July 5, 2022 – The Texas Court of Appeals, Third District, Austin, has issued an opinion ordering the Public Utility Commission of Texas (PUC or Commission) to fully fund all Texas Universal Service Fund (TUSF) programs and to make all disbursements required by existing TUSF orders and commitments.[1]

This is a huge win for the Texas rural communications service providers that filed the lawsuit after the Texas PUC failed to take action in 2020 to keep the TUSF viable, and thereafter cut TUSF high-cost program disbursements by 60-70 percent.

Below is a summary of the events that led to the lawsuit; the sections of the opinion finding that the PUC and PUC Commissioners violated state statute and PUC rules and orders; the remedies granted by the Appeals Court; and the final section of the opinion in which the Court concludes that the PUC’s and PUC Commissioners’ actions resulted in a regulatory taking.

Background Information – TUSF & Texas PUC Inaction/Action

Like other state universal service programs, the TUSF generally ensures the availability of telecommunications services to all Texas residents at reasonable rates. It consists of nine specified services and programs, and is funded by a statewide uniform charge payable by each telecommunications provider. This TUSF assessment is calculated by multiplying the Texas PUC approved rate by the provider’s monthly taxable actual intrastate telecommunications services revenue, and is passed on to customers’ monthly bills. The TUSF’s programs for high-cost and rural assistance, at issue here, make up as much as 80 percent of the fund’s total disbursements.

From 2015 to 2020, the TUSF shrunk by $94 million due to some of the same issues plaguing the Federal universal service fund – declining assessable telecommunications revenues and modification of the assessment calculation by wireless providers to remove costs related to data. Despite facing a collapsing TUSF, at a June 2020 open meeting, the Texas PUC declined to increase the TUSF assessment rate from 3.3% to 6.4%, which would have kept the fund solvent through August 2021. At the time, Solix, the TUSF administrator, estimated that the fund would lack sufficient revenue for all programs as soon as December 2020, if it continued to operate under the current 3.3 assessment rate.

Shortly thereafter, Texas rural communications providers filed a petition for reconsideration urging the PUC to increase the assessment rate and then implement long-term reforms. At the same time, they filed a petition for rulemaking, proposing two other legal options to address the TUSF shortfall: (1) clarify that providers of VoIP services must pay into the TUSF and (2) move from a revenue-based to a connections-based assessment. The PUC took no action on the petition for reconsideration and denied the petition for rulemaking.

Instead, the PUC later amended its contract with Solix, the TUSF administrator (referred to in the opinion as the December 2020 Contract Amendment), which established a triage system for the deteriorating TUSF and directed Solix to prioritize expenditures from the TUSF each month.

This directed Solix to create a TUSF payment hierarchy: (1) pay as “first priority” disbursements all monies owed to the TUSF’s lifeline programs, including programs for low-income and disability assistance and schools and library assistance, and all monies for certain administrative expenses; (2) maintain a $4 million balance in the TUSF; and (3) allocate any remaining money among the monthly support payments due to each eligible telecommunications provider who participates in the rural and high-cost fund.[2] Solix later notified companies participating in the TUSF rural and high-cost fund they would receive a 60 to 70 percent reduction to support payments, some of which were actually greater than 70 percent.

The Texas Telephone Association’s executive director and the CEO of the Texas Statewide Telephone Cooperative Inc. attested that the Rural Providers calculated that the new payment hierarchy resulted in a collective shortfall of approximately $10 million per month below the support amounts established by PUC orders.[3]

Texas Rural Providers’ Lawsuit

In January 2021, the Texas Telephone Association, the Texas Statewide Telephone Cooperative, Inc., and their members (the Rural Providers) filed a lawsuit against the Texas PUC and PUC Commissioners for failing to increase the TUSF assessment rate to keep the TUSF solvent. They claimed, among other things, that the PUC and PUC Commissioners violated statute and PUC rules and orders, and the actions resulted in a regulatory taking.

In response, the Texas PUC challenged the trial court’s jurisdiction and moved for summary judgment, generally asserting that the rural providers “had failed to plead a valid waiver of sovereign immunity,” and alternatively asserted that “even if the trial court concluded it had jurisdiction to hear the case, the rural providers had failed to meet their burden of proof on damages or to establish that the Commission was required to approve the assessment increase.”

The trial sided with the Texas PUC, without providing its reasons, and dismissed the case. The Texas Rural Providers appealed.

Texas Court Of Appeals Opinion

As summarized by the Texas Court of Appeals, the core issues of the lawsuit are “whether the Commission is required to completely fund TUSF to enable full payment of the Commission-ordered support amounts and whether the Commissioners violated statutory and constitutional provisions and the Commission’s own rules when they decided not to increase the assessment rate (and corresponding customer surcharge) to the percentage rate required to fully fund TUSF, knowing that it would dwindle to near-insolvency without the increase.”

Ultra Vires Claim 1 – Legal Authority – PUC Violated Statutes & Commission Rules

First, the Court of Appeals addressed whether the PUC Commissioners acted without legal authority when they refused to increase the assessment rate and instead directed “[PUC] staff to triage the dwindling TUSF by prioritizing certain projects over others and to figure out the details with Solix, which resulted in the…creation of a payment hierarchy.”[4]

This is the Rural Providers’ first ultra vires argument – that the Texas PUC Commissioners “lacked legal authority to take these actions and that these actions are contrary to express statutory provisions.”

The PUC Commissioners argued they have broad authority to act as necessary and convenient to administer the TUSF, and furthermore, sovereign immunity bars suits complaining of an exercise of absolute discretion, as is the case here.

As an initial matter, the Court of Appeals reiterated the relevant case law – sovereign immunity “does not bar suits complaining of an officer’s exercise of judgment or limited discretion without reference to or in conflict with the constraints of the law authorizing the official to act.”[5]

With this in mind, the Court agreed with the Rural Providers’ argument that key provisions in three statutes, “taken together, prohibit the Commissioners from underfunding TUSF and underpaying the Rural Providers’ Commission-ordered support amounts.”[6] The Court provided a further explanation:

When the statute is read as a whole, the Legislature’s intent, as further embodied in the Commission’s rules, is clear: while the Commission has discretion to decide how to fund TUSF, it lacks the discretion to underfund TUSF and to fail to make payments owed to the Rural Providers under its own orders.[7]

Moreover, the Court noted the statutory provisions and PUC rules setting the assessment rate and  determining providers’ TUSF support amounts support the Court’s “conclusion that the Commissioners acted in conflict with their legal constraints when they decided to allow TUSF to be funded in an amount insufficient to comply with the Commission’s own orders, effectively reducing the Rural Providers’ ordered support amounts.” The Court provided the following contrast:

If the Commissioners were complying with the statutory scheme, they would have determined the amount needed to fund TUSF based on the cost of each program within TUSF, and they would have then set the statewide uniform charge to be paid by providers and the assessment rate used to calculate the charge in an amount appropriate to fund the costs of those programs.[8]

At the same time, the Court explained that the Texas PUC did have some discretion over the issue – they had the ability to consider and choose other options:

Thus, to the extent the Commissioners expressed concern at the June 2020 open meeting about Commission staff’s recommendation to increase the assessment rate from 3.3% to 6.4% to fund TUSF at the level required by the cost of TUSF programs, the Commissioners had the discretion (which they acknowledged during the June 2020 open meeting) to implement other options, such as changing the revenue-based assessment to a connection-based assessment and expanding the assessment to include Voice over Internet Protocol service.[9]

But, the Court opined, “[r]efusing to approve the assessment rate at the amount required to cover the cost of TUSF programs (including the Commission-ordered monthly support amounts) was not an option within the Commissioners’ discretion. The statutory scheme requires the Commissioners to fund TUSF at the level needed to cover the costs of TUSF programs.”[10]

Ultra Vires Claim 2 – Ministerial Duties – PUC Did Not Have Discretion To Disregard Commission Orders

Next, the Court of Appeals addressed the Rural Providers other ultra vires claim – “the Commissioners have failed, and continue to fail, to perform a purely ministerial act by failing to pay the monthly per-line support amounts established in the Commission’s final orders.”[11]

As part of their pleadings, the Rural Providers explained that every TUSF recipient has gone through “either an election-and-reporting process or contested-case proceedings,” and received a PUC final order setting their support amounts.[12] The PUC must then carry out the ministerial function of disbursing this support. And, the PUC cannot change these support amounts without notice and an opportunity for a hearing, which is what the PUC Commissioners did when they established a triage system for the TUSF that cut support payments by 60 to 70 percent.

The Texas PUC’s argument against that claim, in the Court’s words, was that the “decision to allow TUSF to become underfunded prevents them from fulfilling their ministerial obligations.”[13]

To begin, the Court confirmed that disbursing correct TUSF support amounts is a ministerial function, and once again noted that the Texas Public Utility Regulatory Act (PURA) “prohibits the Commissioners from revising the monthly support amounts the Rural Providers are owed from TUSF without providing notice and an opportunity for a hearing.”[14]

After reviewing and analyzing the parties’ arguments, the Court agreed with the Rural Providers’ claim “that the Commissioners did not have discretion to disregard the Commission’s own final orders.” The Court found that the “obligation to pay ordered amounts, which is part of the Commission’s calculation of how much money is needed to fund TUSF, is itself one of the legal constraints that limits the Commissioners’ discretion in setting the assessment rate.”[15] As the Court had already explained, “the Commissioners may not reopen a final proceeding or review the Commission’s own final orders.”

Like the outcome in the previous section, the Rural Providers sufficiently pleaded the ministerial duties ultra vires claim to overcome the PUC’s sovereign immunity claim and confer jurisdiction on the trial court.

Remedies – Requests For Relief On Ultra Vires Claims

As explained in the two sections above, the Court of Appeals concluded that the Rural Providers established their ultra vires claims – that the PUC and PUC Commissioners acted without legal authority and failed to perform a purely ministerial act.

Since this was met, the Court then conducted an analysis “to determine whether the Rural Providers established that they are entitled to judgment as a matter of law on each of their requests for relief.”[16] Here is how each played out:

1. GRANTED: Declaratory Judgment That Commissioners Are Acting Ultra Vires By (1) Not Fully Funding TUSF; (2) Creating A TUSF Payment Hierarchy; And (3) Not Fully Paying All TUSF Disbursements Pursuant To TUSF Orders And Commitments

2. GRANTED: Declaratory Judgment That (1) Texas PUC Decision To Not Fully Fund TUSF And Create Hierarchy Of Funding Among TUSF Programs Is Void, And (2) December 2020 Contract Amendment Is Void

3. GRANTED: Request To Remand Case To The Trial Court For A Determination Of Attorneys’ Fees

4. GRANTED: Request For Permanent Injunction Enjoining (1) PUC Commissioners From Not Fully Funding TUSF As Required By Statute And From Failing To Fully Pay All Disbursements Required By PURA And The Commission’s Existing TUSF Orders And Commitments; And (2) PUC And PUC Commissioners From Enforcing The December 2020 Contract Amendment

5. DENIED: Request For Prospective Declaratory And Injunctive Relief For Ultra Vires Claims, Including The Payment Of Money – To Run From The June 7, 2021 Date Of The Trial Court’s Judgment

6. AGREED: The Trial Court Should Have Issued A Writ Of Mandamus To The Commissioners Requiring Them “To Enforce Their Orders, Fulfill Their Duty Imposed By Law To Adequately Fund All TUSF Programs And Make All Required Disbursements” – On Remand, The Trial Court Shall Issue A Writ Of Mandamus Ordering The Commissioners To Take Immediate Action To Fulfill Their Duties Imposed By Law To Fully Fund All TUSF Programs And To Make All Disbursements Required By PURA And The PUC’s Existing TUSF Orders And Commitments

7. AFFIRMED – Trial Court’s Dismissal Of Rural Providers’ Request For Mandamus Relief In Connection With Their APA-Rulemaking Claim

Texas PUC Decisions Resulted In A Regulatory Taking

In the final portion of the opinion, the Texas Court of Appeals addressed the Rural Providers’ argument that the Texas PUC’s “June 2020 decision and December 2020 Contract Amendment were unconstitutional takings of private property without just compensation”[17] because the denial of TUSF support “interferes with the investment-backed expectations in owning and operating a telecommunications company in Texas.”[18]

Like the U.S. Constitution, the Texas Constitution provides that “[n]o person’s property shall be taken, damaged or destroyed or applied to public use without adequate compensation being made.”[19] A “regulation that deprives a property owner of all economically beneficial or productive use of property” can be a taking.[20]

When the Texas Court of Appeals reviews a taking claim, it weighs all relevant circumstances, starting with these guiding factors:

1. the economic impact of the regulation on the claimant;

2. the extent to which the regulation has interfered with distinct investment-backed expectations; and

3. the character of the governmental action.

The Court says the first factor – the economic impact of the regulation on the claimant – has been met:

The Rural Providers submitted summary-judgment evidence demonstrating that the impact of the PUC Parties’ decision not to fully fund TUSF and directing Commission staff to instead formulate a payment hierarchy, followed by the Contract Amendment implementing that payment hierarchy, has deprived the Rural Providers of approximately 60%-70% of their ordered funding, collectively amounting to millions of dollars in Commission-ordered monthly support amounts.[21]

The Court says the second factor – the extent to which the regulation has interfered with distinct investment-backed expectations – has been met:

The nonpayment of the ordered TUSF support amounts unquestionably interferes with the Rural Providers’ investment-backed expectations. One of the main purposes of TUSF is to “assist telecommunications providers in providing basic local telecommunications service at reasonable rates in high cost rural areas.” PURA and the Commission’s rules establish the process by which the providers must prove to the Commission their need for continued support to recoup their investments and to maintain their networks and continue providing service in high-cost rural areas at rates comparable to urban-area rates. The expectation of the Rural Providers when they began providing service in the high-cost areas and engaged in Commission proceedings setting their monthly support amounts was that the Commission would abide by PURA and its own rules and orders to provide support that would make that service economically feasible. Both the executive director of the Texas Telephone Association and the CEO of the Texas Statewide Telephone Cooperative Inc. attested to the expense of installing and maintaining the telecommunications network “in sparsely populated areas where facilities must travel longer distances to reach fewer customers” and further attested that it would not be economically feasible to cover the costs of building and maintaining the network in those areas without full TUSF funding. When the Telecom Providers invested in high-cost rural networks, they did so with the expectation that they would receive the full amount of their Commission-ordered TUSF funding.[22]

As for the third factor – the character of the governmental action – the Court considered the PUC’s argument that “the relevant government action is the Commission’s inaction on its staff’s recommendation that the PUC double the assessment rate and that governmental inaction cannot give rise to a taking.”

The Appeals Court disagreed, concluding the PUC Commissioners did in fact do something. Specifically, the Court determined the PUC Commissioners made a decision, made a plan to implement that decision, and executed that plan via the December 2020 Contract Amendment with the TUSF administrator. Further, the Court said the Commissioner’s knew the result of the affirmative act of the contract amendment “would result in underpayment of the ordered monthly support amounts owed to the Rural Providers.” At this point, the Court of Appeals acknowledged that everything points to a regulatory taking, but noted there are other concerns within the third factor it must consider before reaching a final verdict on the claim.

The Appeals Court then analyzed the third factor taking this into consideration: “A taking may more readily be found when the interference with property can be characterized as a physical invasion by government than when interference arises from some public program adjusting the benefits and burdens of economic life to promote the common good.”[23]

The Court said “while the PUC Parties’ regulatory actions prevented an increase in the per-customer charge, they undermined the statutory purpose of supporting high-cost rural service, which the Legislature has identified as an important public policy goal.” The Court also found the PUC’s decision was “exclusively directed” at the Rural Providers because the PUC “specifically identified which programs they would continue to fully fund with TUSF and which programs they would underfund.” When viewed together, the Appeals Court found that “[t]hese other considerations also favor a conclusion that the PUC Parties’ actions constitute a taking.”[24]

After concluding there was a taking, the Texas Court of Appeals considered whether just compensation is owed. It answered in the affirmative:

In this case, we consider it relevant that the PUC Parties acted ultra vires, violated PURA’s rulemaking requirement, and essentially abdicated their responsibility to carry out the Legislature’s stated policy of supporting telecom providers who provide an essential service to Texans. We conclude that the Rural Providers have established as a matter of law that the PUC Parties’ regulatory actions have gone “so far in imposing public burdens on private interests as to require compensation.”

Accordingly, the Court reversed the dismissal of the Rural Providers’ regulatory-taking claim. Since the other relief already provided to the Rural Providers in the opinion does not address the TUSF arrearages owed to them, the Court remanded the claim back to the trial court for a determination of actual damages resulting from the regulatory taking.

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[1] Texas Telephone Association and Texas Statewide Telephone Cooperative, Inc. et al. v. Public Utility Commission of Texas et al., Case No: 03-21-00294-CV, Texas Court Of Appeals, Third District, At Austin (June 30, 2022) (Opinion), https://search.txcourts.gov/Case.aspx?cn=03-21-00294-CV&coa=coa03.

[2] Opinion at pp. 11-12.

[3] Opinion at p. 12.

[4] Opinion at p. 24.

[5] Opinion at pp. 24-25.

[6] Opinion at p. 26.

[7] Opinion at p. 26.

[8] Opinion at p. 27.

[9] Opinion at p. 28.

[10] Opinion at p. 28.

[11] Opinion at p. 31.

[12] Opinion at p.  31. This process was explained by the Court earlier in the opinion: “Under PURA and the Commission’s rules, the costs of the high-cost and rural programs—that is, the amount of support that each eligible telecommunications provider receives from TUSF—is determined through a contested case or other administrative proceeding, based on each individual provider’s demonstrated financial need for continued support from TUSF. Those contested-case proceedings result in Commission orders establishing the precise monthly support amounts to be disbursed by Solix to the providers.” Opinion at p. 27.

[13] Opinion at p. 32.

[14] Opinion at p. 32.

[15] Opinion at p. 32.

[16] Opinion at p. 34.

[17] Opinion at p. 55.

[18] Opinion at p. 55 (citing Hallco Tex., Inc. v. McMullen County, 221 S.W.3d 50, 56 (Tex. 2006)).

[19] Tex. Const. art. 1, § 17.

[20] Opinion at p. 56 (citing Hallco Tex., Inc. v. McMullen County, 221 S.W.3d 50, 56 (Tex. 2006)).

[21] Opinion at p. 57.

[22] Opinion at pp. 57-58.

[23] Opinion at pp. 59-60 (citing Penn Cent. Transp. Co. v. City of New York, 438 U.S. 104 (1978)).

[24] Opinion at p. 60.