This is an administrative appeal from a final order of the Public Utility Commission (the Commission) increasing rates charged for electric transmission and distribution services by Oncor Electric Delivery Company, LLC (Oncor). The district court affirmed all but two of the disputed issues in the Commission’s order. This appeal involves several appellants and ap-pellees, raising a total of twelve issues. For the reasons discussed herein, we affirm the district court’s judgment with re.spect to eight of the twelve issues and reverse the judgment and remand this cause to the Commission for further proceedings with respect to the following three issues: (1) whether the Commission properly excluded from Oncor’s reasonable and necessary expenses a portion of its requested franchise-fee payments; (2) whether the Commission properly calculated the “lead-day” figure for the franchise-tax component of Oncor’s cash-working-capital allowance; and (3) whether the Commission properly determined Oncor’s federal income-tax expense. We reverse the district court’s judgment reversing the Commission’s determination that Oncor need not offer state colleges and universities a 20% discounted rate and render judgment consistent with the Commission’s determination on the discount issue. FACTUAL AND PROCEDURAL BACKGROUND Overview of electric utility ratemaking Oncor is an electric utility, specifically a “transmission and distribution utility,” as defined in the Public Utilities Regulatory Act (PURA). See Tex. Util.Code § 31.002(6). Consequently, its rates are regulated by PURA and set by the Commission in a contested-case proceeding, referred to as a ratemaking proceeding. See generally PURA §§ 36.001-.406; see also Tex. Gov’t Code § 2001.003(1). The Commission is required by PURA to set rates that “will permit the utility a reasonable opportunity to earn a reasonable return on the utility’s invested capital used and useful in providing service to the public in excess of the utility’s reasonable and necessary operating expenses.” PURA § 36.051. In other words, a utility is entitled to rates sufficient to repay its expenses, without a return or profit on those expenses, and to provide a return on the invested capital included in its “rate base,” without repaying that investment. Cities for Fair Util. Rates v. Public Util. Comrn’n, 924 S.W.2d 933, 935 (Tex.1996). In determining the amount of invested capital used to serve customers, the Commission uses the “original cost; less depreciation, of property used by and useful to the utility in providing service.” PURA § 36.053(a). To establish the utility’s reasonable and necessary operating expenses, the Commission starts with the utility’s actual expenses incurred during a “test year” and then adjusts those expenses for known and measurable changes. 16 Tex. Admin. Code § 25.231(b) (2014) (Pub. Util. Comm’n of Tex., Cost of Service). Allowable expenses include such things as operating expenses, federal income taxes, and employee post-retirement benefits. See id. Together, a utility’s allowable expenses plus its return on invested capital compose its “cost of service.” Id. § 25.231(a). Thus, PURA directs the Commis- ' sion to examine financial information taken from a historical test year and calculate prospective rates based on three factors: (1) the amount of invested capital that the utility uses to provide service to its customers (the “rate base”); (2) a reasonable rate of return on that invested capital; and (3) the amount of the utility’s reasonable and necessary operating expenses (“allowable expenses”). See Suburban Util. Corp. v. Public Util. Comm’n, 652 S.W.2d 358, 362 (Tex.1983). Additionally, the Commission determines issues of “rate design,” which involve determining how to distribute the utility’s revenue requirements among the various services provided by the utility. See Nucor Steel v. Public Util. Comm’n, 168 S.W.3d 260, 268 (Tex. App. — Austin 2005, no pet.). In a proceeding involving a proposed rate change, the burden of proving that the rate change is just and reasonable is on the utility. See PURA § 36.006. Proceedings in this case In 2008, Oncor filed an application with the Commission seeking to increase its rates, supporting its request with voluminous testimony and exhibits constituting its “rate-filing package.” See id. § 36.351. The rate-filing package accompanying On-cor’s request for an increase included data based on the 2007 test year. See id. Several other entities (including several appellants and appellees) intervened to oppose Oncor’s request. The Commission referred Oncor’s rate-filing package to the State Office of Administrative Hearings (SOAH) to conduct hearings (administered by Administrative Law Judges (ALJs)) on the utility’s requested rate increase. At the conclusion of the hearings, the ALJs issued a proposal for decision (PFD), which contained the judges’ findings of fact and conclusions of law recommending that the Commission allow some of Oncor’s requested rate increase. After reviewing briefing and argument of the parties, the Commission issued its final Order on Rehearing (Order), wherein it accepted some but also rejected some of the ALJs’ findings and conclusions. See Tex. Gov’t Code § 2003.049(g) (outlining when Commission may change ALJ’s findings and conclusions). Oncor and four other parties involved in the ratemaking proceedings filed suits for judicial review in the district court, seeking reversal of various aspects of the Commission’s Order. See PURA § 15.001. The district court affirmed the Commission’s Order in all respects except regarding two issues: (1) whether Oncor is required to offer a discounted rate to state colleges and universities and (2) whether the Commission properly excluded from Oncor’s expenses its payments of municipal franchise fees. With no party entirely satisfied by the trial court’s judgment, each has appealed portions of it. Parties to this suit and issues on appeal Oncor raises seven issues on appeal, asserting that: (1) the district court erred in reversing the Commission’s decision allowing Oncor to eliminate the 20% discount it had been providing to state colleges and universities; (2) the Commission erred in not allowing Oncor to remove certain deductions from its accumulated-deferred-federal-income-tax (ADFIT) balance; (3) the Commission erroneously calculated Oncor’s cash-working-capital allowance with respect to amounts related to the state franchise tax; (4) the Commission erred in not allowing Oncor to recover certain business restructuring costs; (5) the Commission erred in removing Oncor’s payment of certain employee-incentive compensation from its cost of service; (6) the Commission erred in not allowing On-cor to recover its reimbursement of certain municipalities’ regulatory costs; and (7) the Commission erred in requiring Oncor to prepare a rate-design study addressing the “direct assignment of costs” methodology as applied to wholesale customers as a rate class. The Commission appeals the two issues reversed by the district court. First, the Commission agrees with Oncor’s position on the university discount. Second, the Commission asserts that the district court erred in reversing the Commission’s Order denying Oncor’s recovery of its payment of municipal franchise fees. CenterPoint Energy Houston Electric, LLC (CenterPoint) also appeals the university-discount issue. The Steering Committee of Cities Served by Oncor (Steering Committee) is a coalition of incorporated municipalities. Steering Committee asserts four issues on appeal, alleging that the district court erred by affirming the Commission’s decision to: (1) not impose a consolidated tax savings adjustment on Oncor’s income-tax expense; (2) allow Oncor complete recovery for its expenses incurred in deploying automated meters; (3) base Oncor’s selfi insurance reserve accrual on insufficient evidence; and (4) include pension-related assets in its calculation of Oncor’s ADFIT balance. Four parties join in appealing Steering Committee’s first issue regarding Oncor’s income-tax expense: Texas Industrial Energy Consumers (TIEC), which represents large industrial customers; the Office of Public Utility Counsel (OPUC), which is statutory counsel charged with representing the interests of residents and small businesses; the State of Texas’ Agencies and Institutions of Higher Learning (State Agencies), which represent public agencies and universities; and the Alliance of TXU/Oncor Customers (Alliance), which represents residential customers. The Alliance also joins in appealing Steering Committee’s second issue regarding On-cor’s recovery for automated meters. STANDARDS OF REVIEW To prevail in an administrative appeal, a party must show reversible error in the agency’s order. See Anderson v. Railroad Comm’n, 963 S.W.2d 217, 219 (Tex. App.—Austin 1998, pet. denied); see also Tex. Gov’t Code § 2001.174. The Administrative Procedure Act requires the reviewing court to reverse or remand a case 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, (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. Tex. Gov’t Code § 2001.174. When reviewing an agency’s fact findings and corresponding legal conclusions, a court uses the deferential substantial-evidence standard. Substantial-evidence review is limited in that it requires “only more than a mere scintilla” to support an agency’s determination. Railroad Comm’n v. Torch Operating Co., 912 S.W.2d 790, 792-93 (Tex.1995). Substantial-evidence review “does not allow a court to substitute its judgment for that of the agency.” Id. at 792. As such, “the evidence in the record actually may preponderate against the decision of the agency and nonetheless amount to substantial evidence.” Texas Health Facilities Comm’n v. Charter Med.-Dallas, Inc., 665 S.W.2d 446, 452 (Tex.1984). The true test is not whether the agency reached the correct conclusion, but whether some reasonable basis exists in the record for the action taken by the agency. Id. The findings, inferences, conclusions, and decisions of an administrative agency are presumed to be supported by substantial evidence, and the burden is on the contestant to prove otherwise. Id. at 458. An agency’s decision is arbitrary and capricious or results from an abuse of discretion if the agency: (1) failed to consider a factor that the legislature directs it to consider; (2) considers an irrelevant factor; or (3) weighs only relevant factors that the legislature directs it to consider but still reaches a completely unreasonable result. City of El Paso v. Public Util. Comm’n, 888 S.W.2d 179, 184 (Tex.1994). Other reasons an agency’s decision might be considered arbitrary is if its order denies parties due process of law or the agency fails to follow the clear, unambiguous language of its own regulations. Reliant Energy, Inc. v. Public Util. Comm’n, 153 S.W.3d 174, 199 (Tex.App.—Austin 2004, pet. denied). We review questions of statutory construction de novo. State v. Shumake, 199 S.W.3d 279, 284 (Tex.2006). Our primary objective when construing a statute is to give effect to the legislature’s intent. See id. We seek that intent first and foremost in the statutory text, see id. and we rely on the plain meaning of the text unless a different meaning is supplied by legislative definition or enforcing the plain language would produce absurd results, see Entergy Gulf States, Inc. v. Summers, 282 S.W.3d 433, 437 (Tex.2009). Additionally, we presume the legislature’s intention when enacting statutes is to favor the public interest over any private interest and to produce a just and reasonable result. See Tex. Gov’t Code § 311.021. When reviewing an agency’s interpretation of a statute that it is charged with enforcing, we first consider whether the statute is ambiguous. See Railroad Comm’n v. Texas Citizens for a Safe Future & Clean Water, 336 S.W.3d 619, 625 (Tex.2011). If the legislature’s intent is “clear and unambiguous under the language of the statute, that is the end of the inquiry.” Id. If the statute is ambiguous, however, we will uphold the agency’s construction if it is reasonable and in accord with the statute’s plain language. Id. Deference is particularly warranted when the statutory term at issue is “amorphous,” when the agency oversees “a complex regulatory scheme,” and when the analysis to be performed “implicates” the agency’s technical expertise. Id. at 629-30. DISCUSSION We begin our discussion with the one issue pertaining to rate design: the discount for state colleges and universities. We then proceed to a discussion of the five issues pertaining to rate base, followed by a discussion of the five issues related to reasonable and necessary expenses. Finally, we conclude our discussion with the one issue not directly affecting the rate-making in this proceeding: whether the Commission was authorized to order Oncor to prepare a study about the direct assignment of costs to wholesale customers. I. Rate-design issue: university discount The dispute and procedural background The Commission and Oncor appeal the district court’s reversal of the Commission’s partial summary decision discontinuing a 20% base-rate discount for state colleges and universities (university discount). The statute at issue is PURA section 36.351, stating in relevant part, (a) Notwithstanding any other provision of this title, each electric utility and municipally owned utility shall discount charges for electric service provided to a facility of a four-year state university, upper-level institution, Texas State Technical College, or college. (b) The discount is a 20-percent reduction of the utility’s base rates that would otherwise be paid under the applicable tariffed rate. PURA § 36.351 (emphasis added). It is undisputed that Oncor is an “electric utility” under this statute. See id. § 31.002(6) (electric utility defined as 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” but specifically excluding power generation companies and retail electric providers). The point of contention between appellants (the Commission, Oncor, and CenterPoint) and appellees (State Agencies) centers on interpretation of the phrase “electric service provided to [state universities].” In other words, does Oncor “provide electric service” to state universities, which are retail customers? Appellants argue that Oncor does not, as it is statutorily proscribed from providing “retail electric service” because — since 2002, when utility companies were required to “unbundle” into three separate entities — only statutorily defined “retail electric providers” (REPs) may perform that function. State Agencies maintain that Oncor does provide electric service to state universities in the form of “transmission and distribution service” by delivering electricity to each end-user’s electric meter and point of use and therefore falls under section 36.351 and must offer the discount. In its rate-change application, Oncor proposed to continue providing the university discount on the condition that it be allowed to subsidize the discount by recovering any resulting revenue losses from all retail customer classes. In the alternative, it proposed to eliminate the university discount in its entirety. State Agencies filed a motion for partial summary decision seeking an order that Oncor be required to continue providing the discount and that it may not subsidize it. The ALJs considered the State Agencies’ motion and recommended that it be granted, rejecting Óncor’s argument that because it does not directly sell its transmission and distribution services to state universities — but sells those services to REPs, who then sell the electricity to end-use retail customers such as universities — it does not “provide electric service” to state universities and, therefore, does not fall under the statute. The Commission issued an order on the State Agencies’ motion rejecting the ALJs’ recommendation, determining that — while Oncor had previously been required to provide the discount before deregulation of the electric industry — Oncor was no longer required to provide the discount because it is a transmission and distribution utility that operates in an area open to competition, which “limits its provision of services to retail electric providers.” The Commission concluded that “the 20% discount requirement [is limited] to integrated electric utilities that provide electric service in areas that are not open to competition” and that the discount “does not apply to services provided by a transmission and distribution utility that benefit [state universities] when the service is provided to REPs in areas of the State that are open to competition.” Thus, concluded the Commission, Oncor is no longer required to provide the discount. The Commission’s order on the discount issue was incorporated into its final Order. State Agencies appealed the Order to the district court, which reversed the Order, effectively reinstating the university discount. Legislative and factual background of section 36.351 Some background information on the origins of this statutory provision and the regulation of electric utilities in Texas is useful. In 1975 the legislature enacted PURA, creating the Commission and establishing a comprehensive regulatory regime for electric utilities. See State v. Public Util. Comm’n, 110 S.W.3d 580, 583 (Tex.App.—Austin 2003, no pet.). Under the regulated system, a single vertically integrated utility would provide all aspects of electric service to retail customers: power generation, transmission and distribution, and the sale of electricity. Id. Section 36.351 was enacted in 1995 prior to retail deregulation when utilities were still fully regulated and vertically integrated. Id. Four years later, however, the Texas Legislature passed Senate Bill 7, amending the Utilities Code “to establish competition in the retail market for electricity beginning January 1, 2002, and ‘to protect the public interest during the transition’ to competition.” In re TXU Elec. Co., 67 S.W.3d 130, 132 (Tex.2001) (Phillips, C.J., concurring) (quoting PURA § 39.001(a)); see Act of May 27, 1999, 76th Leg., R.S., ch. 405, 1999 Tex. Gen. Laws 2543, 2543-2625 (current version at PURA § 39.001). The 1999 revisions to the Utilities Code were devised to “bring about a major restructuring of the electric power industry in Texas to allow retail electric rates to be determined by competition.” City of Corpus Christi v. Public Util. Comm’n, 51 S.W.3d 231, 235 (Tex.2001). Senate Bill 7 amended PURA, partially deregulated the industry, and required each utility to “un-bundle” by January 1, 2002 into the following entities: a power generation company, a transmission and distribution utility, and an REP. Public Util. Comm’n, 110 S.W.3d at 583. The power generation and retail markets would eventually be governed by “customer choices and the normal forces of competition,” while the Commission would continue to regulate transmission and distribution utilities. See PURA § 39.001(a). One of the effects of unbundling was that, in areas open to competition, the newly created and unregulated REPs (rather than vertically integrated “electric utilities”) became the entities with whom retail customers contract for the provision and sale of electricity. The REPs incorporate the costs of transmission and distribution services (those performed by Oncor and for which Oncor bills the REPs) and the generation of electricity plus an amount to make a profit into a total electric bill that they then charge to the retail customer. See id. § 39.107(d), (e) (after date of introduction of customer choice, transmission and distribution utility “shall bill a customer’s retail electric provider for nonbypassa-ble delivery charges” and may only “bill retail customers at the request of a retail electric provider”). Under the new deregulated scheme and by design to develop a competitive market for the provision of electricity, REPs’ rates are not regulated by the Commission. See id. § 39.001(a) (“public interest in competitive electric markets requires that, except for transmission and distribution services ..., electric services and their prices should be determined by customer choices and the normal forces of competition”). The rates of transmission and distribution utilities, on the other hand, are clearly still regulated, evidenced by the necessity of this ratemaking proceeding. The Commission contends that, with the deregulation of power generation and the sale of retail electric service, now unbundled from the transmission and distribution functions, the meaning of “providing electric service” to retail customers has changed. When enacting Senate Bill 7, the legislature recognized that a fully functioning competitive electric market would not emerge instantaneously on January 1, 2002, but instead would take time to develop, necessitating temporary measures to protect consumers while facilitating the transition to competition. See CenterPoint Energy, Inc. v. Public Util. Comm’n, 143 S.W.3d 81, 96 (Tex.2004) (“The Legislature recognized that ... a market for electricity, both wholesale and retail, would need time to develop, and there would be interim distortions and fluctuations, perhaps even severe ones.”). One such measure was a temporary rate freeze or rate cap for state universities, outlined in uncodi-fied section 63 of the bill. See Act of May 27, 1999, 76th Leg., R.S., ch. 405, § 63, 1999 Tex. Gen. Laws 2543, 2625 (uncodified). Section 63 provided: Notwithstanding any other provision of this Act or Title 2, Utilities Code, any person or entity that provides electric service to a four-year state university, upper-level institution, Texas state technical college, or college, as provided by Section 36.351, Utilities Code, on December 31, 2001, shall continue to offer electric service to a four-year state university, upper-level institution, Texas state technical college, or college, as provided by Section 36.351, Utilities Code, until September 1, 2007, at a total rate that is no higher than the rate applicable to the university, institution, or college on December 31, 2001. The rate applicable to a four-year state university, upper-level institution, Texas state technical college, or college, as provided by Section 36.351, Utilities Code, on December 31, 2001, shall be based on the rates provided for or described in Section 36.351, Utilities Code. [...] As used in this section, “person or entity” includes an electric utility, affiliated retail electric provider, municipal corporation, cooperative corporation, or river authority. Id. Section 63 extended the provisions of PURA section 36.351 to include the “newly-created electric power providers that did not exist when § 36.351 was adopted in 1995,” for instance, REPs. See Tex. Pub. Util. Comm’n, Application of Entergy Gulf States, Inc. for Auth. to Change Rates and to Reconcile Fuel Costs, Docket No. 34800, 2008 WL 2852370, at *3-4 (July 16, 2008) (proposal for decision on State’s motion for partial summary disposition). This Court noted that one of the intentions of section 63 was to “preserve th[e] regulated twenty-percent discount for the state Colleges ... for a period of almost six years.” Public Util. Comm’n, 110 S.W.3d at 583. The Commission and Oneor concede that section 36.351 is still in full force and effect but maintain that it applies only for those utilities that have remained fully integrated and continue to operate in a non-competitive market, not for Oncor and similarly situated transmission and distribution utilities in areas open to customer choice. Section 36.351 is ambiguous The parties do not dispute that before deregulation, when Oncor and its successor power-generation company and REP were vertically integrated as one entity, Oncor provided “electric service” (however the term is defined) to retail end-users, including state universities, because the single entity handled every aspect of providing electricity to retail customers. However, now that its operations have been unbundled, Oncor argues that it no longer provides electric service to retail customers but provides only transmission and distribution services to REPs who then provide electric service to retail end-users by selling them electricity. This assertion is consistent with the fact that, since deregulation, Oncor is explicitly prohibited from “selling” electricity. PURA § 39.105(a) (“After January 1, 2002, a transmission and distribution utility may not sell electricity or otherwise participate in the market for electricity except for the purpose of buying electricity to serve its own needs.”). The term “electric service” is not defined in the Utilities Code. We conclude that the term’s meaning in section 36.351, especially as it appears in the phrase “electric service provided to [state universities],” is ambiguous because it could reasonably refer broadly to the provision of any kind of service related to electricity (such as transmission and distribution) or narrowly to only the provision of electricity to retail customers. Because we conclude the statute is ambiguous, we must consider whether the Commission’s interpretation is reasonable and, if so, defer to that interpretation. See Texas Citizens, 336 S.W.3d at 625. The Commission’s interpretation The Commission concluded that Oncor provides transmission and distribution services to REPs in a competitive market but does not provide electric service to retail-customer state universities as contemplated by section 36.351 because REPs now serve that function. We conclude that this interpretation is reasonable and in harmony with the statute. Indeed, as this Court has previously recognized, “[i]n the new competitive regime, a retail electric provider, as opposed to an ‘electric utility,’ will provide electric service to State Colleges located in areas open to competition.” Public Util. Comm’n, 110 S.W.3d at 585 (emphasis added). Although PURA does not define “electric service,” several provisions in the code (which have been added since deregulation) use the term “electric service” in a way signifying that it refers and is limited to the provision and sale of electricity to an end-use retail customer. For instance, section 39.352, pertaining to the certification of an REP, requires the Commission to issue a certification to a person who demonstrates “the financial and technical resources to provide continuous and reliable electric service to customers in the area for which the certification is sought.” PURA § 39.352(b)(1). Likewise, the term “customer choice” is defined as “the freedom of a retail customer to purchase electric services ... from the provider ... of the customer’s choice.” Id. § 31.002(4). Finally, section 17.202 specifically forbids an REP or “vertically integrated electric utility in an area where customer choice has not been introduced” from disconnecting “electric service” without sending a prescribed notice. Id. § 17.202. Notably, section 17.202 does not forbid a transmission and distribution utility or a power generation company from disconnecting electric service, presumably because neither of those entities actually provides “electric service” that would be capable of being disconnected. A fündamental principle of statutory construction is that statutory terms should be interpreted consistently in every part of an act. Texas Dep’t of Transp. v. Needham, 82 S.W.3d 314, 318 (Tex.2002). Because the term “electric service” is consistently used throughout PURA to signify the provision and sale of electricity to an end-use retail customer, it is reasonable to interpret the use of that phrase in the university-discount section similarly. Because Oncor does not and statutorily may not sell electricity to retail customers, it was reasonable for the Commission to conclude that Oncor does not provide those customers with “electric service,” as the provision of electric service to retail customers necessarily involves the sale of electricity, an activity in which a transmission and distribution utility is expressly prohibited from engaging. See PURA §§ 39.352(a) (only certified REP may provide retail electric service), .105(a) (transmission and distribution utility may not sell electricity). Other provisions of the Utilities Code refer to the provision of “retail electric service” (a term also not explicitly defined). It is undisputed that state universities are “retail customers” who purchase electric service in the form of electricity. See PURA § 31.002(16) (“retail customer” defined as “separately metered end-use customer who purchases and ultimately consumes electricity”); see also id. § 17.002(4) (“customer” defined as person in whose name retail electric service is billed, including governmental units at all levels of government). Section 17.002(6) defines an REP as a “person that sells electric energy to retail customers in this state after the legislature authorizes a customer to receive retail electric service from a person other than a certificated retail electric utility.” Id. § 17.002(6). Similarly, section 39.352(a) prohibits a person from “provid[ing] retail electric service” unless it is certified as an REP. Id. § 39.352(a). Because Oncor indisputably is not an REP, the Commission argues, it may not provide “retail electric service” and sell electricity to retail customers (including universities). In light of the Commission’s expertise and PURA’s use of the term “electric service,” we find the Commission’s conclusion that Oncor provides transmission and distribution services to REPs in a competitive market but does not provide electric service to state universities as contemplated by section 36.351 to be reasonable and in harmony with the statute. The Commission’s Order on this issue promotes a competitive, as compared to regulatory, approach to establishing charges for the provision of electricity, which policy is consistent with the legislative purposes since the introduction of customer choice. See PURA § 39.001(a), (d). Accordingly, we defer to the Commission’s reasonable interpretation and reverse the district court’s judgment reversing the Commission’s Order on the university-discount issue and render judgment that Oncor is not required to provide state colleges and universities the discount outlined in section 36.351 of the Utilities Code. II. Rate-base issues A. Oncor’s investment in automated meters The dispute and the “prudence standard” Appellants Steering Committee and the Alliance challenge the Commission’s decision allowing Oncor to include in its rate base the approximate $93 million it invested in its allegedly imprudent purchase and deployment of automated-metering systems. Appellants assert that the Commission’s decision (1) is not supported by substantial evidence and (2) is erroneous because the Commission improperly applied its “prudence standard.” “A utility has the burden to prove the prudence and reasonableness of its expenditures before a rate increase can be approved.” Coalition of Cities for Affordable Util. Rates v. Public Util. Comm’n, 798 S.W.2d 560, 563 (Tex.1990), cert. denied, 499 U.S. 983, 111 S.Ct. 1641, 113 L.Ed.2d 736 (1991). To raise the price of its product, the utility must participate in a rate case and bear the burden of proving that each dollar of cost incurred was reasonably and prudently invested. Entergy Gulf States, Inc. v. Public Util. Comm’n, 112 S.W.3d 208, 214 (Tex.App.—Austin 2003, pet. denied) (citing Public Util. Comm’n v. Houston Lighting & Power Co., 778 S.W.2d 195, 198 (Tex.App.—Austin 1989, no writ)). A utility enjoys no presumption that its expenditures have been prudently incurred by simply opening its books to inspection. Id. In its Order, the Commission acknowledged the application of its “prudence standard” in reviewing the reasonableness of a utility’s investments as set forth in a prior case. See Gulf States Utils. Co. v. Public Util. Comm’n, 841 S.W.2d 459, 475 (Tex.App.—Austin 1992, writ denied). That standard defines prudence as ,“[t]he exercise of that judgment and the choosing of that select range of options which a reasonable utility manager would exercise or choose in the same or similar circumstances given the information or alternatives at the point in time such judgment is exercised or option is chosen.” Id. There may be more than one prudent option within the range available to a utility in any given context, and any choice within the select range of reasonable options is considered prudent. Nucor Steel v. Public Util. Comm’n, 26 S.W.3d 742, 752 (Tex.App.—Austin 2000, pet. denied). The reasonableness of an action or decision must be judged in light of the circumstances, information, and available options existing at the time, without benefit of hindsight. Id. The Commission should not substitute its judgment for that of the utility. Id. Appellants do not challenge the applicability of this standard but contend that the Commission made an error of law by applying it incorrectly when it considered evidence of events that occurred after On-cor had already purchased the meters at issue. Appellants also assert that at some point in Oncor’s multi-year purchase and deployment of automated meters, Oncor knew or should have known that the meters it was deploying might not meet the functionality requirements of new rules that the Commission was in the process of promulgating. At that point in time, appellants contend, Oncor should have ceased purchasing and deploying the automated meters until the Commission issued its final rules, providing guidance on which types of meters would meet the guidelines. The ALJs determined that Oncor had acted imprudently in continuing to purchase and deploy its automated meters after December 2005 when the Commission requested public comments on its rulemaking addressing “advanced metering,” specifically seeking comments about whether advanced-metering technologies should be standardized or left to utilities’ own decisions. In its Order, the Commission rejected the ALJs’ proposal recommending disallowance of Oncor’s automated meter expenses incurred after December 2005 and instead permitted Oncor to recover the full costs of its automated meters. Some of the evidence that the Commission cited in support of its determination that Oncor’s deployment of the meters had been prudent involved comments made at Commission meetings in May 2007, well after Oncor had already purchased the meters at issue. The comments allegedly “encouraged” Oncor to continue deploying the meters despite the imminent finalization of the Commission’s rule outlining func-tionalities that Oncor’s meters allegedly did not have. We must uphold the Commission’s decision if there is “some reasonable basis” for it in the record. El Paso, 883 S.W.2d at 185. This is so even if the evidence preponderates against the decision. Id. Evidence supporting Oncor’s prudence Evidence showed that beginning in December 2004, Oncor began an initiative to replace its existing conventional meters with automated meters in response to a trend across the electric utility industry that had been occurring for at least 20 years. Other utilities across the country had been deploying substantial numbers of automated meters for more than a decade. Oncor executives testified that its decision to replace its conventional meters was part of its larger “Smart Grid” initiative encompassing several components besides automating its metering infrastructure, such as automation of distribution and transmission and implementation of advanced communications and information management. The intentions behind these advanced technologies allegedly included improved reliability, increased customer satisfaction, and improved future services to consumers. The enhanced communications abilities of Smart Grid technologies include the ability to read meters remotely and in real time, predict network problems before they affect customers, detect outages and other network problems as they occur, and speed the restoration and repair of an electric utility’s system. As Oncor witnesses testified, the industry had already been moving in the direction of Smart Grids when Oncor — seeking to remain a top performer in providing safe, reliable electric delivery service to end-use consumers — decided to implement its initiative. In mid-2004 as it rolled out its Smart Grid initiative, Oncor issued a request for proposals to a large number of vendors seeking input on the types of meters that it might deploy. In considering the various proposals and meters then on the market, Oncor found that no single vendor or technology met all of its requirements for the deployment of a uniform automated-metering system for all of its end-use customers. Therefore, Oncor chose to deploy a combination of automated meters and technologies, ultimately settling on two types: two-way Power Line Carrier (two-way line) and Broadband over Power Line (broadband line) systems. Its choice to deploy two different technologies was an attempt to meet the various needs of its diverse customer base. Besides the industry trend, evidence showed that both state and federal legislation encouraged Oncor to invest in automated meters. The Texas Legislature passed House Bill 2129 in May 2005 encouraging the adoption of automated meters, stating that an automated-metering system has “the potential to increase the reliability of the regional electrical network, encourage dynamic pricing and demand response, make better use of generation assets and transmission assets, and provide more choices for consumers.” Act of May 29, 2005, 79th Leg., R.S., ch. 1095, § 8, 2005 Tex. Gen. Laws 3615, 3618 (unco-dified). That same year, the legislature also passed Senate Bill 5, in which it found that broadband line meters can be used “to enhance existing electric delivery systems, which can result in improved service and reliability for electric customers.” Act of Aug. 10, 2005, 79th Leg., 2d C.S., ch. 2, §§ 1-32, 2005 Tex. Gen. Laws 4, 4-34 (current version at PURA § 43.001). Additionally, in enacting the Energy Policy Act, the U.S. Congress expressed its desire for utilities to deploy advanced-transmission technologies. See Energy Policy Act of 2005, Pub.L. No. 109-158, 119 Stat. 594 (codified in scattered sections of 42 U.S.C.); 42 U.S.C. § 16422 (2005) (Federal Energy Regulatory Commission “shall encourage, as appropriate, the deployment of advanced transmission technologies”). Oncor witness Ken Carpenter testified that these pieces of legislation supported Oncor’s actions in deploying its Smart Grid technology. House Bill 2129 also amended PURA section 39.107(h) to allow for an alternative mechanism for utilities to recover reasonable and necessary expenses incurred in connection with deployment of advanced meters short of full-scale ratemaking proceedings by directing the Commission to establish requirements for the recovery of a nonbypassable surcharge. See PURA § 39.107(h). The amendment did not specify functionality requirements for meters that would become eligible for the surcharge but, rather, left the task of defining “advanced metering and meter information networks” to the Commission’s rulemaking function. See id. Notably, section 39.107(h) did not require utilities to deploy advanced-metering systems (AMS) or prohibit them from continuing to recover investment in other kinds of meters through ratemaking proceedings rather than a surcharge. See id.; see also 16 Tex. Admin. Code § 25.130(d)(1) (2014) (Pub. Util. Comm’n of Tex., Advanced Metering) (“Deployment and use of AMS by an electric utility is voluntary unless otherwise ordered by the commission.”). At the first rulemaking workshop on the AMS surcharge, held in September 2005, various advanced-metering technologies were discussed, and a presentation was given by a vendor of Smart Grid technologies wherein the very capabilities of the broadband line and two-way line meters Oncor was deploying and continued to deploy were described as constituting then-available “advanced” automated metering. Part of that presentation also included a study revealing that from 1996 to 2005, several large and well-known utilities across the country had deployed significant numbers of automated meters, includ- ■ ing one that had installed over 2 million of them in 2002 and one that had deployed over 600,000 in 2004. The meters that these utilities deployed did not have the advanced functionality later identified in the Commission’s final rule 25.130 because, as an Oncor witness testified, even as late as when the surcharge rule became effective in May of 2007, there was no commercially available residential meter in the country that could meet all of the functionality requirements of the new rule. See 16 Tex. Admin. Code § 25.130. According to Commission witness Kevin Mathis, broadband line and two-way line meters provided “significant advantage” over conventional meters. Oncor placed its first order of approximately 265,000 automated meters for which it sought recovery in this case in May 2005. Over the course of the next two years, Oncor made several more orders, ultimately purchasing approximately 600,000 automated two-way line and broadband line meters for which it sought and was granted recovery by the Commission. However, because Oncor made most of its decisions to purchase and deploy the two-way line and broadband line meters while the surcharge rulemaking proceedings were ongoing and “advanced meter functionality” was not yet defined, appellants argue that Oncor was imprudent in continuing to purchase and deploy meters without knowing whether they would qualify for the surcharge. Our review of the record indicates that there is a reasonable basis and more than a scintilla of evidence to support the Commission’s determination that Oncor’s decisions about purchasing and deploying its two-way line and broadband line meters— even in the midst of rulemaking proceedings promulgating eligibility requirements for voluntary participation in a surcharge scheme — were within the “range of options which a reasonable utility manager would exercise or choose in the same or similar circumstances given the information or alternatives at the point in time such judgment is exercised or option is chosen.” See Nucor Steel, 26 S.W.3d at 752. The Commission could reasonably have determined that the promulgation of rules pertaining to the voluntary deployment of advanced meters had little to no bearing on the prudence of Oncor’s decisions, especially considering the benefits that the automated meters provided, Oncor’s Smart Grid initiative, legislative directives to deploy such meters, industry trends, and available technology. We may not substitute our judgment for that of the Commission on the factual determination of On-cor’s prudence, and we hold that the above-cited evidence amounts to more than a scintilla to support the Commission’s prudence determination. See El Paso, 883 S.W.2d at 185 (substantial evidence is more than scintilla, and record evidence may preponderate against agency decision and nonetheless amount to substantial evidence). Alleged improper application of “prudence standard” by the Commission Although appellants do not challenge the Commission’s use of the above-cited prudence standard, they argue that the Commission committed legal error by improperly applying that standard to the facts in this case. Specifically, they argue that the Commission considered irrelevant evidence in determining Oncor’s prudence. They note the Commission’s Order citing evidence that on May 8, 2007 — well after Oncor had purchased all of the meters at issue and just before the Commission’s advanced-metering rule was finalized — the Commission held an open meeting during which the Commissioners present “strongly encouraged [Oncor’s] deployment of [broadband line] meters.” Appellants rightfully argue that this and other evidence of “encouragement” by the Commission to Oncor to continue deploying its automated meters is not relevant to the determination of On-cor’s prudence at the much earlier times when the decisions to purchase the meters were made. We agree that the prudence standard requires consideration of the circumstances at the time that the particular decision at issue is made, and Oncor may not meet its burden of proof on the prudence issue by relying on events occurring later in time. However, any weight that the Commission gave to this irrelevant evidence does not render its application of the prudence standard legal error, as long as there is substantial, relevant evidence to support its determination. Because we have determined that there is — even disregarding evidence of the Commission’s later encouragement to Oncor to continue to deploy the automated meters — we conclude that the Commission’s application of its prudence standard did not constitute legal error. The Commission’s decision on the inclusion of Oncor’s automated-metering investments in its rate base is supported by substantial evidence- and is not arbitrary and capricious or affected by other error of law. Accordingly, we overrule Steering Committee’s and Alliance?s respective second issues. B. Calculation of lead days for franchise-tax component of cash working capital Oncor’s third issue challenges the Commission’s Finding of Fact Number 70A concerning the calculation of a component of its cash-working-capital allowance. Specifically, Oncor asserts that the Commission’s calculation of the number of “lead days” related to the state franchise tax as a component of its cash-working-capital allowance was erroneous because it relied on an incorrect construction of the applicable statutes. The Commission responds that the calculation was subject to the Commission’s discretion rather than prescribed by statute and that substantial evidence supports its calculation. While not explicitly mandated by PURA, the Commission’s rules permit a utility to maintain a cash-working-capital allowance as a component of its rate base. 16 Tex. Admin. Code § 25.231(c)(2)(B)(iii) (2014) (Pub. Util. Comm’n of Tex., Cost of Service). This allowance is designed to address the inherent delay that exists between the time that a utility pays for costs associated with providing its service and the time that the utility receives revenues from ratepayers to recover those costs. A cash-working-capital allowance comprises the operating funds, not specifically addressed in other rate-base items, that are necessary to fund the gap between the time that expenditures are made and the time that corresponding revenues are received. To calculate the cash-working-capital allowance, the Commission utilizes a “lead-lag study.” Id. § 25.231(c)(2)(B)(iii)(IV). Although not defined in the Utilities Code or the Commission’s regulations, the parties are in agreement about what a lead-lag study measures: the difference between (1) the time between the date when the ratepayer receives service from the utility and the date on which the ratepayer pays for the service provided (the “revenue lag”) and (2) the time between the date that a utility’s costs are incurred (or when the utility receives goods or services from a third party) and the date that those expenses are paid (the “expense lead”). Any difference in these time periods is expressed in days. The cash-working-capital allowance is then calculated by multiplying those days by the average daily operating level for a particular category of expense. Generally, increases in revenue-lag days and decreases in expense-lead days result in increases to the amount of cash working capital included in the rate base, while decreases to revenue lag days and increases in expense-lead days result in decreases to the cash working capital included in rate base. Consequently, the lead-lag study can result in either an addition to or a reduction of the rate base depending on the utility’s cash requirements. On appeal, Oncor challenges the Commission’s calculation of Oncor’s lead-day figure for one particular category of expense: the Texas franchise tax, which is a “tax on the privilege of doing business in Texas.” TGS-NOPEC Geophysical Co. v. Combs, 340 S.W.3d 432, 437 (Tex.2011); see Tex. Tax Code § 171.001 (“A franchise tax is imposed on each taxable entity that does business in this state.”). Before 2008, the franchise tax was assessed on an entity’s capital or earned surplus; beginning January 1, 2008, the tax was assessed on an entity’s “taxable margin.” TGS, 340 S.W.3d at 437; see Tex. Tax Code §§ 171.002 (tax rate is either 1% or 0.5% of taxable margin), .101 (defining “taxable margin”). Notably, the switch to assessing the tax on “taxable margin” rather than on capital or earned surplus began on January 1, 2008, the day after Oncor’s test year ended. However, besides the way that the tax was calculated and amendments not relevant to this dispute, the other relevant provisions of the franchise-tax scheme did not substantively change in 2008 (for instance, the due dates for payment of the tax and privilege periods covered by the tax have remained consistent). Oncor argues that the Commission erred in calculating the lead days for its franchise-tax payment at negative 319.58 days instead of the positive 46.42 days that On-cor requested. While no statute or regulation prescribes how lead days are to be calculated, the parties are in agreement that the formula testified to by Commission staff witness Mary Jacobs controls: lead days are computed by taking the difference between the date that a utility’s costs are incurred and the date that they are paid. The dispute between the parties centers around the determination of when Oncor’s franchise-tax expense for the 2008 calendar year was “incurred” — specifically, whether it was incurred in 2007 or 2008. Oncor argues that it did not incur the margin tax until 2008 when the new tax scheme became effective and when its first payment thereunder was due and actually paid. The Commission maintains that On-cor incurred the margin tax when it recorded the expense on its accounting books in 2007. Oncor’s witness David Sigler explained why the utility recorded the 2008 franchise-tax expense on its 2007 books: such accounting method was allegedly required by GAAP (Generally Accepted Accounting Principles) because the amended franchise tax had “been interpreted to be an income tax for accounting purposes and therefore will not be reported in the same manner as the [prior] franchise tax.” According to Sigler, this change in accounting practices resulted in Oncor’s doubly recording on its 2007 books both its actual franchise-tax liability for 2007 and a hypothetical margin-tax liability, even though Oncor would not be subject to computing its tax liability on the basis of taxable margins until 2008. Then, as Oncor witness Alan Ledbetter explained, Oncor removed the actual 2007 franchise-tax expense from its rate-filing package and replaced it with the hypothetical margin-tax calculation to account for the “known and measurable change” in the tax laws going forward. See 16 Tex. Admin. Code § 25.281(b) (2014) (Pub. Util. Comm’n of Tex., Cost of Service) (“In computing an electric utility’s allowable expenses, only the electric utility’s historical test year expenses as adjusted for known and measurable changes will be considered.”). Thus, the hypothetical dates that Ledbetter used for calculating expense-lead days were May 15, 2007 (when the margin tax covering the year 2007 would have been due and paid) and approximately July 1, 2007 (the midpoint of the “privilege period” or year that the tax payment would have covered). The Commission used the same “incurred” date as Oncor, not because it understood the margin tax to have actually or hypothetically been assessed on that date, but solely because that is when Oncor recorded the liability on its books (for the reasons explained by Ledbetter and Sigler). Then the Commission used a tax “paid” date of the following calendar year — May 15, 2008 — when Oncor in fact made its first franchise-tax payment under the new margin-tax scheme. Oncor contends that its accounting system is irrelevant to the determination of when it legally incurred the franchise-tax expense and that for the purposes of a lead-lag study a taxable entity “incurs” the tax in the year when payment of the tax covering that year is due. In other words, the lead days should have been calculated by taking the difference between July 1 and May 15 of the same year, not between July 1 of one year and May 15 of the next year, because the tax covers the “privilege period” constituting the year when the tax payment and required annual report are due. See 34 Tex. Admin. Code § 3.584(c)(l)(C)(ii) (2014) (Comptroller of Pub. Accounts, Margin: Reports and Payments) (“The annual franchise tax report must be filed and the tax paid no later than May 15 of each year.... The privilege period for an annual report is January 1 through December 31 of the year in which the annual report is originally due.”). Oncor submits that the determination of when an entity incurs the franchise-tax liability is a question of law, which we must review de novo. The Commission responds that this is not a question of law because no statute or regulation specifically addresses how to calculate the lead time and that, therefore, the resolution of the issue was within its discretion, subject only to substantial-evidence review. We agree with Oncor that this issue raises a question of law. Its resolution requires a determination of whether, under the applicable statutes, the franchise tax is paid to provide a privilege for the calendar year in which the tax is actually paid or for the previous calendar year and, similarly, when a taxable entity legally incurs liability for the tax.' Although the Commission is correct that no statute or regulation prescribes exactly how to calculate the lead days, under the Commission’s own formula (as testified to by its witness Jacobs), the calculation necessarily depends on the determination of when a utility “incurs” liability for the franchise tax. Thus, we turn to consideration of the statutes imposing the franchise tax. The Tax Code specifically provides that a franchise-tax payment assessed on the privilege of conducting business in Texas for a particular year is due on May 15 of that same year: “Payment of the tax covering the regular annual period is due May 15, of each year after the beginning of the regular annual period.” Tex. Tax Code § 171.152(c) (emphasis added); see also Universal Frozen Foods Co. v. Rylander, 78 S.W.3d 588, 590 (Tex. App.—Austin 2002, no pet.) (franchise tax is levied for privilege of doing business in Texas during year for which tax is paid); General Dynamics Corp. v. Sharp, 919 S.W.2d 861, 866 (Tex.App.—Austin 1996, writ denied) (franchise tax is “prospective because the tax levied beginning January of a given calendar year pays for the privilege of doing business through December of that calendar year”). The plain language of section 171.152(c) indicates that payment made on May 15 of each year covers the privilege of conducting business in Texas for that year, not the prior year. It then follows that the tax is “incurred” in the calendar year when payment is due. The ordinary definition of the word “incur” supports this construction. Incur means “to become liable or subject to,” Webster’s Third New Int’l Dictionary 1146 (2002), and “to suffer or bring on oneself (a liability or expense),” Bloch’s Law Dictionary 836 (9th ed.2009); Similarly, a liability is a “quality or state of being legally obligated or accountable.” Id. at 997. A taxable entity becomes liable for the Texas franchise tax on the date that it first conducts business in the state and then, after the start of a “regular annual period,” on every January 1 thereafter. See Tex. Tax Code §§ 171.151, .152; see also General Dynamics, 919 S.W.2d at 866. We also note that, despite its position in this case, the Commission has agreed with this construction in a recent docket, specifically rejecting the very assertion that it advances here that a utility’s accounting accrual of the tax expense determines when it incurs the expense. See Tex. Pub. Util. Comm’n, Application of CenterPoint Elec. Delivery Co., LLC for Auth. to Change Rates, Docket No. 38339, 2010 WL 5004444, at *10-12 (Dec. 2, 2010) (PFD) and 2011 WL 1960201, at *9 (May 12, 2011) (order) (PFD citing Comptroller’s recent opinion in support of conclusion that franchise tax “is paid for the privilege period of the calendar year in which the payment is made and the report is due, regardless of when the accounting accrual for the cost occurs” and “franchise tax payment is made on May 15 of any given year and relates to the service provided during the calendar year”) (order approving franchise-tax conclusions of PFD). We agree with Oncor’s assertion that its recording of the franchise-tax liability on its accounting books is not dispositive of the legal issue of when it in fact incurred that liability for the purposes of a lead-lag study. Rather, the applicable Tax Code provisions prescribe when the franchise tax is levied by the state and, consequently, incurred by a taxable entity. Oncor could not have incurred the franchise-tax expense in the year prior to when the tax was assessed and for which the tax provided the privilege of conducting business in Texas. The Commission’s determination that Oncor incurred liability in 2007 for the franchise tax covering calendar year 2008 and its calculation of Oncor’s lead days in accordance therewith was legal error. See Tex. Gov’t Code § 2001.174(2)(D). Accordingly, we reverse the portion of the Commission’s Order setting Oncor’s expense-lead days for the franchise-tax component of cash working capital (Finding of Fact 70A) and remand the issue to the Commission for recalculation of Oncor’s cash-working-capital allowance for the state franchise tax in accordance with this opinion. C. Issues related to Oncor’s accumulated deferred federal income tax (AD-FIT) 1. Overview of ADFIT accounting practices Expenses related to federal income taxes for ratemaking purposes are “normalized,” which means that the Commission must balance equitably the interests of present and future ratepayers and apportion between consumers and the utility certain tax benefits resulting from depreciation and amortization, investment tax credits, and similar applications. See PURA § 36.059; 16