under traditional regulation, utility recovers prudent capital investments in its rates through depreciation
How later courts described this case
- under traditional regulation, utility recovers prudent capital investments in its rates through depreciation
- PURA authorizes recovery of both a return on, and a return of, its rate base
- Nov. 2, 2012, Order on Rehearing at FOFs 162-70 & COL 14
- Gardner Direct at 29 of 77
Written by the judges who cited it.
The opinion
ACCEPTED
03-14-00706-CV
4055487
THIRD COURT OF APPEALS
AUSTIN, TEXAS
2/6/2015 2:00:05 PM
JEFFREY D. KYLE
CLERK
No. 03-14-00706-CV
IN THE FILED IN
3rd COURT OF APPEALS
THIRD DISTRICT COURT OF APPEALS AUSTIN, TEXAS
AT AUSTIN, TEXAS 2/6/2015 2:00:05 PM
JEFFREY D. KYLE
ENTERGY TEXAS, INC., Clerk
Appellant,
v.
PUBLIC UTILITY COMMISSION OF TEXAS, ET AL.,
Appellees.
Appeal from the 345th Judicial District Court, Travis County, Texas
The Honorable Amy Clark Meachum, Judge Presiding
________________________________________________________________
APPELLANT’S BRIEF
_________________________________________________________________
John F. Williams
State Bar No. 21554100
jwilliams@dwmrlaw.com
Marnie A. McCormick
State Bar No. 00794264
mmccormick@dwmrlaw.com
DUGGINS WREN MANN & ROMERO, LLP
600 Congress Ave., Ste. 1900 (78701)
P. O. Box 1149
Austin, Texas 78767-1149
(512) 744-9300
(512) 744-9399 fax
ATTORNEYS FOR APPELLANT
ENTERGY TEXAS, INC.
ORAL ARGUMENT REQUESTED
February 2015
IDENTITY OF PARTIES AND COUNSEL
Pursuant to Rule 38.1(a), appellant provides this list of all parties to the
order appealed from and the names and addresses of all trial and appellate counsel:
Plaintiff/Appellant: Trial counsel:
Entergy Texas, Inc. John F. Williams
Marnie A. McCormick
Patrick J. Pearsall
DUGGINS WREN MANN & ROMERO, LLP
600 Congress Ave., Ste. 1900 (78701)
P. O. Box 1149
Austin, Texas 78767-1149
Appellate counsel:
John F. Williams
Marnie A. McCormick
DUGGINS WREN MANN & ROMERO, LLP
600 Congress Ave., Ste. 1900 (78701)
P. O. Box 1149
Austin, Texas 78767-1149
Defendant/Appellee: Trial counsel:
Public Utility Commission of Texas Elizabeth R. B. Sterling
Environmental Protection Division
Office of the Attorney General
P. O. Box 12548 (MC 066)
Austin, Texas 78711-2548
Intervenor: Trial counsel:
Office of Public Utility Counsel Ross Henderson
Sara J. Ferris
Office of Public Utility Counsel
1701 N. Congress Ave., Ste. 9-180
P. O. Box 12397
Austin, Texas 78711-2397
i
Intervenor: Trial counsel:
The State of Texas Agencies and Susan M. Kelley
Institutes of Higher Education Bryan L. Baker
("State Agencies") Administrative Law Division
Office of the Attorney General
P. O. Box 12548 (MC018-12)
Austin, Texas 78711-2548
Appellate counsel:
Katherine H. Farrell
Administrative Law Division
Office of the Attorney General
P. O. Box 12548 (MC018-12)
Austin, Texas 78711-2548
Intervenor: Trial counsel:
Texas Industrial Energy Consumers Rex D. VanMiddlesworth
Benjamin Hallmark
Thompson Knight LLP
98 San Jacinto Blvd., Ste. 1900
Austin, Texas 78701
Meghan Griffiths
Andrews Kurth LLP
111 Congress Ave., Ste. 1700
Austin, Texas 78701
ii
TABLE OF CONTENTS
IDENTITY OF PARTIES AND COUNSEL ............................................................ i
TABLE OF CONTENTS ......................................................................................... iii
INDEX OF AUTHORITIES......................................................................................v
STATEMENT OF THE CASE ................................................................................ ix
STATEMENT REGARDING ORAL ARGUMENT ............................................. ix
ISSUES PRESENTED...............................................................................................x
STATEMENT OF FACTS ........................................................................................1
I. ETI is subject to traditional rate regulation. ....................................................1
II. In ETI’s 2011 rate case, the Commission included some but not all of
ETI’s expenses in its cost of service................................................................2
A. Depreciation Expense ............................................................................3
B. Incentive Compensation ........................................................................5
III. The Commission disallowed some of ETI’s rate case expenses in the
rate case expense docket. .................................................................................7
SUMMARY OF THE ARGUMENT ......................................................................10
ARGUMENT AND AUTHORITIES ......................................................................13
I. The Commission’s disallowance of ETI’s costs of litigating the
incentive compensation issue is arbitrary and capricious and an abuse
of discretion. ..................................................................................................13
A. The Commission’s finding that ETI was unreasonable in
advocating recovery of financially-based incentive
compensation is arbitrary and capricious. ...........................................13
B. The Commission acted arbitrarily and abused its discretion by
disallowing ETI’s expenses of making its argument about
financially-based incentive compensation. .........................................17
iii
1. The Commission has never before disallowed the costs of
making unsuccessful incentive compensation arguments. ....... 17
2. It was arbitrary and an abuse of discretion to impose a
new standard upon ETI at the end of the administrative
process. ......................................................................................19
3. The Commission’s action also constitutes improper ad
hoc rulemaking. .........................................................................21
C. The Commission further erred in quantifying the expenses ETI
incurred in seeking to include financially-based incentive
compensation in rates. .........................................................................26
1. The Commission has never before required a utility to
record its rate case expenses by issue, nor has the
Commission used a proxy to quantify a disallowance..............27
2. The Commission imposed a new standard upon ETI at
the end of the contested case, again engaging in
inappropriate ad hoc rulemaking. .............................................30
II. The Commission’s disallowance of the ESI depreciation expense that
ETI incurred in the rate case is not supported by substantial evidence
and is arbitrary and capricious. ......................................................................32
CONCLUSION AND PRAYER .............................................................................36
CERTIFICATE OF COMPLIANCE .......................................................................37
APPENDICES .........................................................................................................39
iv
INDEX OF AUTHORITIES
Cases
Bluefield Waterworks & Improvement Co. v. Public Serv. Comm’n of State
of W.Va.,
262 U.S. 679 (1923) ...............................................................................................2
CenterPoint Energy Entex v. Railroad Comm'n of Texas,
213 S.W.3d 364 (Tex. App. – Austin 2006, no pet.)...........................................23
City of Arlington v. Centerfolds, Inc.,
232 S.W.3d 238 (Tex. App. – Fort Worth 2007, pet. denied)..............................22
City of Corpus Christi v. Public Util. Comm’n of Tex.,
51 S.W.3d 231 (Tex. 2001) ....................................................................................3
City of El Paso v. El Paso Elec. Co.,
851 S.W.2d 896 (Tex. App. – Austin 1993, writ denied) ............................. 21, 30
City of El Paso v. Public Util. Comm’n of Tex.,
344 S.W.3d 609 (Tex. App. – Austin 2011, no pet.) .............................................2
City of El Paso v. Public Util. Comm’n of Tex.,
883 S.W.2d 179 (Tex. 1994) ..................................................................................2
Entergy Gulf States, Inc. v. Public Utility Comm'n of Tex.,
173 S.W.3d 199 (Tex. App. – Austin 2005, pet. denied) .....................................23
Federal Power Comm’n v. Hope Natural Gas Co.,
320 U.S. 591 (1944) ...............................................................................................2
Flores v. Employees Ret. Sys.,
74 S.W.3d 532 (Tex. App. -- Austin 2002, pet. denied) ........................ 20, 21, 30
Harris County Hosp. Dist. v. Public Util. Comm'n of Tex.,
No. 03-10-00647-CV, 2012 WL 2989228 *7
(Tex. App. – Austin Jul. 13, 2012, no pet.) (not designated for
publication) .................................................................................................... 21, 30
Oncor Elec. Delivery Co. v. Public Util. Comm’n of Tex.,
406 S.W.3d 253 (Tex. App. – Austin 2013, no pet.)................................... passim
v
Public Util. Comm’n of Tex. v. Texas Telephone Ass’n,
163 S.W.3d 204 (Tex. App. – Austin 2005, no pet.) ...........................................16
Railroad Comm'n of Tex. v. WBD Oil & Gas Co.,
104 S.W.3d 69 (Tex. 2003) ..................................................................................22
Rodriguez v. Service Lloyds Ins. Co.,
997 S.W.2d 248 (Tex. 1999) ......................................................................... 22, 23
South Tex. Indus. Servs., Inc. v. Texas Dep’t of Water Res.,
573 S.W.2d 302 (Tex. Civ. App. – Austin 1978, writ ref’d n.r.e.) .....................16
Southwestern Bell Tel. Co. v. Public Util. Comm'n of Tex.,
745 S.W.2d 918 (Tex. App. – Austin 1988, writ denied) ...................................23
State of Texas Agencies & Institutions of Higher Learning v. Public Util.
Comm’n of Tex.,
No. 03-11-00072-CV, 2014 WL 6893871 *31
(Tex. App. – Austin Dec. 4, 2014, no pet. h) .......................................... 10, 13, 15
State v. Public Util. Comm’n of Tex.,
883 S.W.2d 190 (Tex. 1994) ..................................................................................3
Texas State Board of Pharmacy v. Witcher,
447 S.W.3d 520 (Tex. App. – Austin 2014, pet. filed) ................................ passim
Statutes
Tex. Gov't Code Ann. § 2001.023 ...........................................................................22
Tex. Gov't Code Ann. § 2001.029 ...........................................................................22
Tex. Gov't Code Ann. §§ 2001.032–.033 ................................................................22
Tex. Gov’t Code Ann. § 2001.174 .............................................................. 21, 32, 35
Tex. Util. Code Ann. §§ 11.01, et seq. ......................................................................1
Tex. Util. Code Ann. § 36.051 ...................................................................................1
Tex. Util. Code Ann. § 36.061 ............................................................................ 2, 29
Tex. Util. Code Ann. §§ 39.001-.359 ........................................................................1
vi
Texas Util. Code Ann. § 39.452 ................................................................................1
Rules
16 Tex. Admin. Code § 25.231 ..................................................................................2
16 Tex. Admin. Code § 25.245 ........................................................................ passim
16 Tex. Admin. Code § 25.272 ................................................................................35
39 Tex. Reg. at 6445 ................................................................................................25
Commission Proceedings
Application of AEP Texas Central Co. for Authority to Change Rates,
Docket No. 28840 .......................................................................................... 14, 18
Application of AEP Texas Central Company for Authority to Change Rates,
Docket No. 33309 .......................................................................................... 16, 18
Application of CenterPoint Energy Houston Electric, LLC for Authority to
Change Rates, Docket No. 38339 ........................................................................17
Application of El Paso Electric Company to Change Rates, to Reconcile
Fuel Costs, to Establish Formula-Based Fuel Factors, and to Establish an
Energy Efficiency Cost Recovery Factor, Docket No. 37690 ..............................15
Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile
Fuel Costs, and Obtain Deferred Accounting Treatment,
Docket No. 39896 ......................................................................................... passim
Application of Oncor Electric Delivery Company, LLC for Authority to
Change Rates, Docket No. 35717 ........................................................................15
Application of Southwestern Electric Power Co. for Authority to Change
Rates and Reconcile Fuel Costs, Docket No. 40443............................................15
Application of Southwestern Electric Power Company for Authority to
Change Rates, Docket No. 37364 ........................................................................15
Application of Southwestern Public Service Company Authority to Change
Rates, to Reconcile Fuel and Purchased Power Costs for 2006 and 2007
and to Provide a Credit for Fuel Cost Savings, Docket No. 35763 ....................15
vii
In re El Paso Electric Co., Docket No. 9945 ................................................... 27, 28
Proceeding to Consider Rate Case Expenses Severed from Docket No.
28840, Docket No. 31433.............................................................................. 18, 28
Proceeding to Consider Rate Case Expenses Severed from Docket No.
33310 and Docket No. 33309, Docket No. 34301 ...............................................18
Requests for Rate Case Expenses Severed from Docket No. 38339,
Docket No. 39127 .................................................................................................17
viii
STATEMENT OF THE CASE
This is a suit for judicial review of the final order of the Public Utility
Commission of Texas in its Docket Number 40295, a proceeding to determine the
expenses Entergy Texas, Inc. may recover for prosecuting its 2011 base rate case.
Entergy Texas, Inc. sought judicial review of the agency’s disallowance of two
categories of expense.1 The district court, Judge Amy Clark Meachum presiding,
summarily affirmed the order.2
STATEMENT REGARDING ORAL ARGUMENT
Cases involving public utility regulation usually involve complex regulatory
principles, and this one is no exception. For that reason, the Court’s decisional
process would be aided by oral argument.
1
Clerk’s Record (“CR”) 3-15.
2
CR 232-34.
ix
ISSUES PRESENTED
1. The Commission has historically stated a policy of disallowing incentive
compensation that is tied to “financial” as opposed to “operational”
measures, but the Commission has not clearly or consistently defined how to
determine whether actual incentive costs fall in one category or the other.
Despite that, and even though Entergy Texas, Inc. succeeded in convincing
the Commission to change precedent in one respect, the Commission
disallowed expenses of advocacy on the subject. Did the Commission act
arbitrarily and capriciously by disallowing these expenses?
2. The Commission has never before disallowed a utility’s expenses of making
an unsuccessful attempt to include financially-based incentive compensation
in rates. Did the Commission act arbitrarily and capriciously, or abuse its
discretion, by imposing this new policy upon Entergy Texas, Inc., for the
first time at the end of this contested case without adequate explanation,
instead of imposing the new policy prospectively after a formal rulemaking
proceeding?
3. The Commission for the first time quantified the disallowance using a
“proxy” method that has no logical connection to the actual expense of
making the purportedly unreasonable argument. Did the Commission act
arbitrarily and capriciously or abuse its discretion by imposing this new
method at the end of this contested case without adequate explanation,
instead of imposing the new method prospectively after a formal rulemaking
proceeding?
4. Entergy Texas, Inc. also presented unrebutted evidence that the depreciation
expense it incurred for its affiliate’s services in the rate case was reasonable
and necessary. Is the Commission’s disallowance of that expense, contrary
to the Commission’s treatment of analogous expense in the underlying rate
case, unsupported by substantial evidence or arbitrary and capricious?
x
STATEMENT OF FACTS
Entergy Texas, Inc. (“ETI” or “the Company”) is an investor-owned electric
utility. ETI provides bundled generation, transmission, distribution, and customer
services to over 400,000 retail customers in southeastern Texas.
I. ETI is subject to traditional rate regulation.
The services ETI provides to Texas retail customers are subject to regulation
by the Public Utility Commission of Texas (the “Commission” or “PUCT”) under
the Public Utility Regulatory Act (“PURA”).3 The Texas legislature in 1999
ordered electric utilities to “unbundle” their generation, transmission, distribution,
and customer service functions as part of an effort to introduce competition into the
Texas retail electric industry. See Tex. Util. Code Ann. §§ 39.001-.359. However,
in 2009, the legislature amended PURA to require ETI to cease activities relating
to the transition to retail competition. See id. § 39.452(i). Accordingly, ETI
remains subject to traditional cost-of-service rate regulation. Id. § 39.452(a).
Under PURA and applicable constitutional principles, a traditionally-
regulated utility is entitled to rates that afford it 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.” Id. § 36.051; Federal Power Comm’n v. Hope Natural Gas Co., 320
3
See Tex. Util. Code Ann. §§ 11.01, et seq.
1
U.S. 591, 603 (1944); Bluefield Waterworks & Improvement Co. v. Public Serv.
Comm’n of State of W.Va., 262 U.S. 679, 692 (1923). To set a rate, the
Commission looks at a historical “test year” and determines the amount of money
the utility will need to cover both its expenses and a return on its investment in the
future. E.g., City of El Paso v. Public Util. Comm’n of Tex., 344 S.W.3d 609, 613
(Tex. App. – Austin 2011, no pet.); 16 Tex. Admin. Code 25.231. The total is
called the utility’s “revenue requirement” or “cost of service.” See, e.g., City of El
Paso v. Public Util. Comm’n of Tex., 883 S.W.2d 179, 187 (Tex. 1994); 16 Tex.
Admin. Code § 25.231. PURA also authorizes the Commission to allow a utility to
recover through rates the reasonable expenses of participating in a rate case. Tex.
Util. Code Ann. § 36.061.
II. In ETI’s 2011 rate case, the Commission included some but not all of
ETI’s expenses in its cost of service.
The Company initiated a general base rate case and fuel reconciliation in
2011 because the rates then in effect did not adequately compensate ETI for its
cost of providing service. The Commission assigned Docket No. 39896 to that
case.4 ETI sought a total annual increase of $104.8 million.5 ETI also asked to
recover its expenses of preparing the filing and participating in the rate case.6
4
Reporter’s Record Joint Exh. 1 (Administrative Record or “AR” Part I, Binder 2, Item 55 (May
21, 2013, Final Order at FOF 3)).
5
Id. at FOF 10.
6
Id. at 1.
2
The Commission severed the request for recovery of rate case expenses from
Docket No. 39896 and established new Docket No. 40295 to address that issue.7
The Commission ordered in the rate case that ETI’s base rates be increased by a
total of $27.7 annually.8 That decision is not challenged in this appeal.9 However,
two aspects of that decision are relevant to this appeal from the Commission’s
decision in the rate case expense docket.
A. Depreciation Expense
One of the expenses PURA entitles a utility to recover is the depreciation of
reasonable and necessary capital investments. See, e.g., State v. Public Util.
Comm’n of Tex., 883 S.W.2d 190, 199 (Tex. 1994) (PURA authorizes recovery of
both a return on, and a return of, its rate base); City of Corpus Christi v. Public
Util. Comm’n of Tex., 51 S.W.3d 231, 238 (Tex. 2001) (under traditional
regulation, utility recovers prudent capital investments in its rates through
depreciation). In its rate case, ETI sought to recover depreciation expense for
7
AR Part I, Binder 1, Item 1 (SOAH Order No. 1); AR Part I, Binder 2, Item 55 (Final Order at
FOF 4).
8
AR Part I, Binder 2, Item 55 (Final Order at FOF 12).
9
Several parties, including ETI, the Commission, and the Office of Public Utility Counsel
(“OPUC”), appealed the Commission’s decision in Docket No. 39896. That appeal is currently
pending before this Court as Case No. 03-14-00735-CV. None of the issues raised in that appeal
pertain to the issues raised in this appeal.
3
some of its own capital investments, including assets used by ETI employees to do
their jobs during the test year.10
ETI also sought to recover depreciation expense it incurred for assets that its
affiliate, Entergy Services, Inc. (“ESI”), used to provide general services to ETI
during the test year. Company witness Stephanie Tumminello explained that ESI
is a service company established to provide professional services primarily to ETI
and other Entergy utilities that operate in other jurisdictions.11 In order to support
the operations that are necessary to provide these services, ESI must invest in
depreciable assets like computer equipment, computer software systems,
communications equipment, furniture, fixtures, and leasehold improvements.12
ESI allocates depreciation expense to ETI and the other companies ESI serves
according to the labor cost it bills to each of them.13 Ms. Tumminello confirmed
that the depreciation costs ESI charges to ETI do not include any profit or markup,
and are based on the actual costs of the assets used in ESI’s operations.14 The
10
Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and
Obtain Deferred Accounting Treatment, Docket No. 39896, ETI Exh. 13 (Watson Direct at Exh.
DAW-1). The Administrative Law Judge in the docket underlying this appeal took official
notice of the record in Docket No. 39896. See AR Part III, Vol. A (Transcript of Hearing on the
Merits at 16). Public filings in Docket No. 39896 and other Commission dockets may be
accessed at the Commission’s interchange:
http://interchange.puc.texas.gov/WebApp/Interchange/application/dbapps/filings/pgSearch.asp
by entering the docket number in the “Control Number” field.
11
Id., ETI Exh. 41 (Tumminello Direct at 9 of 98).
12
Id. at 79 & 81 of 98.
13
Id. at 80 & 83 of 98.
14
Id. at 84 of 98.
4
Commission included the test-year ESI depreciation expense in ETI’s cost of
service in Docket No. 39896.15
B. Incentive Compensation
In Docket No. 39896, ETI also requested that its rates include the cost of
incentive compensation programs for the Company’s employees. Company
witness Kevin Gardner testified that the primary purpose of these programs, in
conjunction with the Company’s base pay program, is to enable ETI to attract and
keep talented employees, whose efforts translate into safe and reliable electric
service for customers.16 Mr. Gardner acknowledged that the Commission has, in
several past cases, not allowed utilities to include what has been termed
“financially based incentive compensation” in their cost of service used to set
rates.17 Another Company witness, Jay C. Hartzell, PhD,18 explained more
specifically that incentive compensation tied to cost control measures, profitability
measures, and stock prices has been deemed “financially based” in some past
Commission dockets.19 Mr. Gardner acknowledged that some (but not all) of
ETI’s test-year incentive compensation expenses fall within those categories.20
15
Id. (Nov. 2, 2012, Order on Rehearing at FOFs 162-70 & COL 14).
16
Id., ETI Exh. 36 (Gardner Direct at 6-7 of 77) & ETI Exh. 50 (Gardner Rebuttal at 2 of 18).
17
Id. (Gardner Direct at 29 of 77).
18
Dr. Hartzell is the Chair of the Finance Department, and Professor of Finance, at the
University of Texas at Austin School of Business. Id., ETI Exh. 15 (Hartzell Direct at 1 of 31).
19
Id. at 3 of 31.
20
Id., ETI Exh. 36 (Gardner Direct at 30).
5
Both Mr. Gardner and Dr. Hartzell, however, testified that the Commission
should consider including all of ETI’s incentive compensation programs in ETI’s
cost of service. Both witnesses testified that the Company’s incentive
compensation programs generally benefit customers.21 They focused specific
comments on incentive compensation programs that are tied to cost control
measures, explaining at length how those programs in particular benefit
customers.22
After an evidentiary hearing, the Administrative Law Judges (“ALJs”)
recommended that over $6 million of ETI’s requested $104.8 million rate increase
should be disallowed as financially-based incentive compensation.23 The ALJs
agreed with ETI, however, that incentive compensation tied to cost control
measures should be included in rates. They distinguished prior Commission
precedent on cost-control incentive compensation and reasoned that, “[t]he
evidence in this case demonstrates that ratepayers benefit when a utility
incentivizes its employee to control costs.”24 The Commission, with a few
exceptions, adopted the proposal for decision. The Commission disallowed ETI’s
request to include financially-based incentive compensation in rates, but contrary
21
Id. at 30-31; ETI Exh. 50 (Gardner Rebuttal at 5 & 8-9 of 18); ETI Exh. 15 (Hartzell Direct at
6-8 of 31); ETI Exh. 53 (Hartzell Rebuttal at 4-10 of 15).
22
Id., ETI Exh. 50 (Gardner Rebuttal at p. 6-8 of 18); ETI Exh. 15 (Hartzell Direct at 9-12 of
31); ETI Exh. 53 (Hartzell Rebuttal 10-13 of 15).
23
Id. (Proposal for Decision at 166-176).
24
Id. at 175.
6
to its prior decisions, agreed that incentive compensation tied to cost controls
should not be treated as “financial” in nature, thus allowing its inclusion in rates.25
III. The Commission disallowed some of ETI’s rate case expenses in the rate
case expense docket.
In Docket No. 40295, the expense proceeding severed from Docket No.
39896, the ALJ granted party status to the City of Anahuac, et al. (“Cities”), State
of Texas agencies and institutions of higher education (“State Agencies”), the
Office of Public Utility Counsel (“OPUC”), and Texas Industrial Energy
Consumers (“TIEC”).26 ETI sought a total of roughly $7.6 million of its own
expenses, as well as reimbursement for expenses incurred by Cities in the amount
of about $1.2 million.27
Two components of ETI’s request are the subject of this appeal. First, the
costs ETI sought to recover included those of seeking to include financially-based
incentive compensation in the rates set in Docket No. 39896. Second, consistent
with its request to recover in base rates the test-year depreciation expense ETI
incurred for ESI’s general services, ETI sought to recover the separate depreciation
expense ETI incurred for the services ESI provided on ETI’s behalf in the rate
case.28
25
Id. (Nov. 2, 2012, Order on Rehearing at FOFs 127-34).
26
AR Part I, Binder 1, Items 5 & 10 (SOAH Order Nos. 2 & 4).
27
AR Part I, Binder 2, Item 55 (Final Order at 1).
28
AR Part II, Binder 3, ETI Exh. 6 (Considine Supp. Direct at 3-4); ETI Exh. 7 (Considine
Rebuttal at 11).
7
After an evidentiary hearing, the ALJ issued a proposal for decision
recommending the Commission reduce ETI’s requested expenses by some $1.5
million.29 Some of that reduction was attributable to the ALJ’s conclusion that ETI
should not recover depreciation expense associated with ESI’s efforts on the rate
case.30 Another part of the reduction was attributable to the ALJ’s conclusion that
ETI should not recover expenses associated with its efforts to recover financially-
based incentive compensation through rates. The ALJ concluded that ETI’s effort
to recover financially-based incentive compensation was an “aggressive,” “long
shot” argument.31 The ALJ did not attempt to quantify the actual expenses ETI
incurred in its effort to recover this compensation, but instead used a proxy for that
amount. The ALJ determined the ratio that ETI’s financially-based incentive
compensation bore to ETI’s total requested rate increase in Docket No. 39896, and
then reduced ETI’s rate case expenses by that same ratio.32 The remainder of the
ALJ’s recommended disallowance was related to other issues that are not pertinent
to this appeal.33 The ALJ’s proposal for decision is appended to this brief as
Appendix A.
The Commission accepted some of the ALJ’s recommendations and rejected
others. The Commission agreed with the ALJ that ETI should not recover
29
AR Part I, Binder 2, Item 32 (Proposal for Decision at 34).
30
Id. at 11-12.
31
Id. at 23.
32
Id. at 32-34.
33
See AR Part I, Binder 2, Item 55 (Final Order at 3).
8
depreciation expense associated with ESI’s efforts in the rate case.34 The
Commission also agreed that it was “unreasonable” and “overly aggressive” for
ETI to argue its rates should include financially-based incentive compensation.
The Commission further agreed that the disallowance should be quantified using
the ALJ’s “proxy” approach.35 The Commission’s order is appended to this brief
as Appendix B.
ETI timely filed a motion for rehearing challenging the Commission’s
decision to disallow the depreciation expense and the Commission’s decision to
disallow the expense of seeking to include financially-based incentive
compensation in rates. ETI also challenged the Commission’s method of
quantifying the disallowance associated with the financially-based incentive
compensation argument.36 The motion was overruled by operation of law.
ETI sought judicial review of the Commission’s decision.37 State Agencies,
OPUC, and TIEC intervened.38 The district court summarily affirmed the
Commission’s decision.39
34
Id. at FOF 18(a).
35
Id. at 2 & FOF 18(f).
36
AR Part I, Binder 2, Item 56 (ETI’s Motion for Rehearing).
37
CR 3-15.
38
Id. 16-17, 19-23, & 27-29.
39
Id. 232-34.
9
SUMMARY OF THE ARGUMENT
The Commission’s decision is arbitrary and capricious in several respects.
First, the finding that ETI was unreasonable for seeking to include incentive
compensation in rates does not hold water in light of Commission precedent.
Though the Commission has in the past disallowed incentive compensation that it
has deemed “financially based,” the Commission has never articulated a clear
definition of that category of costs. In fact, the Commission has treated analogous
costs differently in rate cases involving different utilities. As this Court recently
recognized, whether a particular cost is “financially based” is a fact question. See
State of Texas Agencies & Institutions of Higher Learning v. Public Util. Comm’n
of Tex., No. 03-11-00072-CV, 2014 WL 6893871 *31 (Tex. App. – Austin Dec. 4,
2014, no pet. h). It is not a settled principle of policy or law. Nor is the
Commission bound to follow its previous decisions in the same way a court is
bound. For these reasons, it cannot have been patently unreasonable for ETI to
seek to persuade the Commission to consider including incentive compensation
costs in rates.
Second, though the Commission has several times disallowed the expenses
of various utilities’ incentive compensation programs, the Commission has never
before disallowed the costs of making an unsuccessful attempt to include them in
rates. Indeed, the Commission has allowed other utilities to recover the costs of
10
making their unsuccessful arguments. The Commission imposed its new policy of
disallowing this type of rate case expense for the first time at the end of this
contested case. The Commission did not acknowledge its departure from its
previous decisions, much less explain it or give ETI notice of the change when ETI
could have done something about it. The Commission’s decision is reversible on
this basis alone. This Court reached that conclusion in an analogous appeal from a
rate case expense order. See Oncor Elec. Delivery Co. v. Public Util. Comm’n of
Tex., 406 S.W.3d 253, 267 (Tex. App. – Austin 2013, no pet.).
The Commission’s decision is also reversible because it constitutes improper
adjudicative rulemaking. The Commission actually engaged in a formal
rulemaking on this issue soon after this case was decided. See 16 Tex. Admin.
Code § 25.245. It was error for the Commission to impose its new policy upon
ETI at the end of this contested case, instead of prospectively after engaging in a
formal rulemaking proceeding. This Court recently reached a similar conclusion in
a case involving a different agency. See Texas State Board of Pharmacy v.
Witcher, 447 S.W.3d 520, 535 (Tex. App. – Austin 2014, pet. filed).
Even if the Commission were justified in disallowing the expenses of
advocating recovery of incentive compensation costs, the Commission erred in
quantifying the disallowance. ETI presented evidence of the expenses of making
the argument. No party presented any evidence in rebuttal. Nevertheless, the ALJ
11
declined to attempt to quantify the actual expenses of making the argument.
Instead, the ALJ used a “proxy” for actual expenses that results in a disallowance
that bears no logical relationship to the purportedly “unreasonable” expense. Even
though the Commission has never before used such a “proxy” method, the
Commission used the proxy method at the end of this contested case, before it
engaged in a formal rulemaking proceeding on the issue. The Commission’s
decision in this respect is arbitrary and capricious.
So is the Commission’s disallowance of the ESI depreciation expense that
ETI incurred for ESI’s efforts in the rate case. The Commission’s decision is not
supported by any evidence in the record. Instead, it is based upon an illogical
speculation that ETI would not have paid as much if it had hired an outside vendor
to perform the services that ESI performed. No witness said anything supporting
that speculation. Moreover, the Commission allowed ETI to recover the analogous
depreciation expense it incurred for ESI’s general services during the test year,
finding it was a reasonable and necessary test-year expense. There is no rational
basis in the evidence upon which to distinguish between ESI’s use of assets to
perform general services during the test year and ESI’s use of the same assets to
assist ETI in a rate case. The Commission’s disallowance of the depreciation
expense here must, therefore, be reversed.
12
ARGUMENT AND AUTHORITIES
I. The Commission’s disallowance of ETI’s costs of litigating the incentive
compensation issue is arbitrary and capricious and an abuse of
discretion.
The Commission determined that $522,244.66 of ETI’s rate case expenses
were “properly disallowed” because they were “attributable to unreasonable and
overly aggressive arguments pursued by ETI in Docket 39896 related to
financially-based incentive compensation.”40 The Commission’s stated rationale
for its decision was that:
The Commission has repeatedly ruled that a utility cannot recover the
cost of financially-based incentive compensation because financial
measures are of more immediate benefit to shareholders and financial
measures are not necessary or reasonable to provide utility services.
The Commission concludes that it should follow its well-established
policy here.41
A. The Commission’s finding that ETI was unreasonable in
advocating recovery of financially-based incentive
compensation is arbitrary and capricious.
This Court recently acknowledged the Commission’s policy of allowing the
recovery of incentive compensation tied to operational performance, but denying
recovery of incentive compensation tied to financial performance on the theory that
the latter more immediately benefits shareholders than ratepayers. See State of
Texas’ Agencies & Institutions of Higher Learning, supra, 2014 WL 6893871 *31
40
AR Part I, Binder 2, Item 55 (Final Order at pp. 5-6, FOF 18(f)).
41
Id. at 2 (footnote omitted).
13
n.34 (collecting cases). ETI does not disagree that the Commission has historically
articulated this perceived dichotomy.
However, the division between the two types of costs is anything but clear
under Commission precedent. The Commission has not foreclosed the possibility
of recovering any incentives associated with numerical triggers.42 Indeed, while
the Commission has clearly identified two theoretical “buckets” of incentive costs,
the Commission has not clearly or consistently advised utilities how to assign
actual costs to one bucket or another. For example, though the Commission
previously disallowed another utility’s incentive compensation tied to cost
controls,43 the Commission allowed ETI to recover incentive compensation tied to
cost controls in Docket No. 39896.44 And though the Commission disallowed
recovery of ETI’s stock-based incentive payments in Docket No. 39896,45 the
Commission subsequently allowed another utility to recover the “restricted stock
42
AR Part II, Binder 3, ETI Exh. 12 (Morris Rebuttal at 2 of 14).
43
See Application of AEP Texas Central Co. for Authority to Change Rates, Docket No. 28840
(Aug. 15, 2005, Final Order at FOFs 164-70), cited in Docket No. 39896, supra, (Proposal for
Decision at 175) (Appendix C).
44
Docket No. 39896, supra, (Proposal for Decision at 175; Nov. 2, 2012, Order on Rehearing at
FOFs 127-34) (Appendix C).
45
Docket No. 39896, supra, (Proposal for Decision at 166-72; Nov. 2, 2012, Order on Rehearing
at FOFs 127-34) (Appendix C).
14
units” it paid as incentive compensation.46 Excerpts of these Commission
decisions are compiled in Appendix C to this brief.
In short, the question of which incentives are “financial” versus
“operational” in a given case is one of fact, to be decided in light of the evidence
presented in that case. This Court said so in no uncertain terms in the State of
Texas’ Agencies case just two months ago. State of Texas’ Agencies, 2014 WL
6893871 *31 (“Because the question of whether Oncor’s incentive-compensation
payments were ‘financial’ rather than ‘operational’ in nature is one of fact,” the
Court reviewed the Commission’s assignment of costs to one category or the other
for evidentiary support under the substantial evidence rule).
The fact that the Commission has not adopted a consistent approach is
perhaps why many utilities have repeatedly raised the issue in rate cases for
years.47 It is also likely why PUCT Commissioner Anderson acknowledged that
46
Application of Southwestern Electric Power Co. for Authority to Change Rates and Reconcile
Fuel Costs, Docket No. 40443 (Mar. 6, 2014, Order on Rehearing at 11 & FOF 220) (Appendix
C).
47
AR Part II, Binder 3, ETI Exh. 12 (Morris Rebuttal at 3 of 14) (citing Application of
Southwestern Electric Power Company for Authority to Change Rates and Reconcile Fuel Costs,
Docket No. 40443 (Direct Testimony of Andrew R. Carlin at 5); Application of El Paso Electric
Company to Change Rates, to Reconcile Fuel Costs, to Establish Formula-Based Fuel Factors,
and to Establish an Energy Efficiency Cost Recovery Factor, Docket No. 37690 (Direct
Testimony of Michael D. Feuerbacher at 5), Order (July 30, 2010); Application of Southwestern
Electric Power Company for Authority to Change Rates, Docket No. 37364 (Direct Testimony of
David A. Jolley at 13-30), Order (Apr. 16, 2010); Application of Southwestern Public Service
Company Authority to Change Rates, to Reconcile Fuel and Purchased Power Costs for 2006
and 2007 and to Provide a Credit for Fuel Cost Savings, Docket No. 35763 (Direct Testimony of
Marvin E. McDaniel, Jr. at 12), Order (June 2, 2009); Application of Oncor Electric Delivery
Company, LLC for Authority to Change Rates, Docket No. 35717 (Direct Testimony of James A.
15
the recovery of financially-based incentive costs may be possible in a “properly
organized and evidenced” case.48
The findings that Commission policy was cemented long ago, and that it was
unreasonable for ETI to seek recovery of financially-based incentives, simply
cannot withstand scrutiny. The contours of financially-based incentive
compensation are demonstrably not set in stone. ETI actually prevailed in Docket
No. 39896 on some of its request to recover what had previously been deemed
unrecoverable incentive compensation, resulting in an additional $1 million for
recovery of incentive compensation costs. Even if the issue had not undergone any
development over time, the Commission is not absolutely bound by its previous
decisions and may change its policy on a given issue when relevant circumstances
change. See, e.g., Public Util. Comm’n of Tex. v. Texas Telephone Ass’n, 163
S.W.3d 204, 218-19 (Tex. App. – Austin 2005, no pet.); South Tex. Indus. Servs.,
Inc. v. Texas Dep’t of Water Res., 573 S.W.2d 302, 304 (Tex. Civ. App. – Austin
1978, writ ref’d n.r.e.). For all these reasons, ETI’s litigation of the financially-
based incentive compensation issue in Docket No. 39896 cannot have been
patently unreasonable. To the contrary, it is patently arbitrary for the Commission
to treat the issue as a case-by-case, factual inquiry in multiple cases, including
Greer at 43-44), Final Order (Aug. 31, 2009); Application of AEP Texas Central Company for
Authority to Change Rates, Docket No. 33309 (Direct Testimony of David A. Jolley at 12),
Order (Dec. 13, 2007)).
48
AR Part II, Binder 3, ETI Exh. 12 (Morris Rebuttal at 3-4 of 14 & Exh. SFM-R-1).
16
ETI’s 2011 rate case, and then treat it as a question of law governed by unvarying
and unalterable precedent for purposes of rate case expense review.
B. The Commission acted arbitrarily and abused its discretion
by disallowing ETI’s expenses of making its argument
about financially-based incentive compensation.
Regardless of how “aggressive” ETI’s position was on the issue of
financially-based incentive compensation, it was arbitrary and an abuse of
discretion for the Commission to disallow the costs of asserting the argument in
this case.
1. The Commission has never before disallowed
the costs of making unsuccessful incentive
compensation arguments.
Though the Commission had previously disallowed the inclusion of
financially-based incentive compensation in rates, the Commission has consistently
allowed utilities to recover the expenses associated with their efforts to recover the
incentive costs. For example, the Commission disallowed some of CenterPoint’s
incentive compensation in Docket No. 38339,49 but allowed CenterPoint to recover
the expenses of making this argument.50 Similarly, the Commission disallowed
some of AEP Texas Central Company’s long-term incentive compensation in
49
Application of CenterPoint Energy Houston Electric, LLC for Authority to Change Rates,
Docket No. 38339 (Jun. 23, 2011, Order on Rehearing at FOFs 81-83) (Appendix D).
50
Requests for Rate Case Expenses Severed from Docket No. 38339, Docket No. 39127 (Jun. 6,
2011, Order at FOFs 6, 12, & 20) (Appendix D).
17
Docket No. 33309,51 but allowed the company to recover the expenses of making
its argument and expressly determined that they were reasonably incurred.52
Furthermore, the Commission disallowed some of AEP Central’s “performance
based” incentive compensation in Docket No. 28840,53 but allowed the company to
recover its expenses of making its argument, which the Commission expressly
determined were reasonably incurred.54 Excerpts from these Commission
decisions are compiled at Appendix D to this brief.
This is the first time the Commission disallowed the expenses of advocating
for the recovery of financially-based incentive compensation. Chairman Nelson
acknowledged this fact at the open meeting in this very case:
And on C.2.a. which is financially based incentive compensation, I
kind of struggled with this issue because I – I understood what all the
different parties were articulating, but ultimately I’m not sure in this
docket it’s appropriate for us to impose a new policy of disallowing
rate case expenses related to advocacy of long-shot positions.55
Nevertheless, the Commission imposed the new standard, for the first time, at the
conclusion of this contested case.
51
Application of AEP TCC for Authority to Change Rates, Docket No. 33309 (Mar. 4, 2008,
Order on Rehearing at FOF 82) (Appendix D).
52
Proceeding to Consider Rate Case Expenses Severed from Docket No. 33310 and Docket No.
33309, Docket No. 34301 (May 23, 2008, Final Order at FOFs 18, 20, & 21) (Appendix D).
53
Application of AEP Central for Authority to Change Rates, Docket No. 28840 (Aug. 15, 2005,
Final Order at FOFs 164-70) (Appendix D).
54
Proceeding to Consider Rate Case Expenses Severed from Docket No. 28840, Docket No.
31433 (Mar. 3, 2006, Order at FOF 26) (Appendix D).
55
April 11, 2013, Transcript at 7:25-8:14 (emphasis added) (Appendix E).
18
2. It was arbitrary and an abuse of discretion to
impose a new standard upon ETI at the end of
the administrative process.
Parties are entitled to know what agency standards will be applied to them in
advance of the administrative process. This Court recently reiterated this
fundamental principle of Texas administrative and constitutional law in another
rate case expense appeal. See Oncor Elec. Delivery Co., supra, 406 S.W.3d at 267.
In Oncor, the Commission disallowed the utility’s expenses that were incurred in
the past because, the Commission declared, past rate case expenses that occurred
outside the test year are not recoverable. This was a departure from the
Commission’s past interpretation of relevant principles, imposed long after the
utility had incurred the expenses at issue. This Court held that the Commission’s
post-hearing imposition of a new policy was fundamentally unfair because by that
time, it was too late for Oncor to comply with the new rule. Id. at 268-69.
The same thing happened here. The administrative process at issue began
when Docket No. 39896 was filed. At that time, the Commission had given no
indication whatsoever that it would not continue to allow recovery of otherwise
reasonable expenses related to litigating incentive compensation. The Commission
announced its new policy only after ETI had litigated the issue (and, ironically,
won part of it). Had the Commission made the new policy known on a prospective
basis, ETI would have had the opportunity to present its case differently.
19
The Commission’s action in this case also violates another principle that was
at issue in Oncor. That is, as this Court wrote, “[a]lthough agencies are not bound
to follow their decisions in contested cases in the same way that courts must follow
controlling precedent, an agency must explain its reasoning when it departs from
prior norms.” Id. at 267 (citing, e.g., Flores v. Employees Ret. Sys., 74 S.W.3d
532, 544–45 (Tex. App. -- Austin 2002, pet. denied)). Because the Commission in
Oncor changed its position on the recovery of expenses incurred outside the test
year without providing any explanation for its change in its prior practice — and
denied Oncor's expenses on the basis of its new position — this Court reversed the
Commission’s decision. Id. at 272.
The same result should obtain here. Contrary to its consistent precedent
allowing utilities to recover the cost of litigating the incentive compensation issue,
the Commission for the first time declared it is unreasonable to incur expenses to
litigate that issue. The Commission in its order did not acknowledge, much less
explain, its departure from its precedent on this issue. Because the Commission
gave no notice or justification for its about-face on the recovery of rate case
expenses in this circumstance, the Commission’s application of the policy to ETI
in this case is arbitrary and capricious and an abuse of discretion. Harris County
Hosp. Dist. v. Public Util. Comm'n of Tex., No. 03-10-00647-CV, 2012 WL
2989228 *7 (Tex. App. – Austin Jul. 13, 2012, no pet.) (not designated for
20
publication); Flores, 74 S.W.3d at 544-45; City of El Paso v. El Paso Elec. Co.,
851 S.W.2d 896, 900 (Tex. App. – Austin 1993, writ denied). The decision must
be reversed for that reason alone. See Tex. Gov’t Code Ann. § 2001.174.
3. The Commission’s action also constitutes
improper ad hoc rulemaking.
The appropriate way for the Commission to impose a new policy like this is
to engage in a rulemaking and impose the new standard upon the industry
uniformly on a prospective basis.
When an agency adopts a new policy that it intends to apply irrespective of
the circumstances of an individual case, the agency adopts a “rule.” E.g., Witcher,
supra, 447 S.W.3d at 528-30 & 535-356. It is indisputable that the Commission in
this case adopted a new rule of general applicability. The Commission did not in
its order identify any facts peculiar to this case that suggest the policy applies only
to this case. The Commission’s broad conclusion that it is “unreasonable” to incur
expense to litigate the recoverability of financially-based incentive compensation is
based solely on something the Commission says is “well-established policy.”56
The decision clearly has implications beyond the parties to the underlying
proceeding. Indeed, as noted above, Chairman Nelson confirmed at an open
meeting that the Commission was in this case setting a “new policy.” She even
56
AR Part I, Binder 2, Item 55 (Final Order at 2).
21
observed, on the record, that the subject is more properly addressed in a
rulemaking. She said:
What I would like to do is, if it’s okay with you, is open a rulemaking.
I think just the issue in general of rate case expenses, whether it’s a
utility or the cities, I think it’s something that we’ve needed to look at
for a while, and this is the type of issue that would be appropriate to
include in that type of a rulemaking.57
A state agency presumptively must promulgate new rules through
rulemaking procedures, which include giving notice of a proposed new rule,
soliciting public comment, submitting to legislative review, and entering an order
to adopt the new rule. See Tex. Gov't Code Ann. §§ 2001.023; 2001.029;
2001.032–.033; Rodriguez v. Service Lloyds Ins. Co., 997 S.W.2d 248, 255 (Tex.
1999). Rulemaking hearings are different from contested case hearings in that
“rulemaking procedures maximize ‘public participation in the rulemaking process,’
a stated purpose of the APA, while contested case procedures limit participation to
those directly affected by the dispute.” Railroad Comm'n of Tex. v. WBD Oil &
Gas Co., 104 S.W.3d 69, 77 (Tex. 2003) (footnote omitted), cited in City of
Arlington v. Centerfolds, Inc., 232 S.W.3d 238, 253-54 (Tex. App. – Fort Worth
2007, pet. denied). By providing for formal rulemaking procedures, the legislature
intended to ensure that the public and affected persons are heard on matters that
affect them and receive notice of new rules. See Rodriguez, 997 S.W.2d at 255.
57
April 11, 2013, Transcript at 7:25-8:14 (emphasis added) (Appendix E).
22
The legislature delegates formal rulemaking power to an agency with the
expectation that an agency will ordinarily adopt rules of general application
through that power. Id.
Allowing an agency to create broad amendments to its rules through
administrative adjudication rather than through its rulemaking authority undercuts
the APA. Rodriguez, 997 S.W.2d at 255. Only in “exceptional” cases may an
agency choose to formulate and enforce a general requirement through a decision
in a particular case. See, e.g., id.; Witcher, 447 S.W.3d at 535. As this Court
recently reiterated in Witcher, supra, adjudicative rulemaking has been recognized
as appropriate only when an agency is confronted with: (1) an issue of first
impression; (2) a new or amended statutory scheme or administrative rules; or (3)
an issue that cannot be adequately captured within the bounds of a general rule
because the problem is so specialized and varying in nature. Witcher, 447 S.W.3d
at 535; see also City of El Paso v. Public Util. Comm'n of Tex., 883 S.W.2d 179,
188–89 (Tex.1994); CenterPoint Energy Entex v. Railroad Comm'n of Texas, 213
S.W.3d 364, 369 (Tex. App. – Austin 2006, no pet.); Entergy Gulf States, Inc. v.
Public Utility Comm'n of Tex., 173 S.W.3d 199, 212 (Tex. App. – Austin 2005,
pet. denied); Southwestern Bell Tel. Co. v. Public Util. Comm'n of Tex., 745
S.W.2d 918, 926 (Tex. App. – Austin 1988, writ denied).
23
None of those circumstances is present here. First, whether a utility should
be precluded from recovering expenses of arguing against a decision in a prior
Commission proceeding is certainly not an issue of first impression. Virtually
every rate case involves such a scenario; that is what drives the evolution of
agency policy over time. And the expenses of making the particular argument at
issue here – the recoverability of financially-based incentive compensation – have
been awarded in numerous Commission dockets.58 Second, the Commission’s
decision is not based upon any new or amended statutory provision or agency rule.
Finally, whether a utility should be allowed to recover expenses of arguing against
a prior Commission decision is not an issue so specialized or varying in nature that
it cannot be adequately captured in a general rule.
Not only did Chairman Nelson expressly acknowledged that the issue is
well-suited to a rulemaking proceeding, but the Commission ultimately did adopt a
rule on this very subject. On August 6, 2014, the Commission adopted new Rule
25.245, entitled “Rate Case Expenses.” See 16 Tex. Admin. Code § 25.245
(Appendix F). In that rule, the Commission set forth the criteria for review and
determination of the reasonableness of rate case expenses. One of those criteria is
whether “the utility’s … proposal on an issue in the rate case had no reasonable
basis in law, policy, or fact and was not warranted by any reasonable argument for
58
See Appendix D.
24
the extension, modification, or reversal of commission precedent.” Id. §
25.245(c)(4). In response to comments that there should be a delay in
implementation of the rule to give parties adequate notice of its effect, the
Commission noted that the “proposed rule will only apply to applications filed
after the effective date of the rule and will not be applied retroactively.” 39 Tex.
Reg. at 6445.
The Commission itself obviously recognizes that the recoverability of the
expense of arguing against Commission precedent is the proper subject of a formal
administrative rule, and one that should be applied on a prospective basis.
Moreover, the standard that resulted from the formal rulemaking process, in which
there was wide participation from all types of industry participants, does not
penalize utilities for making “long shot” or “aggressive” arguments. Rather, the
standard contemplates penalizing utilities for making arguments that have no
reasonable basis in law or fact and not based on a reasonable argument for the
extension, modification or reversal of Commission precedent. 16 Tex. Admin.
Code § 25.245(c)(4). Given that ETI supported its argument in this case with
abundant evidence and policy arguments, and those arguments resulted in the
reversal of Commission policy in one respect, application of the rule would not
result in a disallowance of rate case expenses in this case. The Commission’s
adoption of a more stringent policy in this contested case, before fully vetting it in
25
a formal rulemaking proceeding, was invalid ad hoc rulemaking and must be
reversed. See, e.g., Witcher, 447 S.W.3d at 535.
C. The Commission further erred in quantifying the expenses
ETI incurred in seeking to include financially-based
incentive compensation in rates.
Even if the Commission’s rationale for the disallowance were not reversible,
the Commission’s quantification of the disallowance should be reversed. The
Commission adopted the ALJ’s method of determining how much money should
be disallowed for litigating the recovery of financially-based incentive
compensation. The ALJ acknowledged that some of ETI’s expenses relating to the
pursuit of its financially-based incentive compensation are clear in the record.59
The ALJ opined, however, that ETI’s total cost of litigating the issue was not clear
because the cost of discussing the issue at hearing and in post-hearing briefing was
not separately identified in the record.60 The ALJ, therefore, abandoned an effort
to quantify the expenses of litigating the issue and instead used a proxy for that
amount.61 The ALJ recommended reducing the balance of ETI’s otherwise
reasonably incurred rate case expenses by the ratio of the disallowed incentive
compensation to the total requested rate increase in Docket No. 39896.62 Using
this method, the Commission found that $522,244.66 of ETI’s rate case expenses
59
AR Part I, Binder 2, Item 32 (Proposal for Decision at 24).
60
Id.
61
Id. at 32-33.
62
Id. at 33-34.
26
were “related to” the financially-based incentive compensation argument.63 The
Commission’s use of this “proxy” method for quantifying the disallowance is
another significant, unexplained departure from Commission precedent and should
be imposed, if at all, prospectively after a rulemaking proceeding.
1. The Commission has never before required a
utility to record its rate case expenses by issue,
nor has the Commission used a proxy to
quantify a disallowance.
The ALJ ignored ETI’s evidence based on his belief that the Company had
the burden to “separate out any unreasonable expenses.”64 But there has never
been any regulatory requirement for utilities to segregate fees and expenses based
on speculation about what might later be considered to be a long-shot, aggressive
position. Indeed, as noted above, the Commission has consistently authorized
utilities to recover all their expenses of making arguments about incentive
compensation, even when utilities have been partially unsuccessful in making
those arguments.
Moreover, historically, when the Commission has disallowed rate case
expenses tied to contested issues, it has quantified the disallowances based on
actual amounts of expenses associated with testimony tied to the contested issue.65
63
AR Part I, Binder 2, Item 55 (Final Order at FOF 18(f)).
64
AR Part I, Binder 2, Item 32 (Proposal for Decision at 32).
65
In re El Paso Electric Co., Docket No. 9945, 18 P.U.C. Bull. 9, 576 (Feb. 6, 1992 Order on
Rehearing at FOF 197); Proceeding to Consider Rate Case Expenses Severed from Docket No.
27
For example, in Docket No. 9945, the Commission disallowed the “fees and
expenses” of an El Paso Electric Company witness based on a finding that his
testimony “contributed nothing to the docket.”66 Similarly, in Docket No. 31433,
the Commission disallowed fifty percent of a Cities’ witness’s fees based on a
finding that a survey she performed was “seriously flawed.”67 The fifty percent
disallowance imposed was an estimate of the actual rate case expenses
unreasonably incurred based on specific fees identified in the record evidence. The
Commission did not resort to a proxy approach to determine the amount of the
disallowance to be imposed.
The Commission’s historical approach creates an appropriate and
proportionate economic incentive to avoid unreasonable action by assessing the
cost of the action and then disallowing that level of cost. The proxy method, on
the other hand, has no actual relationship to the rate case expenses associated with
the litigated issue. Because the disallowance is calculated based upon the proposed
value of the position and not the cost of asserting the position, the disallowance
will almost surely be more — or less — than the actual rate case expenses at issue.
It is very unlikely, under this proxy approach, that the disallowance will even
resemble the actual cost the utility incurred to litigate the particular issue.
28840 (Application of AEP Texas Central Co. for Authority to Change Rates), Docket No.
31433 (Mar. 3, 2006 Order at 3).
66
Docket No. 9945, supra, 18 P.U.C. Bull. 9, 576 (Feb. 6, 1992 Order on Rehearing at FOF
197).
67
Docket No. 31433, supra (Mar. 3, 2006 Order at 3).
28
In this case, no party contends that ETI actually incurred anywhere near
$522,244.66 in expenses to pursue recovery of financially-based incentive
compensation. ETI provided unrebutted evidence of the amount of rate case
expenses associated with the witnesses who addressed the issue. Dr. Hartzell’s
direct billings to the Company totaled $12,825.68 The rate case expenses
associated with all of Mr. Gardner’s work on the rate case were identified as
$277,668.69 Assuming arguendo that a disallowance was appropriate, the record
does not support a disallowance of nearly twice the sum of these amounts. In fact,
even if a disallowance were appropriate, the record reasonably supports a much
lesser disallowance, because at least half of Mr. Gardner’s testimony related to
topics other than financially-based incentive compensation. And both Mr. Gardner
and Dr. Hartzell’s testimony focused in part upon cost-control-based incentive
compensation, which is an issue upon which ETI prevailed. Nevertheless,
hundreds of thousands of dollars in admittedly reasonable rate case expenses were
disallowed. This is an illogical application of the applicable PURA provision,
which authorizes the Commission to enable a utility to recover its reasonably-
incurred rate case expenses. See Tex. Util. Code Ann. § 36.061(b).
68
AR Part II, Binder 3, ETI Exh. 10 (Morris Supp. Direct at 13-14 of 24).
69
AR Part II, Binder 3, ETI Exh. 6 (Considine Supp. Direct, Exh. MPC-SD-6).
29
2. The Commission imposed a new standard upon
ETI at the end of the contested case, again
engaging in inappropriate ad hoc rulemaking.
The imposition of the new standards for tracking expenses, and for
quantifying disallowances, at the conclusion of the case, especially without any
articulated rational justification, is arbitrary and capricious and an abuse of
discretion. Oncor, 406 S.W.3d at 272; Harris County Hosp. Dist., 2012 WL
2989228 *7; Flores, 74 S.W.3d at 544-45; City of El Paso, 851 S.W.2d at 900.
Moreover, these are not new issues, are not the subject of any new statute or rule,
and are not so specialized or varying in nature that they cannot be adequately
captured in a general rule. Therefore, the imposition of the new standards upon
ETI in this case does not fall within the narrow set of exceptions to the general
requirement that an agency develop and impose rules uniformly upon the industry
through formal rulemaking proceedings. E.g., Witcher, 447 S.W.3d at 535.
The Commission argued below that it was not an abuse of discretion to
employ these new standards at the end of this case, after ETI had already incurred
and tracked its expenses as it had always done, because the Commission was “not
making any new policy decision” and “not adopting a rule.” Again, the
Commission’s recent rulemaking disproves its argument. The new rule pertaining
to rate case expenses for the first time requires utilities to record their rate case
expenses by issue. See 16 Tex. Admin. Code § 25.245(b)(6). It also details for the
30
first time how the Commission will quantify disallowances for various reasons.
The Commission will “use estimates in lieu of actual costs if reasonably accurate
and supported by the evidence.” Id. § 25.245(d)(1). The Commission will
disallow a percentage of total rate case expenses only when it determines that “rate
case expenses as a whole were disproportionate, excessive, or unwarranted in
relation to the nature and scope of the rate case….” Id. § 25.245 (c)(5) &
(d)(2)(A). Clearly, whether and when to use the “proxy” approach is the proper
subject of a rulemaking.
The terms of the new rule make clear the very types of issues and
responsibilities that ETI had no warning of and no ability to anticipate or comply
with in this proceeding. It was an abuse of discretion for the Commission to fault
ETI for the way it recorded its rate case expenses, and to craft and apply the
“proxy” approach at the end of this case, after the utility had already incurred and
recorded the expenses at issue in reliance on past Commission decisions.
Imposition of the new standards on ETI in the context of this contested case, before
even proposing the rule, was arbitrary and capricious and an abuse of discretion,
just as it was to disallow the expenses of the incentive compensation advocacy in
the first place. For any one of these reasons, this Court must reverse the
Commission’s decision on this issue and remand the case to the Commission for
31
further proceedings. Witcher, 447 S.W.3d at 534; Oncor, 406 S.W.3d at 272; see
Tex. Gov’t Code Ann. § 2001.174.
II. The Commission’s disallowance of the ESI depreciation expense that
ETI incurred in the rate case is not supported by substantial evidence
and is arbitrary and capricious.
As explained above, ETI also sought to recover the costs of the work its
affiliate, ESI, performed in connection with Docket No. 39896.
In the rate case, the Commission found that the wage and depreciation expense
associated with the general services ESI performed during the test year were
“reasonable and necessary.”70 In the rate case expense proceeding, however, the
Commission allowed the wage expense but disallowed the $207,683 in
depreciation expense. The only reason the Commission gave for disallowing the
depreciation cost was that ETI “would not similarly recover such an expense in an
arms-length transaction with an unaffiliated company.”71
This decision is not supported by any evidence in the record. No one
testified that ETI paid more for ESI’s services than it would have paid to an outside
vendor because ETI paid depreciation expense. To the contrary, ETI proffered
unrefuted evidence in Docket No. 40295 that the costs of ESI’s efforts, including
the depreciation expense, were reasonable and necessary expenses of participating
70
See Docket No. 39896, supra, (Nov. 2, 2012, Order on Rehearing at FOFs 162-70 & COL 14).
71
AR Part I, Binder 2, Item 32 (Proposal for Decision at 12); AR Part I, Binder 2, Item 55 (Final
Order at 1).
32
in the rate case.72 ETI witness Michael Considine testified that the ESI costs
charged to ETI for work on Docket No. 39896 included the actual cost of ESI
employee payroll, benefits, and taxes as well as depreciation expense associated
with the depreciable assets that enable ESI employees to provide services,
including those provided in connection with the ETI rate case.73 Mr. Considine
further explained:
The use of assets required to support employee service functions
necessarily results in depreciation and amortization cost. ESI’s
depreciation expense is thus loaded to all project codes which incur
ESI labor charges. The rate case project code here should likewise be
charged its share of depreciation expense.74
ETI witness Stephanie Tumminello’s testimony in the rate case, of which the
ALJ took official notice,75 further supports Mr. Considine’s testimony. Again, Ms.
Tumminello explained that ESI’s depreciation expense is for computer equipment,
software, communications equipment, furniture, fixtures, and leasehold
improvements.76 She confirmed that the depreciation costs charged to ETI
represent actual costs and do not include any profit or mark-up.77 She also
72
AR Part II, Binder 3, ETI Exh. 1 (Considine Direct at 61 of 62); AR Part II, Binder 3, ETI
Exh. 6 (Considine Supp. Direct at 4 of 5); AR Part II, Binder 3, ETI Exh. 7 (Considine Rebuttal
at 11 of 11).
73
AR Part II, Binder 3, ETI Exh. 7 (Considine Rebuttal at 10 of 11 & MPC-R-1).
74
AR Part II, Binder 3, ETI Exh. 7 (Considine Rebuttal at 11).
75
AR Part III, Vol. A (Transcript of Hearing on the Merits at 16).
76
Docket No. 39896, supra, ETI Exh. 41 (Tumminello Direct at 79 of 98).
77
Id. at 84 of 98.
33
confirmed that ESI could not serve ETI without the depreciated assets.78 There is
no evidence to the contrary in the record.
The ALJ’s speculation that ETI could have procured the services without
equivalent expense from a non-affiliate appears to be the result of confusion over
differences in how this cost is billed by ESI versus non-affiliated vendors. ETI’s
outside vendors, which use depreciable assets to the same extent ESI does, do not
itemize their depreciation expense on their bills. That practice, however, does not
support the conclusion that outside vendors do not recover depreciation expenses
from ETI. It only shows that they are not required to bill with complete
transparency, and do not necessarily bill their services at cost. The ALJ ultimately
acknowledged that depreciation costs “would ‘typically [be] imbedded in a
vendor’s labor costs billed to the Company.’”79 This fact — deemed a
“concession” by the ALJ — proves ETI’s point.
ESI, in contrast to outside vendors, itemizes the costs of providing service to
ETI to demonstrate that ESI does provide those services at cost.80 The fact that the
costs of ESI’s services are tracked at a more granular level than those of outside
vendors is a function of the Commission’s affiliate rules, which require that an
affiliate fully allocate its costs and prohibit a utility from subsidizing its affiliate’s
78
Id. at 81 of 98.
79
AR Part I, Binder 2, Item 32 (Proposal for Decision at 12).
80
See Docket No. 39896, supra, ETI Exh. 41 (Tumminello Direct at 11 of 98).
34
business with funds from regulated activities. See 16 Tex. Admin. Code
§ 25.272(e)(1). ETI witness Mr. Considine confirmed that ESI expenses did not
include prohibited expenses.81 No witness testified to the contrary.
The Commission has argued that ETI’s proof was not sufficient to establish
these expenses were reasonably incurred because affiliate expenses are subject to
more scrutiny than other categories of expense. But again, the Commission
allowed ETI to include depreciation associated with ESI’s general services in its
test-year expenses in the underlying rate case.82 The quality and character of proof
of ESI depreciation expense is the same in both the rate case and the expense
docket. Again, the ALJ at the outset of the hearing in the expense docket took
judicial notice of the record in the rate case.83 There is no rational basis in the
record to include depreciation of ESI’s office equipment in base rates when ESI is
generally serving ETI but not when ESI is working on a rate case. ESI employees
need to use office equipment for both general and rate-case tasks.
There is no logical rationale or any evidentiary support for disallowing this
reasonable and necessary cost that ESI incurred to provide services to ETI in
connection with Docket No. 39896. Accordingly, the Court must reverse the
Commission’s order on this issue. See Tex. Gov’t Code Ann. § 2001.174.
81
AR Part II, Binder 3, ETI Exh. 6 (Considine Supp. Direct at p. 4 of 5).
82
See Docket No. 39896, supra (Nov. 2, 2012, Order on Rehearing at 170).
83
AR Part III, Vol. A (Transcript of Hearing on the Merits at 16).
35
CONCLUSION AND PRAYER
For the foregoing reasons, Entergy Texas, Inc. respectfully requests that the
Court:
reverse the district court’s judgment upholding the Public
Utility Commission of Texas’s disallowance of depreciation
expense associated with ESI’s efforts on the rate case; and
reverse the district court’s judgment upholding the
Commission’s decision to disallow expenses associated with
ETI’s request to include financially-based incentive
compensation in rates or, alternatively, reverse the judgment
upholding the Commission’s quantification of the disallowance
for the expenses associated with the incentive compensation
issue; and
remand the case to the Commission for proceedings consistent
with the Court’s decision.
ETI further requests its costs of court and any other relief to which it may show
itself justly entitled.
36
Respectfully submitted,
DUGGINS WREN MANN & ROMERO, LLP
By: /s/ Marnie A. McCormick
John F. Williams
State Bar No. 21554100
jwilliams@dwmrlaw.com
Marnie A. McCormick
State Bar No. 00794264
mmccormick@dwmrlaw.com
P. O. Box 1149
Austin, Texas 78767-1149
(512) 744-9300
(512) 744-9399 fax
ATTORNEYS FOR APPELLANT
ENTERGY TEXAS, INC.
CERTIFICATE OF COMPLIANCE
I certify that this document contains 8,735 words in the portions of the
document that are subject to the word limits of Texas Rule of Appellate Procedure
9.4(i), as measured by the undersigned’s word-processing software.
/s/ Marnie A. McCormick
Marnie A. McCormick
37
CERTIFICATE OF SERVICE
As required by Texas Rule of Appellate Procedure 9.5, I certify that on the
6th day of February, 2015, the foregoing document was electronically filed with
the Clerk of the Court using the electronic case filing system of the Court, and that
a true and correct copy was served on the following lead counsel for all parties
listed below via electronic service:
Elizabeth R. B. Sterling
Environmental Protection Division
Office of the Attorney General
P. O. Box 12548 (MC 066)
Austin TX 78711-2548
Counsel for Appellee Public Utility Commission of Texas
Rex D. VanMiddlesworth
Benjamin Hallmark
Thompson Knight LLP
98 San Jacinto Blvd., Ste. 1900
Austin TX 78701
Counsel for Appellee Texas Industrial Energy Consumers
Katherine H. Farrell
Administrative Law Division
Office of the Attorney General
P. O. Box 12548 (MC018-12)
Austin TX 78711-2548
Counsel for Appellee State Agencies
Ross Henderson
Office of Public Utility Counsel
1701 N. Congress Ave., Ste. 9-180
P. O. Box 12397
Austin TX 78711-2397
Counsel for Appellee Office of Public Utility Counsel
/s/ Marnie A. McCormick
Marnie A. McCormick
38
APPENDICES
A. ALJ’s Proposal for Decision in Docket No. 40295
B. Commission’s Final Order in Docket No. 40295
C. Excerpts of Commission Dockets Awarding and Denying Various forms of
Incentive Compensation
D. Excerpts of Commission Dockets Awarding Expenses of Unsuccessful
Attempts to Recover Financially-Based Incentive Compensation
E. Excerpts of Transcript of April 11, 2013 Commission Open Meeting
F. Commission Substantive Rule 25.245 (“Rate Case Expenses”)
G. District Court’s Final Judgment
39
Appendix A
ALJ's Proposal for Decision in Docket No. 40295
State Office of Administrative Hearings
•. - 'I .... ·,. .,,_ ~ 1 ~
2013 FEB 19 PM 3: 24
F;i....:.-~'~) 'v .. L ... --"."
Cathleen Parsley
Olief Administrative Law Judge
February 19, 2013
TO: Stephen Journeay, Director Courier Pick-up
Commission Advising and Docket Management
William B. Travis State Office Building
1701 N. Congress, 7th Floor
Austin, Texas 78701
RE: SOAH Docket No. XXX-XX-XXXX
PUC Docket No. 40295
Application of Entergy Texas, Inc. for Rate Case Expenses Pertaining to PUC
Docket No. 39896
Enclosed is the Proposal for Decision (PFD) in the above-referenced case. By
copy of this letter, the parties to this proceeding are being served with the PFD.
Please place this case on an open meeting agenda for the Commissioners'
consideration. There is no deadline in this case. Please notify me and the parties of the
open meeting date, as well as the deadlines for filing exceptions to the PFD, replies to the
exceptions, and requests for oral argument.
Sincerely.
untet.J~klUllh;.,
Administrative Law Judge
HB/mle
Enclosure
xc: All Parties of Record
300 W. 151h Street, Suite 502, Austin, Texas 78701/ P.O. Box 13025, Austin, Texas 78711-3025
512.475.4993 (Main) 512.475.3445 (Docketing) 512.322.2061 (Fax)
www.soah.state.tx.us
(!;7
SOAH DOCKET NO. XXX-XX-XXXX
PUC DOCKET NO. 40295
2DIJ FEB 19 PM 3: 24
~ ~__. i: - ..J, ~'
§ ; v
BEFORE THE STIA.T.E OFFICE
_, ., , F.,
APPLICATION OF ENTERGY
§
TEXAS, INC. FOR RATE CASE
§ OF
EXPENSES PERTAINING TO PUC
§
DOCKET NO. 39896
§ ADMINISTRATIVE HEARINGS
TABLE OF CONTENTS
I. BACKGROUND ....................................................................................................................... 1
II. JURISDICTION, NOTICE, AND PROCEDURAL HISTORY ........................................ 2
III. PARTIES ............................................................................................................................... 2
IV. DISCUSSION ........................................................................................................................ 3
A. Overview .................................................................................................................... 3
B. Cities' Rate Case Expenses ....................................................................................... 4
C. ETl's Rate Case Expenses ........................................................................................ 8
1. Challenges to Specific ETI Rate Case Expenses That are
Relatively Quantifiable ................................................................................. 8
a. Costs Associated with Gerald Tucker, ETl's
Consulting Expert ............................................................................ 8
b. Costs Associated with "Lessons Learned" .................................. 10
c. ESI Depreciation Costs .................................................................. 11
d. Miscellaneous Internal Rate Case Expenses ............................... 13
e. Costs Associated with the Calpine-Carville PPA ........................ 13
f. Specific Items That State Agencies Contend Cast Doubt on
ETl's Overall Scrutiny of Its Expenses ....................................... 15
(1) External Legal Fees .......................................................... 16
(2) Meals and Snacks ............................................................. 17
(3) Courier and Taxi Services ............................................... 18
(4) Meals Over $25 ................................................................. 19
(5) Clothing and Laundry Service ........................................ 20
(6) Airfare and Lodging ........................................................ 20
SOAH DOCKET NO. XXX-XX-XXXX TABLE OF CONTENTS PAGE2
PUC DOCKET NO. 40295
2. Challenges to Specific ETI Rate Case Expenses That are Difficult to
Quantify ....................................................................................................... 21
a. Financially-Based Incentive Compensation ................................ 21
b. Transmission Equalization (MSS-2) Expenses ........................... 25
c. Purchased Power Capacity Rider ................................................. 27
3. Proportional Reduction .............................................................................. 28
D. Recovery Method ..................................................................................................... 34
1. Rate Case Expense Allocation and the Recovery Mechanism .........•...... 34
2. ETl's Request to Earn a Return on the Unpaid Balance of Rate
Case Expenses .............................................................................................. 35
V. CONCLUSION ..................................................................................................................... 36
VI. PROPOSED FINDINGS OF FACT, CONCLUSIONS OF LAW, AND
ORDERING PARAGRAPHS ............................................................................................ 36
A. Findings of Fact ....................................................................................................... 36
B. Conclusions of Law ................................................................................................. 38
C. Proposed Ordering Paragraphs ............................................................................. 39
SOAH DOCKET NO. XXX-XX-XXXX
PUC DOCKET NO. 40295
§ BEFORE THE STATE OFFICE
APPLICATION OF ENTERGY
§
TEXAS, INC. FOR RATE CASE
§ OF
EXPENSES PERTAINING TO PUC
§
DOCKET NO. 39896
§ ADMINISTRATIVE HEARINGS
PROPOSAL FOR DECISION
I. BACKGROUND
Entergy Texas, Inc. (ETI) is an investor-owned electric utility with a retail service area
located in southeastern Texas. ETI serves retail and wholesale electric customers in Texas. On
November 28, 2011, ETI filed an application requesting approval of an increase in annual base rate
revenues, a reconciliation of fuel costs, and authority to defer costs for the transition to the Midwest
Independent System Operator (the ETI Application). On November 29, 2011, the Commission
referred the ETI Application, PUC Docket No. 39896, to SOAH (Docket 39896). On April 4, 2012,
the Administrative Law Judges (ALJs) presiding over Docket 39896 issued an order severing from
Docket 39896 the issues relating to ETI's request to recover its rate case expenses and creating this
docket, Docket 40295, for consideration of the rate case expenses.
In this Proposal for Decision (PFD), the ALJ recommends as follows:
• That Cities 1 be allowed to recover from ETI a total of $1,201,569 in rate case expenses
(representing $1,125,769 in rate case expenses incurred through August 31, 2012, plus up to
$7 5,800 in rate case expenses as they are incurred after August 31, 2012); and
• That ETI be allowed to recover a total of $7,344,113 in rate case expenses.
1
The Cities are: the Cities of Anahuac, Beaumont, Bridge City, Cleveland, Conroe, Dayton, Groves, Houston,
Huntsville, Montgomery, Navasota, Nederland, Oak Ridge North, Orange, Pine Forest, Rose City, Pinehurst, Port Arthur,
Port Neches, Shenandoah, Silsbee, Sour Lake, Splendora, Vidor, and West Orange.
SOAH DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGE2
PUC DOCKET NO. 40295
II. JURISDICTION, NOTICE, AND PROCEDURAL HISTORY
The Public Utility Commission of Texas (Commission or PUC) has jurisdiction over ETI and
this rate case expenses hearing pursuant to Texas Utility Code, Public Utility Regulatory Act
(PURA)§§ 32.001, 33.002, and 35.004. The State Office of Administrative Hearings (SOAH) has
jurisdiction over the contested case hearing, including the preparation of the proposal for decision
(PFD) pursuant to PURA§ 14.053 and Texas Government Code§ 2003.049(b). ETI's notice ofits
application and notice of the hearing were not contested and, therefore, do not require further
discussion here but will be addressed in the proposed findings of fact and conclusions oflaw.
The hearing on the merits in Docket 39896 was held in April-May, 2012. The PFD was
issued on July 6, 2012. A Final Order in Docket 39896 was issued by the Commission on September
14, 2012. In response to motions for rehearing submitted by multiple parties, the Commission issued
an Order on Rehearing on November 2, 2012, in Docket 39896. 2
The hearing on the merits m the present docket, Docket 40295, was held on
November 28, 2012. The record remained open for the filing of post-hearing briefs. The record
closed on December 21, 2012.
III. PARTIES
In addition to ETI, the following entities were granted party status in this case: Texas
Industrial Energy Consumers (TIEC); State of Texas agencies and institutions of higher education
(State Agencies); Office of Public Utility Counsel (OPUC); Cities; and the staff of the Public Utility
Commission (Staff).
2
Multiple second motions for rehearing were denied by the Commission on December 4, 2012.
SOAH DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGE3
PUC DOCKET NO. 40295
The following is a list of the parties who participated in the hearing and their counsel:
PARTIES REPRESENTATIVES
ETI Steven H. Neinast, Wajiha Rizvi, and George Hoyt
Cities Stephen Mack
TIEC Meghan Griffiths
State Agencies Susan Kelley
OPC Sarah Ferris
Staff Brennan Foley
IV. DISCUSSION
A. Overview
In the ETI Application, ETI requested, among other things, approval of an increase in annual
revenues of approximately $104.8 million, proposed tariff schedules including new riders to recover
costs related to purchased-power capacity and renewable-energy credit requirements, and final
reconciliation of its fuel costs. Prior to the hearing, the Commission effectively denied ETI's request
for a purchased-power capacity rider by removing it as an issue to be addressed in the hearing on the
ETI Application. In their PFD, the ALJs recommended an overall rate increase for ETI of
$28.3 million, did not recommend approving the renewable-energy credit rider sought by ETI, and
recommended approving ETI' s request to reconcile fuel and purchased power costs during the
Reconciliation Period. 3 Ultimately, the Commission largely followed the recommendations
contained in the PFD, but reduced the overall rate increase to $27.7 million. 4
In this docket, Michael P. Considine, a Manager in the Regulatory Accounting Department of
Entergy Services, Inc. (ESI), ETI's service company affiliate, testified in support of the company's
claim for recovery of rate case expenses. He explained that ETI is seeking authority to recover its
3
Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and Obtain Deferred
Accounting Treatment, Docket 39896, Proposal for Decision (July 6, 2012).
4
Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and Obtain Deferred
Accounting Treatment, Docket 39896, Order on Rehearing (November 1, 2012).
SOAH DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGE4
PUC DOCKET NO. 40295
rate case expenses over a three-year period, while earning a return on the unamortized balance. 5 ETI
seeks to recover $8,752,545 6 in rate case expenses associated with Docket 39896 that were incurred
and paid as of September 30, 2012. 7 Of that total, $7,635,236 was incurred byETI and $1,117,309
was incurred by Cities. Of the total amount, ETI classifies $3,908,214 as "external" rate case
expenses (i.e., those expenses paid to outside accounting services, outside counsel, and outside
consultants), and $4,844,362 as "internal" rate case expenses (i.e., those expenses related to direct
expenses, payroll, benefits, and taxes of ETI and Entergy Services, Inc. (ESI), an affiliated company
of ETI). 8 Mr. Considine offered the opinion that all of ETI's internal rate case expenses were
reasonable and necessary. 9 Another ETI witness, Stephen F. Morris, offered his opinion that all of
ETI's external rate case expenses were reasonable and necessary. 10 Mr. Morris is an attorney and
certified public accountant who was retained by ETI to review the company's external rate case
expenses. 11 ETI also seeks authority to defer until its next rate case all rate case expenses incurred in
Docket 39896 after September 30, 2012. 12
B. Cities' Rate Case Expenses
Pursuant to PURA § 33. 023, any municipality participating in a ratemaking proceeding may
engage attorneys, consultants, and others to assist it, and the electric utility "shall" reimburse the
municipality for its "reasonable cost" of participating in the ratemaking proceeding "to the extent the
[Commission] determines is reasonable."
5
ETI Ex. 1 (Considine Direct) at 62.
6
Initially, ETI sought recovery of$8,752,576. In its briefing, however, ETI explains that it is reducing the amount it
seeks to $8,752,545 (a reduction of$31) to account for two excessive charges for meals. ETI Init. Br. at 1 n. 1.
7
ETI Ex. 6 (Considine Supp.) at 1.
8
ETI Ex. 6 (Considine Supp.) at 3, 5, and attachment MPC-SD-5. The $1,117,309 in expenses incurred by Cities is
included as part ofETI's "internal" expenses.
9
ETI Ex. 6 (Considine Supp.) at 7.
10
ETI Ex. 8 (Morris Direct) at 18.
11
ETI Ex. 8 (Morris Direct) at 1-2.
12
Transcript from Hearing on the Merits (Tr.) at 17.
SOAH DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGES
PUC DOCKET NO. 40295
In this case, Cities seek reimbursement for rate case expenses totaling $1,201,568.61. Cities
identify this amount as the "total actual and estimated rate case expenses" incurred by Cities in four
forums: (1) ETI's base rate cases before the municipalities; (2) participation in Docket 39896;
(3) participation in any appeals of Docket 39896; and (4) participation in the present case,
Docket 40295. 13 Of the $1,201,568.61 total, $1,125,768.61 represents actual expenses incurred by
Cities through August 31, 2012, while $75,800 represents Cities' estimated expenses through
completion of Dockets 39896 and 40295, and any appeal. 14 Cities offered the expert testimony of
Amalija "Amy" Hodgins, a former ALJ, who opined that these expenses were reasonable and should
be reimbursed. 15
No party challenged the reasonableness of Cities' expenditures through August 31, 2012
(i.e., $1,125,768.61), and the ALJ can find no reason to do so either.
Staff challenges, however, Cities' attempt to recover their estimated expenses after that date
(i.e., $75,800). Cities seek to be reimbursed for these estimated expenses only "if and when they
occur," up to the maximum of$75,800. 16 Ms. Hodgins offered her opinion that the amount of the
estimated expenses is reasonable. 17 In reliance upon Commission precedent from 2005,
Ms. Hodgins argued that estimated rate case expenses are reimbursable. Ms. Hodgins testified as
follows:
Projected rate case expenses can be, and routinely have been, found reasonable and
reimbursable by this Commission. The fact that a municipality's rate case expenses
have not all been incurred, as of the date of the determination of the reasonableness
of rate case expenses, does not render them unreasonable. Expenses need only be
reasonable and incurred to be recoverable.
13
Cities Init. Br. at 2.
14
Cities Init. Br. at 5.
15
See Cities Ex. No. 1 (Hodgins Direct) and Ex. No. 2 (Hodgins Supp.).
16
Cities Ex. 2 (Hodgins Supp.) at n. 6.
17
Cities Ex. 2 (Hodgins Supp.) at 13-14.
SOAH DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGE6
PUC DOCKET NO. 40295
The future activities and corresponding costs, that are the subject of estimation, are
necessary to complete a proceeding before the Commission. The Commission in
CenterPoint's CTC case found estimated costs to complete a case were recoverable
once the estimated expenses were incurred and known and measurable. . . .
Accordingly, it is reasonable for the Commission, in this proceeding, to consider and
allow the Cities to recover the estimated costs to complete this proceeding, including
possible judicial appeals, if and when those expenses are incurred. 18
Staff argues, based upon Commission precedent, that Cities are not entitled to reimbursement
for estimated future rate case expenses. 19 Staff does not challenge the reasonableness of the amount
of estimated expenses, nor does any other party. Rather, Staff asserts that the Commission precedent
relied upon by Ms. Hodgins has been superseded by more recent precedent. Specifically, in 2010,
the Commission decided a case in which it disallowed estimated rate case expenses. In
Docket 37772, the Commission disallowed recovery of estimated expenses, holding that "approving
estimated rate-case expenses is not in the public interest," but allowed the cities involved in that case
to seek "recovery of actual rate-case expenses included in the estimates in [the utility's] next rate
20
case." Thus, Staff argues that Cities' attempt to obtain its estimated expenses should be disallowed.
Staff further argues that Cities should not be entitled to recover the expenses associated with
the preparation of the portion of Ms. Hodgins' testimony in which she advocates in support of the
recovery of Cities' estimated expenses. By Staffs calculation, this reduction amounts to $1,208.42
(representing Cities' actual costs for Ms. Hodgins' testimony related to the recovery of estimated
expenses). 21 No other party joins Staff in its opposition to Cities' estimated expenses.
The ALJ recommends that Cities' request with regard to its estimated expenses be granted.
Pursuant to Section 33.023 of PURA, Cities are entitled to reimbursement for their expenses
18
Cities Ex. 1 (Hodgins Direct) at 6-7; citing Application ofCenterPoint Energy Houston Electric, LLCfor Competition
Transition Charge, Docket No. 30706, Order at 31 and FOFs 72-74 (Jul. 14, 2005)(Docket 30706).
19
Stafflnit. Br. at 6.
20
Application of Southwestern Electric Power Company for Rate Case Expenses Pertaining to Docket No. 37364,
Docket 37772, Order at 1-2 (Oct. 21, 2010)(emphasis in original)(Docket 37772).
21
Stafflnit. Br. at 7.
SOAH DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGE7
PUC DOCKET NO. 40295
reasonably incurred in this case. As noted above, no party challenged the reasonableness of Cities'
estimation that its expenses after August 2012 would total $75,800. The ALJ concludes that the
estimate is reasonable. 22 Most importantly, the ALJ notes that Cities are not actually seeking
reimbursement of estimated rate case expenses. Rather, Cities asks for: (1) approval now of the
reasonableness of its estimated expenses; but (2) reimbursement of those expenses only after they are
incurred, and only up to the estimated amount of $75,800. Cities argue that, from a policy
standpoint, it is more economical and efficient for Cities to request reimbursement of reasonable
estimated rate case expenses to the extent they are incurred in this case, rather than requiring Cities
to wait and ask for reimbursement of those expenses when ETI files a new rate case at some point in
the future, a contingency which might not occur for many years. The ALJ agrees. The ALJ further
believes that it would be unfair if Cities were obligated to wait until ETI files a new rate case in order
to recover its estimated expenses from the present case. Any such arrangement would delay,
potentially for years, Cities' recovery of its actual expenses in the present rate case, a result which
seems contrary to the clear intent expressed in PURA § 33.023 that municipalities are entitled to
reimbursement for their reasonable rate cases expenses. Moreover, such an arrangement would
obligate Cities to participate in a future ETI rate case that they might otherwise have no interest in
becoming a party to.
For these reasons, the ALJ recommends:
(1) that Cities' rate case expenses be found to be reasonable in the amount of
$1,201,568.61 (consisting of $1,125,768.61 in actual expenses incurred by Cities
through August 31, 2012, and $75,800 in estimated expenses to be incurred by Cities
after August 31, 2012 through completion of Dockets 39896 and 40295, and any
appeal);
(2) that ETibe ordered to reimburse Cities for $1,125,768.61 in actual expenses incurred
by Cities through August 31, 2012; and
22
Indeed, the ALJ notes that Cities attached to their Reply Brief an affidavit from Ms. Hodgins attesting to the fact that,
from September through November 2012, Cities actually incurred expenses of$43,525.45 (or 57% of the estimated
$75,800). Cities Reply Br. at 4-5, and attached affidavit.
SOAH DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGES
PUC DOCKET NO. 40295
(3) that ETI be ordered to reimburse Cities for actual expenses incurred by Cities after
August 31, 2012, through completion of Dockets 39896 and 40295 and any appeal up
to a maximum possible amount of$75,800.
C. ETI's Rate Case Expenses
Pursuant to PURA Section 36.061(b), the Commission "may'' allow a utility to recover its
"reasonable costs of participating in a [ratemaking proceeding] not to exceed that amount approved"
by the Commission.
ETI seeks recovery of$8,752,545 in rate case expenses associated with Docket 39896 that
were incurred and paid as of September 30, 2012. However, that total includes only the
$1,125,768.61 in expenses incurredbyCities through August 31, 2012, but does not also include the
$7 5,800 in expenses estimated for Cities as discussed above. Because the ALJ is recommending that
Cities' estimated expenses be approved as outlined above, the ALJ deems ETI's overall request to
have been increased by $75,800 to a total amount of $8,828,345.
The parties other than ETI challenged various components of ETI's rate case expenses.
Those challenges are discussed as follows.
1. Challenges to Specific ETI Rate Case Expenses That are Relatively Quantifiable
a. Costs Associated with Gerald Tucker, ETl's Consulting Expert
In Docket 39896, ETI retained Gerald Tucker as a consulting expert to assist in the
preparation of the utility's case dealing with affiliate transactions. Mr. Tucker is an accountant who
has experience regarding affiliate costs in Commission rate cases and who has commonly assisted
ETI in its rate cases. 23
23
ETI Ex. 8 (Morris Direct) at 29-30.
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PUC DOCKET NO. 40295
State Agencies contend that Mr. Tucker's fees should be disallowed. No party other than
State Agencies challenged Mr. Tucker's expenses. State Agencies complain that Mr. Tucker: ( 1) did
not testify; (2) provided services that were described by ETI in only "the most general terms;" and
(3) provided services (such as reviewing witness testimony, reviewing discovery responses,
benchmarking, and assisting in preparing witnesses for deposition) that were duplicative of services
provided by ETI's legal counsel or other consultants. Accordingly, State Agencies argue that the
$116,119 representing Mr. Tucker's fees should be excluded from rate case expenses. 24
ETI responds by contending that, over the last 20 years or so, the Commission has, at times,
disallowed large percentages of utility companies' affiliate expenses, based upon the fact that ALJs
and the Commissioners have had difficulty understanding the complex information supplied by
utilities concerning affiliate transactions. In light of that history, ETI contends that it reasonably
relied upon the expertise and accounting experience of Mr. Tucker to assist it in preparing and
presenting information about the company's affiliate transactions in order to assure that it was
understandable. According to ETI, Mr. Tucker has been involved in all rate cases of ETI and its
predecessor since in 1997. ETI contends that Mr. Tucker's participation in Docket 39896 enabled
the company to present clearer and more accurate information about its affiliate transactions.
Moreover, ETI disputes that Mr. Tucker's work was duplicative of the work performed by the
company's attorneys, pointing out that Mr. Tucker provided expertise from the accounting
perspective, rather than from the legal perspective. 25
The ALJ recommends that Mr. Tucker's fees be included in the rate case expenses. State
Agencies are essentially arguing that it was solely the job of ETI' s attorneys and its testifying experts
to prepare the case regarding affiliate transactions and, therefore, any work performed by Mr. Tucker
with regard to affiliate transactions was purely duplicative. The ALJ disagrees. As pointed out by
ETI, the notion that multiple people with varied expertise cannot provide valuable input on a
complex issue like affiliate transactions is overly simplistic. ETI demonstrated that Mr. Tucker
24
State Agencies Init. Br. at 18-19.
25
ETI Init. Br. at 10-11; ETI Ex. 7 (Considine Supp.) at 9-10.
SOAH DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGE 10
PUC DOCKET NO. 40295
provided real expertise that benefited the company in the presentation of its case. In other words,
ETI proved the reasonableness of Mr. Tucker's expenses.
b. Costs Associated with "Lessons Learned"
In Docket 39896, ETI included several charges from its law firm, Duggins, Wren, Mann &
Romero (Duggins Wren), for "lessons learned," as shown in a July 26, 2011 invoice from the law
firm. The charges total $5,743.50. 26 According to ETI, the charges relate to a memo provided to
ETI by the firm which contained a "detailed analysis of developments in ETI' s last rate case as well
as developments in four recent pertinent cases at the PUCT that had taken place since the last ETI
rate case.'m The memo identified procedural and substantive issues for ETI to consider while
preparing its rate case in Docket 39896. 28
State Agencies contend that any "lessons learned" should have already been learned in the
prior rate case and, therefore, any "refreshing [of] the learning curve ... should be a shareholder, not
ratepayer, expense. Bringing one's attorneys 'up to speed' for the third rate case filed in five years
ought to be regarded as the legal equivalent of a 'luxury item. "'29 No party other than State Agencies
challenged the "lessons learned" expenses.
ETI responds by contending that State Agencies are essentially seeking to punish the
company for its efforts to learn from the past. ETI also contends that State Agencies' argument
would have the perverse effect of increasing, rather than decreasing rate case expenses. According to
ETI:
26
ETI Ex. 8 (Morris Direct) at 29-30.
27
ETI Ex. 12 (Morris Rebuttal) at 28-29 (Attachment SFM-R-3).
28
ETI Ex. 12 (Morris Rebuttal) at 28-29 (Attachment SFM-R-3).
29
State Agencies Init. Br. at 19.
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PUC DOCKET NO. 40295
Incurring these costs to analyze lessons learned from litigating prior rate cases and
important aspects of non-ETI Commission rate cases, if anything, reduces overall rate
case expenses by supporting a more efficient case presentation and avoiding prior
issues that lead to contention among the parties. 30
The ALJ agrees and recommends that the "lessons learned" expenses be included in the rate
case expenses. ETI demonstrated that the expenses were reasonable because they benefited the
company in the presentation of its case.
c. ESI Depreciation Costs
ETI identified, as part of its "internal" rate case expenses, $207 ,683 in "Depreciation &
Amort" expenses. 31 As explained by ETI witness Considine, the expenses are for the depreciation of
assets (apparently office equipment) used by ESI employees who participated in the rate case. 32
Mr. Considine further testified that the costs were a reasonable and necessary part of ESI providing
services for the rate case. 33
State Agencies contend that recovery of such depreciation expenses should be denied
because: (1) such a recovery is unprecedented; (2) ETI has failed to prove that the expenses were
reasonable and necessary; and (3) the expenses were not "incurred" for the rate case. As to the last
point, State Agencies explains: "ESI's depreciable property exists, and is presumably depreciated,
whether or not proceedings in Texas take place. As such, this 'cost' was not necessary for ETI's
participation in the rate case and should be disallowed." 34 No party other than State Agencies
challenged the depreciation expenses.
30
ETI Init. Br. at 13.
31
ETI Ex. 7 (Considine Rebuttal) at 9-11 and Attachment MPC-R-1.
32
ETI Ex. 7 (Considine Rebuttal) at 11.
33
ETI Ex. 7 (Considine Rebuttal) at 11.
34
State Agencies Init. Br. at 20.
SOAH DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGE 12
PUC DOCKET NO. 40295
ETI responds by explaining that the costs at issue are "a loader to ESI labor costs covering
depreciation on office expenses and capital." Notably, however, ETI also concedes that such costs
would "typically [be] embedded in a vendor's labor costs billed to the Company."35
The ALJ recommends that the depreciation expenses be disallowed. ETI has not cited to any
precedent which would justify the recovery of these apparently unusual rate case expenses.
Moreover, ETI has failed to prove the reasonableness of the expenses under the more stringent
standards that are applicable to affiliate expenses. As explained in Railroad Comm 'n v. Rio Grande
Valley Gas Company, unlike arms-length transactions, affiliate transactions "are clearly tainted with
the possibility of self-dealing."36 The Commission and the courts have consistently placed a greater
burden of proof upon a utility company to prove the reasonableness of transactions with its affiliated
companies because of the potential for self-dealing.
In this case, ETI is seeking reimbursement of $2.9 million for payments it made to its
affiliate, ESI, for work done by ESI employees relevant to Docket 39896, plus $207,683 for
depreciation of the assets used by the ESI employees in their work. 37 This is in stark contrast to its
arms-length dealings with outside consultants. For example, ETI is seeking reimbursement for
$2.4 million in expenses from Duggins Wren, but it is not also seeking to recover depreciation
expenses for Duggins Wren's equipment. If the work done by ESI employees had, instead, been
done by outside consultants, it is very doubtful that the outside consultants would also have expected
an ETI payment for the depreciation of their equipment. Thus, the very nature of ETI' s depreciation
request calls its validity into question. Simply put, ETI has failed to establish that it is entitled to
recover a depreciation expense related to an affiliate transaction because it would not similarly
recover such an expense in an arms-length transaction with an unaffiliated company.
35
ETI Init. Br. at 12.
36
683 S.W.2d 783, 786 (Tex. App.-Austin 1985, no pet.).
37
ETI Ex. 7 (Considine Rebuttal) at Attachment MPC-R-1.
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PUC DOCKET NO. 40295
d. Miscellaneous Internal Rate Case Expenses
Under the heading of"Intemal Rate Case Expenses (Non-Payroll)," ETI seeks recovery of a
number of categories of expenses. State Agencies challenge the following four categories:
• "business meals/entertainment" in the amount of $3,852;
• "other employee expenses" in the amount of$3,423;
• "employee mtgs/functions" in the amount of $7,762; and
• "utility bills" in the amount of$2,518. 38
According to State Agencies, the justification for these charges has not been explained, nor are they
reasonable and necessary. No other party challenged these expenses.
ETI responds by explaining, in great detail, where the supporting documentation can be
found, within the company's exhibits, to justify each of the expenses. 39 Without repeating that
discussion here, the ALJ is convinced that the evidence in the record supports the conclusion that the
expenses are reasonable and should be recovered by ETI.
e. Costs Associated with the Calpine-Carville PPA
In a "Recommendation" filed prior to the hearing in this matter, OPUC argued that the
Commission should disallow the recovery of any rate case expenses associated with the regulatory
approval of the Calpine-Carville Purchased Power Agreement (the Calpine-Carville PPA). In
Docket 39896, ETI sought, and obtained, regulatory approval of the Calpine-Carville PPA.
The affiliate expenses related to the contract were assigned to Project F3PPWET308. The
Project F3PPWET308 costs were approved for recovery in Docket 39896. 40 As a result, OPUC
38
ETI Ex. 7 (Considine Rebuttal) at Attachment MPC-R-1; see also State Agencies Init. Br. at 21.
39
ETI Reply Br. at 23-24.
40
Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and Obtain Deferred
Accounting Treatment, Docket 39896, Proposal for Decision at 236 (July 6, 2012).
SOAH DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGE 14
PUC DOCKET NO. 40295
contends that ETI has already recovered its expenses associated with the Calpine-Carville PPA and,
if it were allowed to recovery those expenses again, it would be receiving a double recovery. 41
OPUC did not identify a specific dollar amount that it believes should be disallowed. Moreover,
OPUC did not discuss this issue in any of its post-hearing briefing. In their post-hearing briefing,
State Agencies "concurred" with OPUC's recommendation, but provided no discussion of the
issue. 42
ETI did discuss this issue in its post-hearing briefing. The company points out, correctly, that
the Commission has already specifically rejected OPUC's double recovery argument. In
Docket 39896, OPUC argued that the costs ETI sought related to the Calpine-Carville PPA should
have been denied in that docket because they were, among other things, rate case expenses. The
Commission specifically disagreed and allowed recovery of the costs in that docket. 43 In other
words, because the Commission has already concluded that ETI did not recover any rate case
expenses associated with the Calpine-Carville PPA in Docket 39896, the company will not be
receiving a double recovery if it recovers such expenses in this docket.
Further, as explained by ETI witness Considine, costs were charged to Project F3PPWET308
(the internal project code for the Calpine-Carville PPA development costs) as the contract was being
developed. Those costs were recovered in Docket 39896. On the other hand, costs were charged to
Project F5PPETX011 (the internal project code for the rate case in Docket 39896) as testimony or
other hearing-related work was performed for Docket 39896. According to ETI, it is only the latter
costs, associated with Project F5PPETX01 l, that are being sought here. As a result, no double
recovery will occur. 44 The ALJ concludes that ETI has the better argument on this issue, and
41
Application of Entergy Texas, Inc. for Rate Case Expenses Pertaining to PUC Docket No. 39896, Docket 40295,
OPUC's Recommendation and Request for Hearing at 2-3 (November 6, 2012).
42
State Agencies Reply Br. at 20.
43
Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and Obtain Deferred
Accounting Treatment, Docket 39896, Proposal for Decision at 236 (July 6, 2012).
44
ETI Ex. 7 (Considine Rebuttal) at 7-9.
SOAH DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGE 15
PUC DOCKET NO. 40295
recommends that ETI be allowed to recover its rate case expenses associated with the
Calpine-Carville PP A.
f. Specific Items That State Agencies Contend Cast Doubt on ETl's
Overall Scrutiny of Its Expenses
State Agencies performed what they described as a number of "spot check" reviews ofETI' s
costs and identified several errors or items that they contend should be disallowed. Moreover, State
Agencies contend that it is not only these specific items which should be disallowed. Rather, they
argue that the flaws they have identified should cast doubt on the overall adequacy of the internal
review process utilized by ETI in quantifying its rate case expenses. According to State Agencies,
"[i]dentification of these questionable costs underscores the need for conservative, rather than
liberal, standards for allowing rate case expenses. "45 Similarly, State Agencies argue that these items
demonstrate ETI's "lack of diligence in exercising basic economic restraint."46
Staff agrees that State Agencies' examination of these issues "call[s] into question the
thoroughness ofETI's review of its rate case expenses."47 Staff further points out that, because the
testimony of ETI witness Considine (who was the company's prime witness supporting the
reasonableness of its internal rate case expenses) contained "mistakes that he was engaged to
identify," his testimony "is oflimited value."48 In its Reply Brief, Staff reiterates: "Staff shares the
concerns raised by State Agencies regarding the adequacy of ETI's review of its rate case
expenses."49 Similarly, OPUC agrees that State Agencies' examples illustrate that, as to rate case
expenses, ETI did not act as a prudent gatekeeper. 50
45
State Agencies Init. Br. at 7.
46
State Agencies Reply Br. at 9.
47
Stafflnit. Br. at 12.
48
Stafflnit. Br. at 12.
49
Staff Reply Br. at 9.
50
OPUC Init. Br. at 1.
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PUC DOCKET NO. 40295
(1) External Legal Fees
ETI seeks to recover roughly $2.4 million in legal fees paid to the Duggins Wren law firm. 51
State Agencies argue that this amount should be reduced. ETI witness Stephen Morris was hired to
review ETI' s external legal expenses and testify about the reasonableness of those expenses. 52 State
Agencies question the objectivity, quality, and extent of Mr. Morris' review. For example, State
Agencies point out that, rather than being retained by ETI, he was retained by Duggins Wren, the
firm whose fees he was to review. 53 Staff agrees that this arrangement "likely undermined
Mr. Morris' objectivity." 54
State Agencies also contend that, based upon his invoices, Mr. Morris spent only a ''minimal"
amount of time reviewing Duggins Wren's bills. 55 Yet, by State Agencies' own reckoning,
Mr. Morris and his associate spent roughly 21 hours reviewing Duggins Wren bills. 56 Mr. Morris
testified as to the reasonableness of the hourly rates charged by Duggins Wren. State Agencies
argue, however, that Mr. Morris' focus was too narrow and he should have, instead, been critical of
the fact that too many Duggins Wren attorneys, twelve, were involved in the case. 57 State Agencies
are also critical of the fact that Mr. Morris apparently did not scrutinize Duggins Wren's bills for
duplicative legal work. For example, State Agencies point out that on April 25, 2012, a day from the
hearing in Docket 39896, five Duggins Wren attorneys billed a total of 26.3 hours for a hearing day
that lasted less than seven hours and in which in-house ETI lawyers defended many of the witnesses.
On the next day, April 26, six Duggins Wren attorneys billed a total of24.4 hours for a hearing day
58
that lasted less than eight hours and in which only three Duggins Wren attorneys participated. State
51
ETI Ex. 7 (Considine Rebuttal) at Attachment MPC-R-1.
52
ETI Ex. 8 (Morris Direct) at 2.
53
State Agencies Init. Br. at 10.
54
Staff Reply Br. at 9.
55
State Agencies Init. Br. at 10.
56
State Agencies Init. Br. at 12.
57
State Agencies Init. Br. at 9.
58
State Agencies Init. Br. at 13.
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PUC DOCKET NO. 40295
Agencies contend that "a reduction is in order" for the Duggins Wren costs, but do not suggest what
size the reduction should be.
ETI responds by defending the reasonableness of the Duggins Wren costs. For one thing, ETI
points out that the $2.4 million in legal fees paid to Duggins Wren includes fees and expenses for
five consultants billed through Duggins Wren without mark-up. 59 Additionally, ETI explains that the
huge scope of the hearing necessitated substantial legal work. ETI presented 39 witnesses who
discussed hundreds of categories of costs. ETI points out that while it used the services of
12 attorneys, they were opposed by 15 attorneys: four for Staff; three for TIEC; three for Cities; and
one each for State Agencies, OPUC, U.S. Department of Energy, Kroger, and Wal-Mart. 60
The ALJ is unswayed by State Agencies' arguments. Given the size and complexity of
Docket 39896, the legal costs involved do not appear to be inordinate. Mr. Morris testified, credibly,
that the fees and expenses charged by Duggins Wren were reasonable and necessary. The ALJ does
not recommend any reduction of the fees in response to State Agencies' arguments.
(2) Meals and Snacks
State Agencies identified 19 entries in Duggins Wren invoices whereby the firm charged ETI
for meals or snacks. According to State Agencies, most of these purchases occurred during business
hours and involved only law firm personnel. ETI personnel were only occasionally involved in these
purchases. Almost all of the charges were for meals or snacks delivered to Duggins Wren's offices.
The purchases total $2,723.54. 61 State Agencies contend that these costs were not necessary for
participation in Docket 39896 and should be disallowed.
59
ETI Reply Br. at 19; ETI Ex. 6 (Considine Supp.) at 8.
60
ETI Reply Br. at 19.
61
State Agencies Init. Br. at 14-15.
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PUC DOCKET NO. 40295
Moreover, State Agencies point out that Duggins Wren is applying a different standard to
itself than it applies to its own contractors. Pursuant to the contract by which Duggins Wren hired
Mr. Morris, meals while he or his staff are located at his office are not reimbursable. 62 Thus, State
Agencies conclude that Duggins Wren should be held to the same standard when passing on rate case
expenses for office meals, beverages, and snacks. 63
ETI responds by pointing out that the charges were not done routinely, but only when
necessary to enable personnel "to work over lunch and dinner to meet certain deadlines ... and as an
alternative to purchasing reimbursable meals at restaurants when out-of-town members of the rate
case team worked in Austin."64 ETI describes the expenses as a reasonable part of prosecuting a
laborious rate case. The ALJ agrees and does not recommend any disallowance of these costs.
(3) Courier and Taxi Services
State Agencies identified 20 dates in Duggins Wren invoices whereby the firm charged ETI
for courier, taxi, or Federal Express charges for delivery of documents that State Agencies argue
could have been delivered electronically. The charges total $1,004.52. 65 State Agencies contend
that these costs were not necessary for participation in Docket 39896 and should be disallowed.
State Agencies again point out that Duggins Wren is applying a different standard to itself than it
applies to its own contractors. The contract by which Duggins Wren hired Mr. Morris states that
"advances in technology, specifically transmission of information and documentation by e-mail,
scanning, ... etc. have made routine ... delivery of hard copy documents less critical and, in many
62
State Agencies Ex. 15 at. 3.
63
State Agencies Init. Br. at 14.
64
ETI Reply Br. at 20.
65
State Agencies Init. Br. at 16-17.
SOAH DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGE 19
PUC DOCKET NO. 40295
cases, unnecessary. " 66 Thus, State Agencies conclude that Duggins Wren should be held to the same
standard when passing on rate case expenses for document delivery. 67
ETI responds by explaining the context of many of the charges. For example, two of the
three cab fares were for a paralegal to attend and transport voluminous documents to the hearing, and
the third was to transport the same paralegal to the Commission for legal research. 68 As to the
courier and FedEx charges, ETI points out that Commission rules require some types of documents
to be physically delivered for filing, and that the use of couriers and FedEx is sometimes entirely
appropriate. ETI argues that it was "completely reasonable" for ETI to have incurred roughly $1,000
in courier and FedEx charges over the course of a rate case of the size and scope of Docket 39896.
The ALJ agrees and recommends no disallowance of these charges.
(4) Meals Over $25
ETI asserts that its intent was to exclude from its rate case expenses any meals above $25 per
person. 69 State Agencies have, however, identified at least six meals above $25 that were
erroneously included as a part of ETI's rate case expenses. 70 ETI admits that at least some of these
charges were included in error. 71 ETI disputes, however, the notion that these errors should call into
question the overall reliability of its rate case expenses.
The ALJ agrees with ETI. This was a large case with a large number of expenses. The
relatively few errors with respect to meals uncovered by State Agencies do not lead the ALJ to doubt
the overall accuracy ofETI's accounting. Nevertheless, by the ALJ's reckoning, the total amount
66
State Agencies Ex. 15 at 4.
67
State Agencies Init. Br. at 16.
68
ETI Reply Br. at 20.
69
State Agencies Ex. 5.
70
State Agencies Exs. 1, 12; State Agencies Reply Br. at Atts. 3, 6.
71
Tr. at 40.
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PUC DOCKET NO. 40295
that should be disallowed for meals over $25 (i.e., the amount by which the meals exceeded
$25/meal) is $281.04.
(5) Clothing and Laundry Service
State Agencies identified, as part of ETI's requested rate case expenses, a $10.44 invoice
from a Duggins Wren attorney for the purchase of a shirt and socks "due to unexpected extended
stay." 72 Similarly, OPUC contests a $40.33 laundry charge incurred by the same attorney for the
same reason. 73 ETI witness Considine generally agreed that clothing charges by attorneys working
on the rate case should not be passed through to ratepayers as a rate case expense. 74
ETI argues that the expenses were reasonable because they were brought about by an
unplanned, but necessary, extension of the attorney's business trip. 75 Mr. Morris testified that such
expenses can be considered reasonable. 76 Nevertheless, ETI has agreed to no longer request
reimbursement for the $10.44 clothing charge. Because laundry has to be done regardless of where
one finds oneself, the ALJ recommends that the $40.33 laundry charge likewise be disallowed.
(6) Airfare and Lodging
State Agencies identify several charges for airfare by ETI employees or consultants that were
in the $500 to $650 range. State Agencies fault ETI for not controlling costs by securing discount, or
at least more economical, fares. 77 Similarly, State Agencies complain that, too often, ETI employees
or consultants "went 'first class' on accommodations," incurring charges of more than $200 per night
72
State Agencies Ex. 17 at 20.
73
OPUC Init. Br. at 1-2.
74
Tr. at 43.
75
ETI Reply Br. at 22.
76
Tr. at 67-68.
77
State Agencies Reply Br. at 11-12.
SOAH DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGE21
PUC DOCKET NO. 40295
and, on occasion, $300 per night. State Agencies also complain of inadequate documentation of
lodging charges, pointing to a $4 79 .55 lodging charge without any underlying receipts. 78 ETI makes
no response to these complaints.
The ALJ acknowledges that these complaints raise a legitimate concern. It is human nature
to be more carefree with "other people's money'' than with one's own. The complaints raised by
State Agencies suggest that ETI may have been more lax with its spending because it believed that
airfare and lodging expenses would ultimately be borne by its ratepayers. Nevertheless, other than
for the $4 79 .5 5 lodging charge, State Agencies' complaints are too vague and unproven to justify any
specific disallowance recommendations by the ALJ. For example, although it might not always cost
$600 to get from Point A to Point B, such a fare might be unavoidable under certain circumstances.
Without evidence in the record demonstrating that ETI paid $600 for an airfare when a cheaper fare
was available, the ALJ cannot conclude that the fare was unreasonable. The same logic applies to
the lodging complaints. Accordingly, the ALJ recommends no large disallowances related to airfare
and lodging charges, but does recommend disallowing the $479.55 lodging charge that 1s
unsupported by receipts.
2. Challenges to Specific ETI Rate Case Expenses That are Difficult to Quantify
a. Financially-Based Incentive Compensation
One of the hotly contested issues in Docket 39896 concerned ETI's request to recover,
through its rates, incentive compensation paid to its employees that was tied to the company's
financial goals (financially-based incentive compensation). In Docket 39896, all parties, including
ETI, agreed that Commission precedent mandated that financially-based incentive compensation is
not recoverable. Nevertheless, in its application, ETI asked the Commission to reconsider its
precedents on this issue. ETI contended that the reason why cost recovery had been denied for
financially-based incentive compensation in prior rates cases was that, in those prior cases, there was
78
State Agencies Reply Br. at 13-14.
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PUC DOCKET NO. 40295
a lack of evidence showing sufficient benefits to ratepayers. ETI asserted that it assembled evidence
not previously considered by the Commission showing the benefits to ratepayers of using financial
measures in incentive compensation programs.
All of the other parties in Docket 39896 opposed ETI's efforts to recover the costs of its
financially-based incentive compensation, uniformly agreeing that the Commission has a well-
established and straightforward policy that incentive compensation tied to financial goals is not
recoverable. In the PFD in Docket 39896, the ALJs concluded that ETI should not be entitled to
recover its financially-based incentive compensation costs:
Simply put, the ALJs conclude that ETI has failed to establish a sufficient
justification for overturning the well-established Commission policy that financially
based incentive compensation is not recoverable. 79
The Commission agreed and ordered that $6, 196,03 7 plus associated FICA taxes (representing ETI' s
financially-based incentive compensation payments) should be removed from ETI's Operating and
Maintenance (O&M) expenses, and $335,752.96 (representing ETI's capitalized incentive
compensation that was financially-based) should be excluded from ETI's rate base. 80
In this docket, Staff, State Agencies, and OPUC contend that ETI should not be entitled to
recover any rate case expenses it incurred in attempting to recover its financially-based incentive
costs in Docket 39896. For example, Staff argues that, by challenging "overwhelming Commission
precedent," ETI did not act reasonably when it incurred expenses litigating for recovery of its
financially-based incentive costs. 81 Staff contends that the Commission has such an ''unequivocal"
history of denying recovery for financially-based incentive payments that "ETI should have known
79
Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and Obtain Deferred
Accounting Treatment, Docket 39896, Proposal for Decision at 236 (July 6, 2012).
80
Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and Obtain Deferred
Accounting Treatment, Docket 39896, Order on Rehearing at 17-18, 24-25 (November 1, 2012)
81
Staff Reply Br. at 5; see also Stafflnit. Br. at 7-10.
SOAH DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGE23
PUC DOCKET NO. 40295
that litigating a position opposed to [it] was not a reasonable use of resources." 82 State Agencies
point out that Docket 39896 was merely the latest of three recent cases in which ETI sought, but
failed to obtain, authority to charge ratepayers for its financially-based incentive costs (the others
being Dockets 34800 and 37744). 83
ETI defends its decision to seek to recover financially-based incentive costs in Docket 39896
by contending that the issue of the compensability of such costs is undergoing "continuing
clarification" at the Commission. 84 Moreover, ETI suggests that, in open meetings,
"Commissioners" have expressed some concern with the Commission's precedents on this issue and
suggested recovery might be allowed in a "properly organized and evidenced" case. 85 Finally, ETI
points to a recent SOAH order in an on-going SWEPCO rate case in which the ALJs denied State
Agencies' attempt to have stricken testimony proffered by SWEPCO regarding financially-based
incentive compensation. 86
The ALJ agrees with Staff, State Agencies, and OPUC. It was obvious throughout the
hearing in Docket 39896 that ETI was taking an aggressive position and making a "long-shot"
argument in seeking recovery for its financially-based incentive compensation. 87 In its briefing in the
present case, ETI cites to a number of cases in which, over the years, other utilities have requested
recovery of financially-based incentive compensation. These examples, however, hurt ETI's cause
more than they help it because all of the requests were unanimously denied by the Commission. This
hardly suggests that the issue is undergoing "continuing clarification." Likewise, ETI's suggestion
that "Commissioners" have expressed some concern with the Commission precedent overstates and
distorts the facts. The statements relied upon by ETI came from a single Commissioner,
82
Stafflnit. Br. at 8.
83
State Agencies Init. Br. at 7-8.
84
ETI Init. Br. at 7.
85
ETI Init. Br. at 7; ETI Ex. 12 (Morris Rebuttal) at 5-6.
86
Application of Southwestern Electric Power Company for Authority to Change Rates and Reconcile Fuel Costs,
Docket No. 40443, SOAR Order No. 17 (Dec. 13, 2012).
87
The ALJ in the present case was also one of the presiding ALJs in Docket 39896.
SOAH DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGE24
PUC DOCKET NO. 40295
Mr. Anderson, not multiple C9mmissioners. Moreover, in that statement, Commissioner Anderson
only obliquely implied that he might prefer to allow recovery for financially-based incentive costs,
but he agreed that Commission precedent mandates otherwise, and the Commission voted
unanimously to disallow such costs in the case before them. Additionally, Commissioner Anderson
has stated that, if the Commission were to ever discontinue "such a long and accepted precedent," it
should do so through "rulemaking" rather than "do it in a particular case." 88
Finally, ETI's reliance on the recent SOAH order in the SWEPCO case is similarly
misplaced. In that order, the ALJs effectively held that SWEPCO was not legally precluded from
seeking recovery for its financially-based incentive compensation. It is one thing to acknowledge
that a utility has a legal right to pursue a long-shot theory. It is another thing entirely, however, to
hold that the ratepayers must pay the costs of the utility's pursuit of that long-shot.
Simply put, the ALJ concludes that ETI did not act reasonably when it incurred expenses
litigating for recovery of its financially-based incentive costs in the face of clear and consistent
precedent to the contrary on the issue. As such, the ALJ recommends that ETI' s expenses be cut by
some amount to account for this issue. The problem then becomes how to quantify the size of the
disallowance. A few of ETI' s expenses relating to the pursuit of its financially-based incentive
compensation are clear. ETI utilized the services of Dr. Jay Hartzell as an expert witness on this
issue. In total, ETI paid Dr. Hartzell at least $12,825 in consulting fees, plus $13 ,680 in legal fees
related to the preparation of his testimony. 89 This, however, does not capture ETI's entire cost of
litigating the issue of financially-based incentive compensation. Substantial costs were incurred, for
example, in discussing the issue at the hearing and in post-hearing briefing. These additional
amounts are not in the record. In Section IV.C.3 of this PFD, below, the ALJ discusses various
possible approaches for reducing the amount of rate case expenses recovered by ETI to account for
the financially-based incentive compensation issue.
88
Staff Reply Br. at 6; OPUC Ex. 3; Open Meeting Tr. at 190 (July 30, 2009).
89
ETI Ex. 10 (Morris Supp. Direct) at 15-16; State Agencies Ex. 3.
SOAH DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGE25
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b. Transmission Equalization (MSS-2) Expenses
Another of the hotly contested issues in Docket 39896 concerned ETI's request to recover,
through its rates, roughly $9 million more for transmission equalization payments than it actually
paid in the Test Year. ETI is one of several "Entergy Operating Companies" that shares usage of an
Entergy transmission grid. Payments for use of the grid (the transmission equalization payments) are
made among the Entergy Operating Companies based upon a highly complex formula set out in the
"MSS-2" agreement.
In the Test Year at issue in Docket 39896, ETI made transmission equalization payments
totaling roughly $1. 7 million. Rather than seeking to recover only $1. 7 million, however, ETI sought
to recover roughly $10. 7 million, which it claimed represented its anticipated transmission
equalization payments in the Rate Year. ETI claimed the additional $9 million was based on the
company's estimates of transmission construction projects that were expected to have been
completed by or during the Rate Year.
All other parties in Docket 39896 opposed ETI's effort to recover more than its Test Year
expenses. The ALJs concluded that ETI failed to meet its burden to prove that its proposed Rate
Year MSS-2 costs were known and measurable. 90 The Commission agreed and ordered that only
ETI's Test Year costs should be counted. 91 The Commission described ETI's projection ofits Rate
Year expenses as ''uncertain and speculative."92
In this docket, Staff, OPUC, and State Agencies contend that ETI should not be entitled to
recover any rate case expenses it incurred in attempting to recover the additional $9 million in
90
Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and Obtain Deferred
Accounting Treatment, Docket 39896, Proposal for Decision at 116 (July 6, 2012).
91
Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and Obtain Deferred
Accounting Treatment, Docket 39896, Order on Rehearing at 20-21, FOFs 87-94 (November 1, 2012).
92
Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and Obtain Deferred
Accounting Treatment, Docket 39896, Order on Rehearing at 20, FOF 90 (November 1, 2012).
SOAH DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGE 26
PUC DOCKET NO. 40295
projected transmission equalization payments. 93 As explained by Staff: "It was clearly unreasonable
for ETI to have sought recovery for [its projected Rate Year costs] due to the exceedingly speculative
nature of those costs, and therefore a disallowance to its requested rate case expense amount should
be imposed." 94 OPUC witness Nathan Benedict testified that, by seeking the additional $9 million,
ETI was, in effect, challenging the precedent that post-Test Year adjustments must be known and
95
measurable.
ETI responds by first disputing the notion that it was "challenging precedent" by seeking the
additional $9 million.
ETI did not incur rate case expenses in pursuit of a position contrary to the well-
established 'known and measurable' standard for PTYAs [post Test Year
adjustments]. Rather, the Commission disagreed that the evidence put forth by ETI
met that standard. This is a very important distinction. Finding that evidence put
forth by a utility did not meet an established standard does not equate to a finding that
the utility unreasonably contested the applicability of such standard. 96
ETI further points out that the evidence in the record supported its contention that its actual post-Test
Year transmission equalization payments were on an upward trend. 97
The ALJ recommends that ETI's rate case expenses associated with its pursuit of the
additional $9 million for post-Test Year transmission equalization payments be disallowed. The ALJ
acknowledges the distinction made by ETI: It sought not to challenge the "known and measurable"
precedent, but merely failed to meet the standard. In this regard, ETI' s position as to transmission
equalization payments was perhaps less controversial than its position as to financially-based
incentive compensation. Nevertheless, ETI took another "long-shot" position as to its transmission
equalization payments. Its claim was based on future transmission construction projects that might
93
OPUC Init. Br. at 9-10, 12; Stafflnit. Br. at 13; State Agencies Reply Br. at 17.
94
Stafflnit. Br. at 13.
95
OPUC Ex. 1 (Benedict Direct) at 7-8.
96
ETI Init. Br. at 8 (emphasis in original, footnotes omitted).
97
ETI Reply Br. at 16.
SOAH DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGE27
PUC DOCKET NO. 40295
never be undertaken and that were found by the Commission to have been speculative. Accordingly,
the ALJ concludes that ETI did not act reasonably when it litigated the issue, and recommends that
ETI' s expenses related to this issue not be passed on to the ratepayers.
Having concluded that these rate case expenses should not be paid by the ratepayers, the
problem again becomes how to quantify the expenses. ETI did not structure its rate case expenses in
such a manner as to make it possible to determine how much of the expenses were incurred in
pursuing the additional $9 million in transmission equalization payments. 98 In Section IV.C.3 of this
PFD, below, the ALJ discusses various possible approaches for reducing the amount of rate case
expenses recovered by ETI to account for the transmission equalization payments issue.
c. Purchased Power Capacity Rider
In Docket 39896, ETI initially requested a Purchased Power Capacity Rider (PPCR), instead
of including purchased capacity costs in base rates. The Commission, however, rejected the PPCR
request in a Supplemental Preliminary Order on the grounds that the Commission already had a
then-pending rulemaking effort underway to determine the structure of such a rider for all generating
utilities. 99
In this docket, Staff, OPUC, and State Agencies argue that ETI should not be entitled to
recover any rate case expenses it incurred in attempting to secure a PPCR because it was too
100
speculative in light of the pending rulemaking effort.
ETI responds by contending that the mere fact that there was a rulemaking effort underway
with respect to PPCRs did not mean that ETI was somehow precluded from seeking a PPCR through
its application. Moreover, ETI notes that, in briefing during Docket 39896, Staff, State Agencies,
98
Tr. at 45-46.
99
Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and Obtain Deferred
Accounting Treatment, Docket 39896, Supplemental Preliminary Order at 2 (Jan. 9, 2012).
100
OPUC Init. Br. at 10; Stafflnit. Br. at 14 and Reply Br. at 8-9; State Agencies Reply Br. at 17.
SOAH DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGE 28
PUC DOCKET NO. 40295
and TIEC all took the position that there was no legal impediment to ETI's seeking a PPCR in the
rate case. 101
The ALJ agrees with ETI and does not recommend any disallowances in relation to the PPCR
request. The fact that there was a pending proposed rule at the time ETI asked for the rider should
not be viewed as precluding ETI' s request. Indeed, the very uncertainty inherent in the rulemaking
process suggested that the accepted practices with regard to purchased capacity costs were in a state
of flux and, therefore, it was reasonable for ETI to pursue the rider.
3. Proportional Reduction
In addition to the above challenges to specific items of expense incurred by ETI, a number of
parties raised more generic concerns about the company's rate case expenses. State Agencies
expressed concern that, as a general matter, rate case expenses in cases before the Commission
appear to be "getting out of hand." 102 Staff "firmly agrees" with this concern. 103 State Agencies
worry that utilities have no incentive to minimize the number of rate case proceedings or the
efficiency of rate case presentation because they assume their costs will simply be passed on to
ratepayers. 104 State Agencies urge the Commission to allocate rate case expenses in such a way that
incentivizes utilities to more productively and efficiently use their time in rate cases. 105 OPUC
agrees that the standard for evaluating the amount of rate cases expenses to be reimbursed ought to
be structured so as to give a utility pause before deciding to pursue overly aggressive or novel
arguments. 106
101
ETI Reply Br. at 16-17.
102
State Agencies Init. Br. at 1-2.
103
Staff Reply Br. at 13.
104
State Agencies Init. Br. at 1-2.
105
State Agencies Init. Br. at 5.
106
OPUC Init. Br. at 8.
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Along these same lines, Staff and OPUC expressed concern about the frequency of ETI rate
cases over recent years. Docket 39896 was the third ETI rate case in four years. Each case resulted
in a rate increase and an obligation for the ratepayers to pay ETI's rate case expenses. 107 Staff and
OPUC also expressed concern about the overall size of the rate case expenses in relation to the
outcome of the underlying rate case. Total rate case expenses ($8.8 million) equal roughly one-third
of the total approved rate increase ($27. 7 million). 108 Staff, State Agencies, and OPUC all expressed
the concern that ETI did not provide good stewardship in incurring rate case expenses. 109
In order to address these concerns, the parties have suggested a number of methodologies for
reducing the rate case expenses.
• The 50/50 approach. State Agencies advocate two approaches for reducing the level
of recovery of rate case expenses. State Agencies' primary recommendation is that
ratepayers be charged for only 50% of total rate case expenses. State Agencies argue
that this approach would recognize that shareholders, who reap benefits from a rate
increase, ought to also share in the cost of obtaining that rate increase. 110
• The Results-Obtained Approach. Alternatively, State Agencies advocate allowing
ETI to recover only 26.4% of its rate case expenses, which is the ratio between the
rate increase obtained in Docket 39896 ($27.7 million) and the increase sought by
ETI ($104.8 million). In other words, because ETI obtained only 26.4% of the rate
increase it sought, State Agencies contend that ETI similarly ought to be reimbursed
for only 26.4% of its rate case expenses. 111 OPUC also advocates this approach. 112
• The Issue-Specific Reduction Approach. Alternatively, OPUC and Staff advocate
an approach whereby ETI's recovery of rate case expenses is reduced by the ratio
between the amounts unsuccessfully sought by ETI for financially-based incentive
payments and transmission equalization payments and the rate increase sought by
ETI. ETI unsuccessfully sought financially-based incentive payments of $6.5
107
Stafflnit. Br. at 3; OPUC Init. Br. at 2-3, 7-8.
108
Stafflnit. Br. at 4; OPUC Init. Br. at 7.
109
See, e.g., Staff Reply Br. at 13.
110
State Agen
This text is long and has been trimmed here. Open the source document for the complete record.