Milestone Texas legislation created the model for Texas utility regulation.
This month marks an important anniversary in the Lone Star State — but one most Texans surely never heard of. It was 100 years ago this month that the Texas Legislature adopted the Cox Act, named after Abilene Democrat Ben L. Cox. If you pay a utility bill, then this law affects you.
The “Cox Gas Bill,” adopted on June 12, 1920, created the Texas model for utility regulation. Through it, cities maintain some level of local control over gas rates and service, although the law also confers authority to state regulators. The Cox Act does not apply directly to electric utility regulation, although the state employs a similar bifurcated model for transmission and distribution utilities. The Cox Act regulatory model also has contributed to significant ratepayer savings over the years.
In commemoration of this important law’s centennial, we look back here to the origins of the law, and briefly to the history of utility rate regulation in Texas that followed it.
Why rate regulation?
But first the question arises, why rate regulation? Because the state’s electric and gas utilities operate as monopolies, if left unchecked they can charge unreasonably high prices and deliver inconsistent service. This is especially problematic if that service is essential to the public welfare, such as for home heating. In the absence of free-market competition (which is impractical or impossible for infrastructure-heavy public utilities) rate regulation gives citizens some measure of protection against unfair rates and bad service. And it was precisely in response to such concerns that the Texas Legislature adopted the Cox Act in 1920.
By that year monopolistic gas companies already had established a strong foothold in several major Texas cities. Houston Gas Light Company, for instance, had been processing coal gas for local customers since the late 1800s. Lone Star Gas operated in Dallas. Cities at this time depended heavily on gas service for their day to day operations, but had found that the service and the rates charged for it had become wildly inconsistent. After a series of gas shortages during the winters of 1919 and 1920 — and in the wake of demands from Lone Star Gas for higher rates — an exasperated Dallas Mayor Frank Wozencraft declared that no other issue was more important to the welfare of his community than gas utility rate regulation. Proposed hikes from the Houston Gas Fuel Company also fueled public outcry.
Gov. W. P. Hobby called a special session devoted exclusively to the passage of regulatory legislation and the result was the Cox Act. Through it, cities solidified their “original jurisdiction” rights to regulate gas utilities within their jurisdictions. The law also gave utilities the right to appeal local decisions to the Texas Railroad Commission. This bifurcated system — that is, a system whereby regulatory power is divided between cities and the state — remains in place today. It also has demonstrably benefitted ratepayers.
How it works
Under the Cox Act system, the Railroad Commission approves base rates for unincorporated areas. City governments that choose to exercise original jurisdiction have responsibility for approving rates for citizens living within city limits. The Commission becomes involved in setting rates within cities only when the utility appeals a municipal rate ordinance in a timely fashion.
To determine a reasonable rate, the Commission examines a utility’s expenses and revenues but with an eye to the utility’s obligation to adequately serve its customers. By law, a utility must have rates that give it the opportunity to earn a reasonable return on invested capital after all reasonable and necessary expenses are covered. The actual commodity costs of natural gas are passed through to consumers.
The state also employs this bifurcated model for electric utility regulation, although it is the Texas Public Utility Commission and not the Texas Railroad Commission that considers electric utility matters. Texas is the only state in the nation that has split responsibilities for gas and electric utility regulation between separate agencies.
The continued involvement of city experts in utility cases has helped control the size of rate hikes. (You can find an example of such savings in the analysis, found here.) It perhaps will not come as a surprise then that utility lobbyists over the years have sought to undermine this important authority conferred to cites by the Cox Act. In the 1970s, for instance, utility lobbyists began pushing lawmakers to transfer all ratemaking authority away from cities and instead grant exclusive jurisdiction to the Railroad Commission. At the time, Lone Star Gas wanted to increase rates by $7 million annually and had grown weary of city resistance. According to one contemporaneous account, “The company hasn’t liked the assertion of local independence one bit, so now wants to terminate any hometown authority over rates.” More recently, utilities have pushed for piecemeal ratemaking schemes such as the “Gas Reliability Infrastructure Program” that allows gas utilities to sidestep contemporaneous rate review. (You can read more about GRIP here.)
Texas lawmakers also looked to the Cox Act for inspiration in 1975 when they adopted House Bill 819 to regulate the state’s electric utilities. HB 819 established both the Texas Public Utility Commission and the Public Utility Regulatory Act under which the PUC operates. HB 819 also specifically established the new agency’s original jurisdiction authority over electric utilities operating within unincorporated areas, and its appellate jurisdiction over those operating inside cities. Sound familiar? This is the same dual regulatory model first established in Texas by the Cox Act, the groundbreaking legislation that celebrates its 100-year anniversary this month.