# Entergy Texas, Inc. v. Public Utility Commission of Texas, Office of Public Utility Counsel, and State of Texas Agencies and Institutions of Higher Education

> Texas Court of Appeals, 3rd District (Austin) · February 6, 2015

URL: https://www.frixlaw.com/law-library/cases/4047806

## Case

- **Court:** Texas Court of Appeals, 3rd District (Austin)
- **Decided:** February 6, 2015
- **Precedential status:** Published
- **Opinion:** Opinion
- **Cited by:** 0 later opinions in the Frix Law Library

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## Opinion text

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.
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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.
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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.
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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).
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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.
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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.
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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 Wre

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/4047806. Public record. Not legal advice.