Chief Justice Hecht delivered the opinion of the Court.

On January 1, 2002, the Public Utilities Regulatory Act (PURA) implemented a competitive retail market for electricity in the Electric Reliability Council of Texas (ERCOT).1 Each incumbent, vertically integrated electric utility within the market was required to "unbundle" its business activities into three separate units2: a power generation company,3 a transmission and distribution utility (TDU),4 and a retail electric provider (REP).5 Of the three, only TDUs continued to be regulated by the Public Utilities Commission (PUC).6

In this case, several parties to a TDU ratemaking proceeding seek judicial review of the PUC's order. As the case comes to us, only three issues remain. We hold that:

We affirm the judgment of the court of appeals10 in part and reverse it in part, and remand the case to the PUC for proceedings consistent with this opinion.

I

Oncor Electric Delivery Co., LLC ("Oncor") is the largest TDU in Texas and the sixth largest in the United States. Its 14,600 miles of transmission lines and 102,000 miles of distribution lines cover 53,300 square miles and reach 7 million consumers in 401 cities and 91 counties within ERCOT. Before deregulation, Oncor's system was part of TXU Electric Co., an integrated utility.

Oncor is regulated by the PUC. In June 2008, Oncor initiated a ratemaking proceeding with the Commission, its first request for a comprehensive rate increase since deregulation. Oncor requested a $253 million increase because of the large investment it had made in its system, its mounting operations costs, and its anticipated need to make capital expenditures. Several parties intervened. After extensive hearings, the administrative law judges recommended only a $30 million rate increase. The PUC ultimately approved a $115 million increase.

Oncor and other parties to the administrative proceeding sued for judicial review and then appealed to the court of appeals. The disputes have been winnowed to three, and we limit our discussion to them. The PUC concluded that:

The trial court agreed with the PUC on the tax issue but disagreed on the other two. The court of appeals agreed with the PUC on the discount and franchise fee issues but not on the tax issue.11

Three petitions for review were filed with this Court:

The issues, rulings, and parties' positions are summarized in this scorecard:

                Issue                                    PUC   TC    CA     PFR      Respondent

Must Oncor discount its rates to state                   No   Yes   No    State     Oncor
universities?                                                                       PUC
                                                                                    CenterPoint

Must Oncor's income tax expense be calculated            No   No    Yes   Oncor15   OPUC
as if it filed a consolidated return with affiliates?                               Cities
                                                                                    TIEC

Are franchise fees paid by Oncor reasonable &            No   Yes   No    Oncor     PUC
necessary?                                                                Cities

[Editor's Note: The preceding image
contains the reference for footnote.15].

We granted all three petitions.16 We address the issues in the order listed.

II

With exceptions not relevant here, PURA Section 36.351 requires an electric utility to "discount charges for electric service provided to a facility of a four-year state university, upper-level institution, Texas State Technical College, or college."17 Under the statute, "[t]he discount is a 20-percent reduction of the utility's base rates that would otherwise be paid under the applicable tariffed rate."18

Section 36.351 was enacted in 1995,19 when, as we noted at the outset, the generation, transmission, distribution, and sale of electricity were vertically integrated operations of single utilities fully regulated by the PUC. In 1999, the Legislature passed Senate Bill 720 "to establish competition in the retail market for electricity beginning January 1, 2002, and `to protect the public interest during the transition' to competition."21 Senate Bill 7 unbundled vertically integrated utilities in ERCOT, mandating that each electric utility separate its business activities into a power generation company, an REP, and a TDU.22 The statute deregulated power generation companies and REPs, creating "a competitive retail electric market that allows each retail consumer to choose the customer's provider of electricity".23 But TDUs remained fully regulated by the PUC.24 Under deregulation, TDUs still deliver electricity directly to the retail consumer's meter and provide metering services, but the charges for TDUs' services are paid by REPs, which in turn charge the consumer.25

Senate Bill 7 did not change the text of Section 36.351, but it did redefine "electric utility" to exclude unbundled power generation companies and REPs, thereby removing them from the discount requirement.26 Section 63 of Senate Bill 7 suspended this change during the transition to a competitive market, freezing total rates paid for electricity by state universities covered by Section 36.351 at December 31, 2001 levels until September 1, 2007.27

When Oncor initiated this ratemaking proceeding in June 2008, Section 63's freeze had expired. Oncor contended that the Section 36.351 discount no longer applied to it because it did not, in the statute's words, "charge[] for electric service provided to a facility" of any retail customer, including state universities. Oncor argued that only REPs provide electric service to retail customers. The State Universities opposed Oncor's position. The PUC agreed with Oncor. Concluding that Section 36.351 is ambiguous, the court of appeals deferred to the PUC's interpretation.28

We do not agree that Section 36.351 is ambiguous. PURA is quite clear: in deregulated areas of the state, a TDU "may not sell electricity";29 only REPs can.30 TDUs cannot charge consumers for electric service; TDUs charge wholesale tariffed rates set by the PUC to REPs, who in turn charge customers negotiated, competitive retail rates. It follows that TDUs cannot discount rates to consumers but only to REPs. But Section 36.351 does not require a discount to REPs. The State Universities acknowledge that an REP may not have a legal obligation to pass along a TDU's discount to consumers but stress that as a practical matter, universities negotiate with REPs for a straight pass-through of the TDU charges without any mark-up. The point remains that if universities continue to receive a discount, it is because of negotiation, not because of Section 36.351. REPs' lack of any obligation to pass along TDU discounts to consumers further illustrates that TDUs do not charge consumers for electric service.

Nor do TDUs provide electric service to consumers. The State Universities argue that TDUs' transmission and distribution of electricity to consumers' service meters is a provision of electric service to consumers' facilities under Section 36.351 because TDUs' lines connect to meters installed and maintained by TDUs at each retail consumer's facilities. But while TDUs do provide electric service31 — the physical delivery of electricity to consumers' premises — they provide this service to REPs. Only REPs can access the electricity delivered by TDUs. Consumers obtain electricity through the service provided by REPs.

The State Universities argue that to interpret Section 36.351 as not applying to TDUs in deregulated areas produces an absurd result: a state university facility in a regulated area of the state — outside ERCOT, where vertically integrated electric utilities still exist and are subject to Section 36.351 — would be entitled to a discount, while a facility in ERCOT would not be. The University of Texas at El Paso would receive the discount; the University of Texas at Arlington would not. But we agree with Oncor and the PUC that leaving any discount to negotiation is consistent with the competitive market under deregulation.

The PUC argues that the Legislature recognized the Section 36.351 discount would not survive deregulation and enacted Section 63 of Senate Bill 7 to extend its effect while the market transitioned to competition. The State Universities counter that Section 63 froze the total rates paid by state universities, not merely the discount. But the discount was included in the frozen rates. Section 63 preserved the discount while capping total rates. Indeed, Section 63 repeatedly referenced Section 36.351. We think the PUC has the better of the argument.32

Finally, the State Universities point to PURA Section 36.354 as evidence that Section 36.351 applies to TDUs. Section 36.354 requires electric utilities to discount rates to military bases but only "in an area where customer choice is not available."33 Thus, the statute does not apply to TDUs. The State Universities argue that when the Legislature wanted to exclude TDUs from a discount provision, it did so explicitly, and no corresponding language appears in Section 36.351. But in 1995, when Section 36.351 was enacted, it was clearly intended to apply to integrated utilities, including their transmission and distribution operations. Senate Bill 7's change in the definition of "electric utility" made Section 36.351, as we have interpreted the provision, inapplicable to TDUs but for Section 63, which expired by its own terms in 2007. No change in Section 36.351's text was needed to remove its application to TDUs. Section 36.354 was not enacted until 2003.34 At that point, the limitation of its application to areas outside ERCOT, still under regulation, was perfectly consistent with Section 36.351.

We agree with the PUC that Section 36.351 does not apply to TDUs in deregulated areas.

III

The PUC was required to determine Oncor's projected expenses and set rates35 at a level that would allow Oncor a reasonable return on its investment.36 One expense was Oncor's future tax liability.37 Oncor contended that its tax expense should be determined as if it were a separate corporation. OPUC, Cities, and TIEC argued that Oncor's tax liability should be calculated as if it were included in its parent's consolidated tax return. The PUC agreed with Oncor. The court of appeals reversed.38

Filing a consolidated federal income tax return allows affiliated companies to share losses and thereby lower their collective tax liability.39 PURA Section 36.060 requires that the tax savings from filing a consolidated return benefit ratepayers.40 At the time Oncor's ratemaking proceeding was pending in the PUC, Section 36.060(a) provided in pertinent part:

Oncor argues that it does not meet condition (1).

Under federal tax law, a parent corporation and certain of its subsidiary corporations are an affiliated group that is allowed to file a consolidated return.42 When Oncor initiated this proceeding in June 2008, it was a wholly owned subsidiary of Energy Future Holdings Corporation (EFH).43 In 2007, EFH and its affiliates, including Oncor, filed a consolidated tax return, as EFH's and Oncor's predecessors had done for years. Oncor, because it was wholly owned by EFH, was deemed a "disregarded" entity and treated as a division of EFH under federal tax law.44 Had Oncor filed separately, its tax liability would have been $151 million, but EFH's affiliated group shared operating losses and, as a result, paid no taxes.45 Using 2007 as the test year, and applying Section 36.060(a), Oncor's projected tax expense was much lower.

But in November 2008, while this proceeding was still pending in the PUC, EFH sold a 19.96% interest in Oncor to two international investors. At that point, Oncor was a "partnership" for federal tax purposes,46 and, because it no longer had a single owner, could not be "`disregarded' as an entity separate from its owner."47 Federal tax law permitted Oncor to elect to be treated as a corporation,48 which would have allowed Oncor to be included in the affiliated group eligible for EFH's consolidated tax return.49 But Oncor did not make that election, and so by default it would be taxed as a partnership and could not be included in EFH's consolidated tax return.50 The change did not impact EFH financially. EFH included its income as a partner in Oncor in its consolidated tax return, offset this income with other losses, and realized the same sort of tax savings as before.

The PUC determined that:

The court of appeals held that because Oncor could have elected to be taxed as a corporation, and there was no impediment to its doing so, it remained a member of an affiliated group eligible to file a consolidated tax return.51 Therefore, the court concluded, the PUC should have used the 2007 test year and applied Section 34.060(a).52

We disagree. Section 36.060(a) very plainly applies only to a utility that "is" a member of an affiliated group eligible to file a consolidated tax return, not a utility that could be. The court of appeals was troubled that Oncor could use its change of ownership and federal tax law to give EFH the savings ratepayers had received when Oncor was included, as a "disregarded" entity, on EFH's consolidated tax return. But that concern cannot be used to read Section 36.060(a) contrary to its plain text. TIEC argues that the statute should apply because Oncor was "eligible" to be part of a group filing a consolidated tax return. But that misreads the provision. It is the group that must be eligible to file a consolidated return, not the utility. The utility must be a member of an eligible group, and after November 2008, Oncor was not.53

The developments of November 2008 were "known and measurable changes" the PUC was required to take into account,54 and it correctly interpreted Section 36.060(a). OPUC, Cities, and TIEC nevertheless argue that the PUC erred in calculating Oncor's tax expense as if it were a corporation when it is taxed as a partnership — that is, its income is passed through to its owners, who bear the tax. For that reason, they insist, Oncor's tax expense is minimal. We rejected this argument in Suburban Utility Corp. v. Public Utility Commission of Texas.55 There, we held that a utility structured as a Subchapter S corporation could include, as reasonable and necessary expenses in a ratemaking proceeding, the income taxes paid by its shareholders on the utility's taxable income.56 Citing precedent from the Commission, we explained that income taxes paid by shareholders of a pass-through entity "are inescapable business outlays and are directly comparable with similar corporate taxes which would have been imposed if the utility operations had been carried on by a corporation."57 Fairness "entitled" the owner of a pass-through entity "to a reasonable cost of service allowance for federal income taxes actually paid by its shareholders on [its] taxable income or for taxes it would be required to pay as a conventional corporation, whichever is less."58

The PUC's determination to calculate Oncor's tax expense as if it were a corporation was not arbitrary or capricious.59

IV

Municipalities franchise to utilities the use of streets, alleys, and other public areas. PURA states that it "does not restrict the rights and powers of a municipality to grant or refuse a franchise to use the streets and alleys in the municipality or to make a statutory charge for that use."60 But Senate Bill 7 added PURA Section 33.008, which addresses franchise charges. As related to this case:

Section 62(a) of Senate Bill 7 added: "Nothing in this Act shall restrict or limit a municipality's historical right to control and receive reasonable compensation for use of public streets, alleys, rights-of-way, or other public property to convey or provide electricity."

In its application to the PUC, Oncor proposed to include $253,884,976 of municipal franchise charges as a reasonable and necessary operating expense. Of this amount, almost $5.7 million was a 5% increase recently negotiated between Oncor and Cities. The PUC rejected Oncor's request, concluding that a utility cannot pay more than the charge set out in Section 33.008(b). In the court of appeals, the PUC abandoned that position, which is directly contradicted by Section 33.008(f)'s phrase, "[n]otwithstanding any other provision". Instead, the PUC argued, citing the language in subsection (f), that Oncor could include in its expenses a charge described in Section 33.008(f) only if it proved that the charge was agreed to "on the expiration of a franchise agreement existing on September 1, 1999".65 The PUC argued that Oncor failed to meet its burden of proof because there was less than a scintilla of evidence that Oncor had agreements with the Cities before September 1, and that these agreements expired thereafter. The court of appeals agreed.66

But the expiration of a franchise agreement existing on September 1, 1999, cannot be read as a condition to agreeing to a different charge. If it were, a municipality that had no franchise agreement with a TDU on that date could never impose a franchise charge in the future. A municipality with a franchise agreement in effect on that date could renegotiate it only once and never again afterward. These restrictions would severely limit "a municipality's historical right to control and receive reasonable compensation" for the use of public property, in direct contradiction of Section 62(a) of Senate Bill 7.

Section 33.008(f) does not restrict renegotiated franchise charges to only those agreed to on the expiration of franchise agreements existing on September 1, 1999. The provision simply precludes the inference that Section 33.008(b) is exclusive. Reading the paragraphs of Section 33.008 together, as we must, they confirm that municipalities may continue to impose franchise charges after competition, that charges per kilowatt hour equal to the average amount charged in 1998 must be considered reasonable and necessary, and that utilities may continue to renegotiate franchise charges, though they must demonstrate that the charges are reasonable and necessary in order to pass them along to REPs.

The court of appeals misinterpreted Section 33.008(f). The PUC's disallowance of Oncor's renegotiated franchise charges was error.

* * * * *

Accordingly, the judgment of the court of appeals is affirmed in part and reversed in part, and the case is remanded to the PUC for proceedings consistent with this opinion.