PUC Overturns TCEQ Interpretation of Statutory Deference to Water Districts in Rate Appeals

by Lauren J. Kalisek and Lisa C. Silveria

Texas water districts should be aware of an emerging shift in how the Public Utility Commission (“PUC”) interprets Texas Water Code (“TWC”) § 49.2122 which permits a district to establish different charges, fees, rentals, or deposits among classes of customers that are based on any factor the district considers appropriate. Departing from prior Texas Commission on Environmental Quality (“TCEQ”) precedent, the PUC has recently determined in a series of water district rate appeals that the statute’s presumption applies not only to the creation of customer classes, but also to the rates and fees set by a district. While this interpretation benefits districts, it does not allow for early dismissal of rate appeals or avoid the opportunity for petitioners to request interim rates.

Understanding TCEQ’s Prior Interpretation of Texas Water Code § 49.2122

For many years, TCEQ interpreted TWC § 49.2122 as applying narrowly to the establishment of customer classes, rather than to the rates charged within those classes. TCEQ looked to the plain language of the statute to conclude that TWC § 49.2122(b) refers to “charges, fees, rentals, and deposits,” but does not reference “rates.” The TCEQ pointed to the section’s title and structure emphasizing customer classes, suggesting that the Legislature intended the provision to govern how districts classify customers, not the specific rates established for those classes.

TCEQ’s interpretation of TWC § 49.2122 was articulated in a series of administrative proceedings. In 2009,¹ TCEQ concluded that TWC § 49.2122(b) does not create a presumption that a district’s rates are valid absent a showing that the district acted arbitrarily and capriciously. Instead, TCEQ observed that the district must still demonstrate that its rates are just and reasonable when challenged on appeal. In 2011, TCEQ also concluded that TWC § 49.2122(b) “only creates a presumption that customer classes, as opposed to rates, established by a district are properly established absent a showing that the district action establishing the classes was arbitrary and capricious.”²

Under this framework, the burden of proof remained on the water district to justify the reasonableness of its rates, even if the classification structure, itself, was afforded some deference.

Shifting Interpretations of TWC § 49.2122: From TCEQ to Recent PUC Decisions

In recent cases before the PUC, the PUC has adjusted its interpretation of TWC § 49.2122, particularly regarding whether the statute creates a presumption favoring district decisions on rates. The PUC has reversed prior TCEQ precedent and confirmed that TWC § 49.2122(b) creates a presumption that rates set by a municipal utility district are properly established, and a petitioner may rebut this presumption by showing that the district acted arbitrarily and capriciously.³

In 2023, property owner Ariza Gosling Owner LLC challenged rates imposed by Northampton MUD as being unjust and unreasonable after being placed into a new customer class due to its tax-exempt status.⁴ PUC staff looked to the plain text of TWC § 49.2122(b), which referenced “charges, fees, rentals, and deposits,” and made no mention of rates at all, indicating that this provision was inapplicable to any rates a district established. Staff echoed the TCEQ precedent that the plain text of the section title unambiguously indicated TWC § 49.2122 related to classes, not the specific rates that are charged to ratepayers. PUC staff argued that under TCEQ precedent, TWC § 49.2122 applied only to the process of creating a class, and not the application of that particular class’s rates to a particular group of ratepayers.⁵ The Administrative Law Judges (“ALJs”) agreed with PUC staff and concluded that: (1) the TWC § 49.2122(b) reasonableness presumption applies only to the establishment of the District’s customer classes, not the District’s rates; (2) Ariza Gosling is not required to first demonstrate that the District acted arbitrarily and capriciously in establishing the appealed rate pursuant to TWC § 49.2122(b) before a just and reasonable determination regarding the appealed rate can be made under TWC § 13.043(j); and (3) the district bears the burden to prove its appealed rate is just and reasonable.⁶ Before the Proposal for Decision came back to the PUC, the parties reached a settlement and filed a joint motion to remand and dismiss the case.⁷

More recent cases before the PUC, however, have declined to follow TCEQ’s long-standing interpretation. In PUC Docket No. 574458 and PUC Docket No. 57765,⁹ both petitioners are multifamily property owners challenging municipal utility districts’ water and sewer rate decisions affecting their properties after they became tax-exempt. One of the central issues in both dockets has been whether TWC § 49.2122 creates a presumption that rates set by municipal utility districts are proper.

While TCEQ found that TWC § 49.2122 applied only to the establishment of customer classes, the PUC declined to follow TCEQ legal and policy precedent in the PUC’s Supplemental Preliminary Order in PUC Docket Nos. 57445 and 57765 issued on August 21, 2025.¹⁰ The PUC concluded that the presumption in TWC § 49.2122(b) applies not only to the establishment of customer classes but also to rates set by the district among customer classes. The statute governs the establishment of rates among customer classes, not merely the creation of those classes as the title suggests and as TCEQ previously concluded. The PUC concluded that TWC § 49.2122 is intended to authorize a district to impose different charges and fees across its customer classes. These terms are broad and encompass what the water and sewer utility industry commonly refers to as rates, including minimum monthly charges, volumetric charges, and other similar assessments. Therefore, charges and fees are types of rates under the PUC’s most recent statutory interpretation.

In at least one recent case the PUC has dismissed a rate appeal on the basis of its PUC’s interpretation of TWC § 49.2122. In PUC Docket No. 54713,¹¹ ratepayers of Westwood Shores MUD appealed the water rates established by Westwood Shores MUD that affected the rates charged for water utility service, tap fees, late charges, and reconnect fees. Westwood Shores MUD based its decision to adjust water rates on its budget, and the rates recovered only reasonable and necessary expenses. The PUC interpreted and applied TWC § 49.2122 consistent with recent PUC decisions in Docket Nos. 57445 and 57765, where the PUC “determined that prior administrative decisions interpreting TWC § 49.2122 to the contrary were incorrect.”¹² The PUC concluded that “[u]nder TWC § 49.2122(b), Westwood Shores MUD is presumed to have properly established its rates” and “[t]he ratepayers bear the burden of proof to overcome the presumption that the appealed rates were properly established under TWC § 49.2122(b).”¹³ “A petitioner may overcome the presumption under TWC
§ 49.2122(b) by showing that a district’s ratemaking decision was arbitrary and capricious.”¹⁴ The PUC did not follow the recommendations from the SOAH ALJ who applied the previous interpretation that the plain text and the title unambiguously indicate that TWC § 49.2122 relates to classes, not the specific rates charged to ratepayers.¹⁵

In PUC Docket No. 57765 the State Office of Administrative Hearings (“SOAH”) ALJ certified five issues to the PUC related to how the PUC’s updated interpretation of TWC § 49.2122 should be implemented in a rate appeal.¹⁶ In response, the PUC provided the following guidance:

A petition for a rate appeal does not need to specifically allege the district acted arbitrarily and capriciously. 16 Tex. Admin. Code §§ 22.73 and 24.103 set forth the requirements for an application to appeal rates under TWC § 13.043(b)(4) and no additional requirements exist in statute or rule.

The ALJ does not need to find that a petitioner met its burden of proof in showing the district acted arbitrarily and capriciously before the ALJ considers whether to set interim rates. There is no requirement for a bifurcated trial or new procedures because the petitioner, rather than the district, holds the initial burden of proof.

The PUC’s interpretation of TWC § 49.2122 only shifted the burden of proof and did not change the process of considering an appeal. Therefore, no bifurcation of the hearing is required and the ALJ does not need to first find a petitioner met its burden of proof in showing the district acted arbitrarily and capriciously before an evidentiary hearing is held. This interpretation results in a district still being subject to discovery requests and hearings on interim rates before the initial issue of whether a district acted arbitrarily and capriciously has been addressed.

The PUC declined to answer the question on whether initial discovery should be limited to the allegations in the petition if an initial finding of arbitrary and capricious action by the district is required.

The PUC may consider a request from a district to recover rate-case expenses, regardless of whether a district is found to have acted arbitrarily and capriciously.

The interpretation of TWC § 49.2122 has evolved and continues to be addressed before the PUC. While TCEQ historically limited the statute to customer classifications, recent PUC cases suggest a broader reading that significantly affects how district rates are reviewed. Ultimately, the PUC’s revised interpretation of TWC § 49.2122 benefits water districts, but it does not create a bifurcated process that would allow districts to avoid the time and expense of a hearing before issues such as arbitrariness and capriciousness are considered. Water districts should monitor these developments closely, as the outcome may alter both the standard of review and the allocation of the burden of proof in future rate disputes.

¹Tex. Comm’n on Env. Quality – State of Texas, TCEQ Docket Nos. 2008-0091-UCR, 2008-0093-UCR, and 2008-1645-UCR, 2009 WL 2612226 (Aug. 19, 2009).
²An Order Regarding the Appeal of the Retail Water and Wastewater Rates of the Lower Colorado River Authority, TCEQ Docket No. 2008-0093-UCR, 2011 WL 577101 at *12 (Feb. 8, 2011).
³Petition of Queenston LLC, Appealing the Decision of Langham Creek Utility District to Change Rates, PUC Docket No. 57891, Supplemental Preliminary Order at 2 (Sep. 11, 2025); Petition by Ratepayers Appealing the Water Rates Established by Westwood Shores Municipal Utility District, PUC Docket No. 54713, Order at 1 (Sep. 11, 2025); Petition of Heritage Cardiff SPE, LLC Appealing the Decision of Northwest Harris County Municipal Utility District No. 36 to Change Rates, PUC Docket No. 57445, Supplemental Preliminary Order at 2 (Aug. 21, 2025); Petition of Premier at Katy, LLC Appealing the Decision of the Harris-Fort Bend Counties Municipal Utility District No. 3 to Change Rates, PUC Docket No. 57765, Supplemental Preliminary Order at 2 (Aug. 21, 2025).
⁴Petitioner of Ariza Gosling Owner LLC Appealing the Water Rates Established by Northampton Municipal Utility District, PUC Docket No. 54966.
⁵Petitioner of Ariza Gosling Owner LLC Appealing the Water Rates Established by Northampton Municipal Utility District, Commission Staff’s Brief Regarding Burden of Proof, PUC Docket No. 54966 (Aug. 7, 2024).
⁶Petitioner of Ariza Gosling Owner LLC Appealing the Water Rates Established by Northampton Municipal Utility District, SOAH Order No. 9, PUC Docket No. 54966 (Sep. 11, 2024).
⁷Petitioner of Ariza Gosling Owner LLC Appealing the Water Rates Established by Northampton Municipal Utility District, Notice of Settlement and Statement of Confidentiality, Joint Motion to Remand, and Motion to Withdraw and Dismiss Appeal, PUC Docket No. 54966 (Nov. 12, 2024).
⁸Petition of Heritage Cardiff Spe, LLC Appealing the Decision of Northwest Harris County Municipal Utility District No. 36 to Change Rates, Docket No. 57445.
⁹Petition of Premier at Katy, LLC Appealing the Decision of the Northwest Harris-Fort Bend Counties Municipal Utility District No. 3 to Change Rates, Docket No. 57765.
¹⁰Petition of Heritage Cardiff Spe, LLC Appealing the Decision of Northwest Harris County Municipal Utility District No. 36 to Change Rates, Supplemental Preliminary Order, Docket No. 57445 (Aug. 21, 2025); Petition of Premier at Katy, LLC Appealing the Decision of the Northwest Harris-Fort Bend Counties Municipal Utility District No. 3 to Change Rates, Supplemental Preliminary Order, Docket No. 57765(Aug. 21, 2025).
¹¹Petition by Ratepayers Appealing the Water Rates Established by Westwood Shores Municipal Utility District, Docket No. 54713.
¹²Petition by Ratepayers Appealing the Water Rates Established by Westwood Shores Municipal Utility District, Order, Docket No. 54713 (Sep. 11, 2025).
¹³Id.
¹⁴Id.
¹⁵Petition by Ratepayers Appealing the Water Rates Established by Westwood Shores Municipal Utility District, SOAH Proposal for Decision with Memorandum, Docket No. 54713 (May 30, 2025).
¹⁶Petition of Premier at Katy, LLC Appealing the Decision of the Northwest Harris-Fort Bend Counties Municipal Utility District No. 3 to Change Rates, Order on Certified Issues, Docket No. 57765 (Dec. 18, 2025).

Lauren Kalisek is the Chair of the Firm’s Districts Practice Group and a member of the Firm’s Water Practice Group. Lisa Silveira is an Associate in the Firm’s Districts and Water Practice Groups. If you would like additional information or have questions related to these or other matters, please contact Lauren at 512.322.5847 or lkalisek@lglawfirm.com, or Lisa at 512.322.5880 or lsilveira@lglawfirm.com.