Entergy Texas, Inc. v. Public Utility Commission of Texas, Office of Public Utility Counsel, and Texas Industrial Energy Consumers

ACCEPTED

03-14-00709-CV

4377970

THIRD COURT OF APPEALS

AUSTIN, TEXAS

3/5/2015 9:28:45 AM

JEFFREY D. KYLE

CLERK

No. 03-14-00709-CV

IN THE FILED IN

3rd COURT OF APPEALS

THIRD COURT OF APPEALS AUSTIN, TEXAS

AT AUSTIN 3/5/2015 9:28:45 AM

JEFFREY D. KYLE

ENTERGY TEXAS, INC., Clerk

Appellant,

v.

PUBLIC UTILITY COMMISSION OF TEXAS,

Appellee.

Appeal from the 53rd Judicial District Court, Travis County, Texas

The Honorable Amy Clark Meachum, Judge Presiding

________________________________________________________________

APPELLANT’S REPLY 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

March 2015

TABLE OF CONTENTS

TABLE OF CONTENTS ........................................................................................... i

INDEX OF AUTHORITIES.................................................................................... iii

ARGUMENT AND AUTHORITIES ........................................................................1

I.  The CGS program is the result of legislative choices that differ

dramatically from traditional utility regulation. ..............................................1

II.  The Commission has ignored part of the legislative enactment,

contrary to the most basic rules of statutory construction. ..............................2

A.  The Commission's order is not sustainable on an undecided

factual theory. ........................................................................................4

B.  The Commission’s error is not harmless. ..............................................7

C.  The 2011 CenterPoint case does not support the Commission’s

interpretation of the CGS statute. ........................................................13

1.  The statute at issue in CenterPoint authorized recovery of

very specific costs; the CGS statute is not so limited. ..............13

2.  Here, ETI seeks to recover the very type of costs the

CGS statute authorizes it to recover. ........................................14

D.  The principle of cost-causation does not justify the

Commission’s disregard of language in the CGS statute....................17

1.  This issue is a red herring. ........................................................17

2.  Though it may not be clear which customers should pay

“unrecovered costs,” it is clear that ETI may not be

required to absorb them. ...........................................................19

3.  The Commission’s brief casts doubt upon whether it

would be patently unfair to allocate “unrecovered costs”

to ineligible customers. .............................................................19

4.  If the statute inescapably dictates an unpalatably unfair

result, the solution was to decline to adopt the program. .........21

i

E.  Other traditional ratemaking principles do not trump the plain

language of the CGS statute. ...............................................................21

1.  The CGS statute is an exception to the traditional

regulatory scheme. ....................................................................21

2.  PURA 11.002 does not shed any light on the proper

interpretation of the CGS statute. .............................................22

3.  The concept of “regulatory lag” does not absolve the

Commission of its duty to follow the plain language of

the statute. .................................................................................23

4.  The reference to discount rates in the CGS statute

supports ETI’s argument. ..........................................................24

III.  The Commission’s decision not to allow ETI to recover all of its costs

of implementing the CGS tariff is reversible because it, too,

contradicts the plain language of the statute..................................................26

IV.  The Commission’s decision not to allow ETI to recover interest on its

unrecovered costs is reversible because the CGS statute entitles ETI to

all of its unrecovered costs. ...........................................................................27

CONCLUSION AND PRAYER .............................................................................29

CERTIFICATE OF COMPLIANCE .......................................................................30

CERTIFICATE OF SERVICE ................................................................................31

ii

INDEX OF AUTHORITIES

Cases

CenterPoint Energy Entex v. Railroad Comm’n of Tex.,

213 S.W.3d 364 (Tex. App. – Austin 2006, no pet.).............................................7

CenterPoint Energy Houston Elec., LLC v. Public Util. Comm'n of Tex.,

354 S.W.3d 899 (Tex. App. – Austin 2011, no pet.) .................................... 13, 14

CenterPoint Energy, Inc. v. Public Util. Comm’n of Tex.,

143 S.W.3d 81 (Tex. 2004) .......................................................................... 28, 29

City of Dallas v. Railroad Comm’n of Tex.,

No. 03-06-00580-CV, 2008 WL 4823225 *1 (Tex. App. – Austin Nov. 6,

2008, no pet.) ........................................................................................................15

City of El Paso v. Public Util. Comm’n of Tex.,

883 S.W.2d 179 (Tex. 1994) ................................................................................15

Columbia Med. Ctr. of Las Colinas, Inc. v. Hogue,

271 S.W.3d 238 (Tex. 2008) ..................................................................................4

Continental Imports, Ltd. v. Brunke,

No. 03-10-00719-CV, 2011 WL 6938489 *5

(Tex. App. – Austin Dec. 30, 2011, pet. denied) ...................................................7

Hooks v. Texas Dep’t of Water Resources,

611 S.W.2d 417 (Tex. 1981) ..................................................................................7

Houston Mun. Employees Pension Sys. v. Abbott,

192 S.W.3d 862 (Tex. App. – Texarkana 2006, pet. denied).................................4

Jackson v. State Office of Administrative Hearings,

351 S.W.3d 290 (Tex. 2011) ................................................................................21

Office of Public Util. Counsel v. Texas-New Mexico Power Co.,

344 S.W.3d 446 (Tex. App. – Austin 2011, pet. denied) .....................................27

Railroad Comm’n of Tex. v. High Plains Natural Gas Co.,

628 S.W.2d 753 (Tex. 1981) ................................................................................24

State v. Public Util. Comm’n,

883 S.W.2d 190 (Tex. 1994) ...............................................................................27

State v. Shumake,

199 S.W.3d 279 (Tex. 2006) ..................................................................................3

iii

Suburban Util. Corp. v. Public Util. Comm’n of Tex.,

652 S.W.2d 358 (Tex. 1983) ................................................................................15

Texas Ass'n of Business v. Texas Air Control Bd.,

852 S.W.2d 440 (Tex. 1993) ..................................................................................7

Texas Coast Utils. Coalition v. Railroad Comm’n of Tex.,

423 S.W.3d 355 (Tex. 2014) .................................................................................4

Texas Nat’l Bank v. Karnes,

717 S.W.2d 901 (Tex. 1986) ...............................................................................12

Statutes

Tex. Gov’t Code Ann. § 2001.141...........................................................................12

Tex. Util. Code Ann. § 11.002 .................................................................................22

Tex. Util. Code Ann. § 36.003 .................................................................................19

Tex. Util. Code Ann. § 36.007 .................................................................................25

Tex. Util. Code Ann. § 36.061 .................................................................................28

Tex. Util. Code Ann. § 36.201 .................................................................................24

Tex. Util. Code Ann. § 39.452 ......................................................................... passim

Tex. Util. Code Ann. § 39.905 .................................................................................13

Commission Proceedings

Application of Entergy Texas, Inc. for Authority to Change Rates and

Reconcile Fuel Costs, Docket No. 41791 ..............................................................9

Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile

Fuel Costs, and Obtain Deferred Accounting Treatment, Docket No.

39896 ......................................................................................................................9

iv

TO THE HONORABLE THIRD COURT OF APPEALS:

Entergy Texas, Inc. (“ETI”) submits this reply to the briefs of the Public

Utility Commission of Texas (the “Commission” or “PUCT”), Texas Industrial

Energy Consumers (“TIEC”), and the Office of Public Utility Counsel (“OPUC”).

ARGUMENT AND AUTHORITIES

I. The CGS program is the result of legislative choices that differ

dramatically from traditional utility regulation.

There is an unwarranted undercurrent of blame running through the

Commission’s brief. Contrary to the Attorney General’s rhetoric, ETI does not

seek a “free lunch,” to “avoid the reality of competition,” or to “maintain its

monopoly” by “designing an unfair program that is sure to be rejected.” Nor is

ETI “insinuating” or “pretending” “nonsense.”1

ETI proposed the competitive generation service (“CGS”) program because

the legislature mandated that it propose one. See Tex. Util. Code Ann.

§ 39.452(b). Moreover, this is a new program that differs in fundamental respects

from the way utilities have operated under traditional regulation. In crafting the

CGS statute, the legislature both expressly and impliedly rendered certain

traditional ratemaking principles inapplicable or unworkable. For example:

• Utilities subject to traditional regulation are responsible for

procuring power for all their customers. The CGS program

1

See PUCT’s Brief at 29 & 30.

1

provides a unique opportunity for some customers to contract

for their own power.

• Utility rates are traditionally set based upon historical levels of

expense. CGS program rates must be set in the same

proceeding in which the program itself is created, even though

there are no historical CGS expenses.

• Under traditional regulation, utilities charge rates to customers

that include generation, transmission, and distribution costs.

ETI, however, must charge an “unbundled” transmission

services rate to CGS customers, who are deemed not to be

“wholesale transmission customers.”

• Because bundled rates are set for the future based upon

historical expenses, utilities generally bear the risk that costs

will increase before the next rate case. In the CGS statute, the

legislature expressly entitled ETI to recover “costs unrecovered

as a result of the implementation of” the program.

• In contrast to general ratemaking principles, the legislature in

the CGS statute specified that some customers may not bear the

burden of unrecovered costs. It protected “manufacturers” who

choose not to participate in the program.

• And though PURA generally limits a regulated utility’s ability

to offer discount rates and then burden other customers with the

costs the discounted customer avoids, CGS program rates “may

not be considered to offer a discounted rate.”

The CGS program is not business as usual.

II. The Commission has ignored part of the legislative enactment, contrary

to the most basic rules of statutory construction.

Over the lengthy course of the underlying contested case, the parties were

never able to agree unanimously on several issues, including the scope of ETI’s

entitlement to recover costs, the extent to which the CGS program may cause ETI

2

not to recover costs embedded in its bundled rates, and who may fairly be required

to pay for any of those unrecovered costs.2 Though appellees continue to debate

the latter two issues, they are not bases for the agency order under review. The

Commission avoided those issues by defining the term “unrecovered costs” as

excluding production-related costs embedded in ETI’s bundled rates.3

The CGS statute entitles ETI “to recover any costs unrecovered as a result of

the implementation of the tariff.” Tex. Util. Code Ann. § 39.452(b). The breadth

of those words, and their failure to exclude any category of costs, cannot

reasonably be disputed. Nevertheless, the Commission has declared that the statute

authorizes ETI to recover only certain costs – specifically, those “of”

implementing the program. The Commission has effectively written several words

out of the statute, as illustrated below:

The utility’s rates shall be set … to recover any costs

unrecovered as a result of the implementation of the tariff….

This interpretation violates the paramount rule of statutory construction that

statutes must be construed according to their plain language. E.g., State v.

Shumake, 199 S.W.3d 279, 284 (Tex. 2006). The truest manifestation of what

legislators intended is what they enacted: the literal text they voted on. Texas

Coast Utils. Coalition v. Railroad Comm’n of Tex., 423 S.W.3d 355, 363 n.16

2

Administrative Record (“AR”) Part I, Binder 2, Item 119 (Final Order at FOFs 11, 14, 18, 19,

27, 32-48, 52-56 & COLs 1-2).

3

AR Part I, Binder 2, Item 119 (Final Order at 6, 7-8, 11, FOFs 49-51, COL 2).

3

(Tex. 2014). The legislature is presumed to have chosen its words with care, and

statutes should not be construed to render legislatively enacted words superfluous.

E.g., Columbia Med. Ctr. of Las Colinas, Inc. v. Hogue, 271 S.W.3d 238, 256

(Tex. 2008). Moreover, when the meaning of a statute is plain from its text, rules

of construction or other extrinsic aids cannot be used to create ambiguity. E.g.,

Houston Mun. Employees Pension Sys. v. Abbott, 192 S.W.3d 862, 864 (Tex. App.

– Texarkana 2006, pet. denied). The Commission may not disregard or rewrite the

unambiguous mandate of the CGS statute.

A. The Commission's order is not sustainable on an undecided

factual theory.

The Attorney General and TIEC assert that the Commission instead

determined that all of ETI’s base-rate production costs will in fact be recovered

through the CGS program that was ultimately adopted.4 The agency said no such

thing. The Commission did not reach that question because, again, the

Commission said the statute does not entitle ETI to recover that type of cost at all.

TIEC champions the factual theory anyway, presumably because it was

TIEC’s principal argument to the agency. TIEC actually agreed that, “[i]f … the

Commission determines that there are unrecovered costs, then Entergy is entitled

4

PUCT’s Brief at 15; TIEC’s Brief at 6-10, 14, 22-23, & 35-37.

4

under the statute to recover any such costs.”5 To TIEC, the dispute should not be

about the scope of the statutory entitlement – it should be about whether ETI

would actually recover all of its costs.6

The Commission disagreed with TIEC about that. After the parties tried

unsuccessfully to settle remaining issues, the Commission conducted a hearing to

consider “the remaining contested threshold issue – what types of costs will be

considered unrecovered for purposes of PURA 39.452(b)….”7 Though the issue is

one of law, the parties submitted testimony on the proper interpretation of the

statute to aid the Commission in its determination.8 After the hearing, the

Commission issued an interim order “making its determination of the definition of

unrecovered costs.”9 The Commission said:

[T]he proper interpretation of “costs unrecovered as a result of

implementation of the CGS program tariff” is costs to implement and

administer the CGS program tariff. Such unrecovered costs do not

include lost revenues, embedded generation costs, or any other types

of costs. The Commission reverses the proposal for decision on this

issue.[10]

In its final order, the Commission acknowledged its interim ruling that:

5

AR Part I, Binder 1, Item 22 (TIEC’s Nov. 1, 2011, List of Unsettled Issues and Request for

Procedural Schedule at 3).

6

Id. at 4 n.3.

7

AR Part I, Binder 2, Item 119 (Final Order at 3 (emphasis added), 7, & FOF 20); see also AR

Part I, Binder 1, Item 77 (Interim Order at 1 & 5).

8

E.g., AR Part II, Binder 3, ETI Exh. 91 (Supp. Direct Testimony of P. May at 5-6 of 23); AR

Part II, Binder 4, TIEC Exh. 15 (Supp. Direct Testimony of J. Pollock at 14).

9

AR Part I, Binder 1, Item 77 (Interim Order at 6) (emphasis added).

10

Id.

5

the types of costs that will be considered ETI’s unrecovered costs for

purposes of PURA § 39.452(b) are those costs necessary to implement

and administer the CGS program and are not to be defined to include

lost revenues, embedded generation costs, or any other types of

costs.[11]

The Commission held fast to its previous interpretation of the statute:

The Commission … finds that unrecovered costs are only those

costs necessary to implement and administer the CGS program and

are not to be defined to include lost revenues, embedded generation

costs, or any other types of costs.[12]

***

2. PURA § 39.452(b) does not allow for the recovery of lost

revenue or embedded generation costs.[13]

A review of the whole order reveals that it is TIEC, not ETI, that is

“plucking” isolated words out of context.14 It is abundantly clear throughout the

order that the Commission’s decision was premised not upon a factual

determination about the extent to which ETI might not recover base-rate costs, but

upon a legal conclusion about the scope of costs recoverable under the CGS

statute.15

For that reason, the order cannot be affirmed on TIEC’s factual theory. This

Court has repeatedly recognized that an agency order can be upheld on any legal

basis shown in the record, but it may not be sustained on an unarticulated factual

11

AR Part I, Binder 2, Item 119 (Final Order at FOF 20) (emphasis added).

12

Id. at 6.

13

Id. at COL 2.

14

See TIEC’s Brief at 36.

15

AR Part I, Binder 2, Item 119 (Final Order at 6, 7-8, 11, FOFs 49-51, COL 2).

6

theory. See Continental Imports, Ltd. v. Brunke, No. 03-10-00719-CV, 2011 WL

6938489 *5 (Tex. App. – Austin Dec. 30, 2011, pet. denied) (not designated for

publication) (citations omitted).

B. The Commission’s error is not harmless.

Though the Commission did not decide any factual dispute about

unrecovered costs, and though the Attorney General recognizes that this case

presents a legal question of statutory interpretation,16 the Attorney General now

advances a “no harm, no foul” theory. That is, the Attorney General contends that

ETI is not “aggrieved” by any error in the Commission’s statutory interpretation

because ETI will in fact recover all its costs.17 The order cannot be sustained on

this basis.

The rule that only a party “aggrieved” by an agency order may challenge it

is the same as the rule that only a plaintiff with a “justiciable interest” may file a

lawsuit. Hooks v. Texas Dep’t of Water Resources, 611 S.W.2d 417, 419 (Tex.

1981); CenterPoint Energy Entex v. Railroad Comm’n of Tex., 213 S.W.3d 364,

368 (Tex. App. – Austin 2006, no pet.). This Court must review the pleadings in

favor of ETI, and if necessary, the record to determine if “any” evidence supports

standing. See Texas Ass'n of Business v. Texas Air Control Bd., 852 S.W.2d 440,

446 (Tex. 1993).

16

PUCT’s Brief at 17.

17

Id. at 12 & 22-29.

7

ETI undeniably pled that it is aggrieved by the agency’s order because the

order deprives ETI of dollars it is entitled to recover under the CGS statute.18 No

one disputed that ETI made this allegation in district court.

Moreover, there is abundant evidence in the record showing that the

Commission’s order deprives ETI of an opportunity to recover all of its costs. The

CGS program was ultimately designed such that participating CGS customers

would bear the costs of the energy and capacity that they contract for under the

CGS program. But the program does not, even as redesigned through negotiations,

impose upon participating customers all the costs they would have borne under the

bundled rates that were set through the traditional ratemaking process.

Under the traditional regulatory scheme, ETI must arrange generation

resources to serve all of its customers. ETI’s generation portfolio consists of many

types of resources. Those include power plants owned and operated by ETI and its

affiliates, short-term purchased capacity contracts, and long-term purchased

capacity contracts. ETI makes commitments and incurs costs to serve all its

customers, including the LIPS class, not knowing which of them might ultimately

migrate to the CGS program, or for how long. The Commission determined in

18

See CR 5.

8

Docket No. 37744 and subsequent rate cases19 which of those costs ETI reasonably

and necessarily incurred, and set base rates to recover those costs.20

When a LIPS customer migrates to the CGS program, the customer will

receive a credit for the embedded production costs the customer would have paid

under ETI’s base rates.21 The credit is some $6.50/kW/month.22 But ETI is still at

risk of having to pay these costs.

Several ETI witnesses explained that the Entergy system must continue to

plan for and acquire short-, limited-, and long-term resources to reliably serve all

its Texas customers, including LIPS customers who may or may not choose to

participate in the CGS program.23 These witnesses acknowledged that the CGS

program may help ETI avoid acquiring some capacity in the future.24 However,

the program has a limited ability to relieve ETI of its planning obligations because

19

The Commission has reset ETI’s bundled rates twice since the Commission adjudicated

Docket No. 37744. See Application of Entergy Texas, Inc. for Authority to Change Rates,

Reconcile Fuel Costs, and Obtain Deferred Accounting Treatment, Docket No. 39896;

Application of Entergy Texas, Inc. for Authority to Change Rates and Reconcile Fuel Costs,

Docket No. 41791.

20

See Supplemental Administrative Record (“Supp. AR”) Part I, Binder 2, Item 53 (Docket No.

37744 Order at FOFs 35 & 40, COLs 7, 9, & 12).

21

AR Part II, Binder 3, ETI Exh. 91 (Supp. Direct Testimony of P. May at 8-9 of 23); AR Part

II, Binder 3, ETI Exh. 101 (Supp. Direct Testimony of D. Roach at 6 of 23).

22

AR Part I, Binder 2, Item 119 (Final Order at FOF 53(A)). This credit is subject to adjustment

in future rate cases. Id. at FOF 41(C)(4).

23

AR Part II, Binder 3, ETI Exh. 91 (Supp. Direct Testimony of P. May at 4 of 23); AR Part II,

Binder 3, ETI Exh. 95 (Supp. Rebuttal Testimony of S. Dingle at 7-8 of 26); AR Part II, Binder

3, ETI Exh. 101 (Supp. Direct Testimony of D. Roach at 7 of 23).

24

AR Part II, Binder 3, ETI Exh. 92 (Supp. Rebuttal Testimony of P. May at 27 of 30); AR Part

II, Binder 3, ETI Exh. 95 (Supp. Rebuttal Testimony of S. Dingle at 8 of 26); AR Part II, Binder

3, ETI Exh. 101 (Supp. Direct Testimony of D. Roach at 7 of 23).

9

of the short-term nature and other characteristics of CGS contracts.25 As ETI

witness Stephen Dingle testified:

The program … will not provide long-term resources to meet

projected resource needs. The limited term nature of the proposed

agreements, coupled with the uncertainty regarding the future

continuation of the program, do not provide sufficient assurance that

CGS resources will be available to meet ETI’s long-term resource

needs. Furthermore, the program does not relieve ETI of its

obligation to serve CGS customers in the event that providers

withdraw or fail to renew under the program. Ultimately, the CGS

program is at best a limited-term alternative that could defer or

displace short- and limited-term PPAs [purchased power agreements],

but it in no way can be considered a long-term resource option or

affect ETI’s long-term acquisition strategy.[26]

Moreover, the CGS program in no way avoids embedded capacity costs that the

Company has already incurred, especially for existing power plants and long-term

purchased capacity contracts.27 Nor does the program enable ETI to recover a

return on investments it has already made to serve customers.28

This evidence was presented after the parties proposed that CGS suppliers

would provide service that Entergy could treat as “firm” capacity.29 The Attorney

General ignores it. Instead, the Attorney General points to testimony from other

25

AR Part II, Binder 3, ETI Exh. 92 (Supp. Rebuttal Testimony of P. May at 28 of 30); see also

id. at 16 of 23; AR Part II, Binder 3, ETI Exh. 93 (Supp. Direct Testimony of A. O’Brien at 3 &

8 of 11); AR Part II, Binder 3, ETI Exh. 94 (Supp. Rebuttal Testimony of A. O’Brien at 2 of 7).

26

AR Part II, Binder 3, ETI Exh. 95 (Supp. Rebuttal Testimony of S. Dingle at 8 of 26).

27

See AR Part II, Binder 3, ETI Exh. 92 (Supp. Rebuttal Testimony of P. May at 28 of 30); AR

Part II, Binder 3, ETI Exh. 95 (Supp. Rebuttal Testimony of S. Dingle at 12 of 26 & Exh. JSD-

R-1, Pollock Depo. at 73-74); AR Part III, Vol. B (Transcript of Hearing on the Merits at 180-

82).

28

AR Part II, Binder 3, ETI Exh. 92 (Supp. Rebuttal Testimony of P. May at 29 of 30).

29

See, e.g., AR Part II, Binder 3, ETI Exh. 91 (Supp. Direct Testimony of P. May at 3 of 23).

10

parties that, at best, suggests ETI may be able to avoid or mitigate some its base-

rate costs as customers migrate to the CGS program.30 ETI disputed the validity of

some of its opponents’ theories, and disputed the extent to which it could avoid

embedded production costs under others.31 ETI acknowledged that CGS customers

will pay a $1.10/kW fee that may offset some of the actual, embedded production

cost that CGS customers avoid by participating in the program.32 But even

considering the costs the Company may reasonably be able to avoid or mitigate,

about $3.50/kW/month of the Company’s embedded production costs will still be

unrecovered.33 The Court should not be misled into thinking that the CGS

program, even as ultimately designed, ensures that ETI will not have unrecovered

costs.

Nor would the CGS program that ETI proposed allow it to recover costs that

it does not actually incur. The CGSUSC rider contained true-up provisions that

would have ensured recovery only of actual, not hypothetical, costs.34 ETI did not

30

See, e.g., PUCT’s Brief at 24 & 26-28.

31

AR Part II, Binder 3, ETI Exh. 91 (Supp. Direct Testimony of P. May at 11-16 of 23); AR Part

II, Binder 3, ETI Exh. 92 (Supp. Rebuttal Testimony of P. May at 7-18 of 30); AR Part II, Binder

3, ETI Exh. 95 (Supp. Rebuttal Testimony of S. Dingle at 5-26 of 26); AR Part II, Binder 3, ETI

Exh. 93 (Supp. Direct Testimony of A. O’Brien at 4-8 of 11); AR Part II, Binder 3, ETI Exh. 94

(Supp. Rebuttal Testimony of A. O’Brien at 1-5 of 7); AR Part II, Binder 3, ETI Exh. 101 (Supp.

Direct Testimony of D. Roach at 6-7 of 23).

32

AR Part II, Binder 3, ETI Exh. 92 (Supp. Rebuttal Testimony of P. May at 26 of 30).

33

AR Part II, Binder 3, ETI Exh. 91 (Supp. Direct Testimony of P. May at 17 of 23 & Exh.

PRM-4).

34

See Supp. AR Part I, Binder 2, Item 36 (Docket No. 37744 Proposal for Decision at 18 & 21);

Supp. AR Part II, Binder 3, ETI Exh. 9 (Direct Testimony of P. May, Exh. PRM-1); AR Part II,

Binder 5, OOP-1.

11

propose a program that would put the Company in a better position than it would

have been under traditional regulation. ETI simply sought to ensure that it would

not be in a worse position as a result of the program.35 That is, after all, what the

legislature mandated when it said CGS rates must be set to allow ETI to recover

“any costs unrecovered as a result of the implementation of the [CGS] tariff.” The

Commission’s erroneous interpretation of this mandate is not harmless – it

deprives ETI of any opportunity to recover costs that will effectively be “stranded”

as a result of the CGS program.

The Attorney General essentially invites this Court to find, based on

conflicting evidence, that ETI is not harmed by the Commission’s decision. But

this Court cannot make original findings of fact. E.g., Texas Nat’l Bank v. Karnes,

717 S.W.2d 901, 903 (Tex. 1986). Moreover, at this juncture, resolving this case

based on conflicting evidence would deprive ETI of its substantive right to

findings on fact issues upon which the agency decision rests. See Tex. Gov’t Code

Ann. § 2001.141. If the Commission indeed disposed of the case on TIEC’s

factual theory, the Commission was required to say so, and harmed ETI by failing

to do that.

35

AR Part II, Binder 3, ETI Exh. 92 (Supp. Rebuttal Testimony of P. May at 28 of 30).

12

C. The 2011 CenterPoint case does not support the

Commission’s interpretation of the CGS statute.

1. The statute at issue in CenterPoint authorized

recovery of very specific costs; the CGS statute

is not so limited.

The Commission based its interpretation of the CGS statute on this Court’s

decision in CenterPoint Energy Houston Elec., LLC v. Public Util. Comm'n of

Tex., 354 S.W.3d 899 (Tex. App. – Austin 2011, no pet.). As ETI explained in its

initial brief, that opinion does not concern the CGS statute. It concerns the Energy

Efficiency Cost Recovery Factor (“EECRF”) statute, which by its very terms,

authorizes a utility to recover only costs made for the specific purpose of satisfying

the goal of an energy efficiency program. See Tex. Util. Code Ann. §

39.905(b)(1). The EECRF statute does not authorize the recovery of other costs,

like those that “result from” the implementation of an energy efficiency program.

Id. That is why this Court held that the EECRF statute does not authorize a utility

to recover lost revenues that were intended to pay for something other than the

utility’s costs of implementing an energy efficiency program. CenterPoint Energy

Houston Elec., LLC, 354 S.W.3d at 904. Though the Court made observations

about other PURA provisions as well, it did not mention the CGS statute.

Moreover, none of those observations were essential to the Court’s interpretation

of the EECRF statute. Because the statute at issue in the 2011 CenterPoint case

13

and the one at issue here are materially different, appellees’ reliance upon the case

is misplaced.

2. Here, ETI seeks to recover the very type of costs

the CGS statute authorizes it to recover.

In an attempt to make this case sound like CenterPoint, or perhaps because

they recognize that the legislature clearly intended ETI to recover all the costs that

will otherwise be unrecovered as a result of implementing the program, appellees

focus their efforts on arguing that ETI is seeking something other than “costs.”

They argue that because the word “revenue” appears in the proposed CGSUSC

rider, ETI is seeking to get (and presumably keep) money that it will not have to

pay out for any expense. That is not true. ETI has throughout this case sought to

recover the money the Commission authorized it to recover via test-year

ratemaking, because that was the amount of money the Commission determined is

necessary to pay ETI’s costs, and because the legislature entitled ETI to recover

that money in the CGS statute.

Appellees’ repeated suggestion that there is some significance to the way

ETI has characterized these amounts is without merit. It is true that ETI has

characterized this money as both “revenues” and “costs” in this case. But that is

not to “escape” this Court’s ruling in CenterPoint.36 ETI simply recognizes the

fundamental ratemaking principle that base rate costs are a utility’s revenue

36

See PUCT’s Brief at 21.

14

requirement. They are flip sides of the same coin. Texas courts, including this

one, understand this concept. See, e.g., City of El Paso v. Public Util. Comm’n of

Tex., 883 S.W.2d 179, 187 (Tex. 1994) (ratemaking formula determines “revenue

requirement”); Suburban Util. Corp. v. Public Util. Comm’n of Tex., 652 S.W.2d

358, 362 (Tex. 1983) (ratemaking formula determines “cost of service”); City of

Dallas v. Railroad Comm’n of Tex., No. 03-06-00580-CV, 2008 WL 4823225 *1

(Tex. App. – Austin Nov. 6, 2008, no pet.) (not designated for publication) (using

“revenue requirement” and “cost of service” to describe the same thing). Even the

Attorney General acknowledges the logical link between “revenues” and “costs” in

test-year ratemaking.37

Appellees’ witnesses acknowledged that, putting semantics aside, what ETI

is seeking is a measure of expenses it will not recover as a result of implementation

of the program. OPUC witness Clarence Johnson testified that the costs at issue

are the embedded test-year production costs upon which base rates were

established in Docket No. 37744.38 He confirmed that fact again on cross-

examination:

Q. And the costs that may go unrecovered due to the CGTS [CGS]

program, they are reflected as part of the overall embedded

costs in the test-year—right—that the rates are set on?

37

Id. at 36.

38

See Supp. AR Part II, Binder 4, OPUC Exh. 1 (Johnson Direct at 88).

15

A. There were costs allocated to the CGS customers and to their

class. So in that sense, yes.39

TIEC witness Jeffry Pollock agreed on cross-examination that the Company’s

proposed rider would account for migrating customers’ share of the Company’s

embedded fixed production costs:

Q. And do you agree that if a LIPS customer decides to switch to

CGS service that ETI will not collect the fixed production cost

included in the LIPS rate from that customer?

A. I think the fact that the customer has switched [to CGS] and the

Company is not collecting the same revenue certainly creates

the potential that some costs would be uncollected...—

unrecovered… unless there are some additional benefits to

offset those unrecovered costs. That’s correct.40

Staff witness Stephen Mendoza confirmed on cross-examination that lost revenues

could be a measure of unrecovered costs.41 In any event, testimony on this point is

immaterial. What constitutes “costs” under the CGS statute is a question of law,

and no number of witnesses testifying that costs are not really costs can make it

true.

The Commission repeatedly suggests that ETI’s proposed rider would enable

it to recover amounts not contemplated by the test-year calculation, so ETI must

39

See Supp. AR Part IV, Vol. E (Docket No. 37744 7/20/2010 Transcript of Hearing on the

Merits at 350-51).

40

See id. at 261-62; see also Supp. AR Part IV, Vol. D (Docket No. 37744 7/16/2010 Transcript

of Hearing on Merits at 154-57 & 161-62).

41

Supp. AR Part IV, Vol. E (Docket No. 37744 7/20/2010 Transcript of Hearing on the Merits at

356).

16

not be seeking “costs.”42 As noted above, the rider contained a true-up provision

that would ensure ETI recovered only amounts it actually paid, not hypothetical

costs. Moreover, this argument concerns the extent to which ETI may have

unrecovered costs, not whether the CGS statute entitles ETI to recover them. That

ETI might get limited relief in a narrow, hypothetical situation (i.e., if a new LIPS

customer joins and participates in the CGS program) does not address or excuse

the Commission’s broad error in denying ETI a mechanism for full relief.

D. The principle of cost-causation does not justify the

Commission’s disregard of language in the CGS statute.

OPUC, representing residential and small business customers, argues the

Commission’s order must be sustained because charging unrecovered base-rate

costs to customers who “indisputably” did not cause them (i.e., customers

ineligible for the CGS program) would be unfair and contravene traditional

ratemaking concepts embodied in PURA.43 The Commission echoes this

argument.44 This is no justification for upholding the Commission’s decision.

1. This issue is a red herring.

ETI’s challenge to the Commission’s order does not hinge on charging

“unrecovered costs” to one group of customers versus another. ETI expressed

opinions about which customers may be required to pay “unrecovered costs,” but

42

PUCT’s Brief at 24 & 33.

43

OPUC’s Brief at 6.

44

PUCT’s Brief at 16, 33, 35, & 41.

17

largely left the issue to the parties who represent the customer groups to resolve.

ETI did not join in or oppose the other parties’ stipulation on the subject.45

Ultimately, the Commission did not decide which customers should pay

unrecovered embedded production costs because the Commission determined they

are not recoverable from anyone.46 The effect of that decision is to impose the

costs on ETI. That result is what ETI disagrees with, because it violates the CGS

statute. Appellees tilt at windmills by arguing about which customers should or

must pay unrecovered costs, or whether ETI is somehow barred from taking a

position on the issue.47 The issue here is whether ETI, rather than customers, may

be forced to bear the costs.

45

AR Part I, Binder 1, Item 67 (Apr. 13, 2012, Stipulation).

46

Contrary to the Commission’s Statement of Facts, nowhere in the Commission’s order is there

any hint that the agency rejected the proposed CGSUSC rider based upon principles of equity or

any PURA provision other than the CGS statute itself. Indeed, the Attorney General does not

cite the Commission’s order as support for that statement. Instead, the Attorney General cites

the ALJ’s proposal for decision. See PUCT Brief at 6. It is true that the ALJ expressed a belief

that it would be inequitable to shift unrecovered LIPS-class, base-rate costs to other customer

classes through the CGSUSC rider. Supp. AR Part I, Binder 2, Item 36 (Docket No. 37744

Proposal for Decision at 24). That belief, coupled with the ALJ’s recognition that ETI will have

unrecovered base rate costs that the CGS statute effectively precludes assigning to LIPS

customers or ETI itself, is the reason the ALJ recommended that the CGS program not be

adopted at all. Id. The Commission, however, did not adopt that recommendation. The

Commission expressly reversed it, concluding that the costs are not recoverable and ordering ETI

to implement the CGS program anyway. AR Part I, Binder 2, Item 119 (Final Order at 8).

47

OPUC begins its brief by arguing that ETI, by failing to oppose a stipulation among other

parties to the case, “waived” its right to argue that customers ineligible for the CGS program

may be required to pay “unrecovered costs.” OPUC’s Brief at 2-3. The Commission expressly

found that ETI did not waive its right to appeal unsettled issues, and reserved its rights under

applicable state and federal law. AR Part I, Binder 2, Item 119 (Final Order at FOF 55).

18

2. Though it may not be clear which customers

should pay “unrecovered costs,” it is clear that

ETI may not be required to absorb them.

It is true that the CGS statute does not expressly state which customer

groups should pay ETI’s unrecovered costs. But there can be no reasonable

disagreement that ETI gets to recover its costs from someone. And appellees

ignore that, to the extent there is inequity built into the CGS program, the

legislature – not ETI – has required this result. Just as the legislature had the

power to enact the general prohibition on preferential rates in PURA,48 it had the

power to enact an exception to that prohibition. There is no way to implement a

program in conformity with the terms of the CGS statute without, in some manner,

creating a preferential rate or assigning costs to customers that may not cause

them.

3. The Commission’s brief casts doubt upon

whether it would be patently unfair to allocate

“unrecovered costs” to ineligible customers.

OPUC argues it is unfair to allocate to customers who are ineligible for the

CGS program costs that would have been paid by LIPS customers under base

rates.49 The Attorney General, too, argues that it would be “absurd,” indeed

“anticompetitive,” to saddle ineligible customers with these costs.50 Implicit in

48

See Tex. Util. Code Ann. § 36.003.

49

OPUC’s Brief at 6.

50

E.g., PUCT’s Brief at 16, 35, & 39.

19

these arguments is the assumption that LIPS customers, not others, caused these

costs.

It is strange, then, that the Attorney General elsewhere questions whether

base rate costs allocated to LIPS customers in traditional rate cases were actually

caused by LIPS customers. The Attorney General notes that test-year expenses are

allocated to customer classes based on several factors, only one of which is the

principle of “cost causation.”51

First, regardless of whether the costs were “caused” by LIPS customers, the

costs were nevertheless allocated to LIPS customers in ETI’s rate cases. They are

the costs LIPS customers avoid by migrating to the program52 and, therefore, the

costs ETI is at risk of not recovering. ETI is entitled to recover them under the

CGS statute.

Second, the Attorney General’s insistence that LIPS customers do not

necessarily cause these costs defeats its own argument that it is unfair to charge

them to other customers. If the costs at issue were not necessarily caused by the

LIPS class, then how can the Attorney General logically argue it violates the

principle of cost causation to assign them to other customer classes? That makes

no sense. Someone caused the costs, because the Commission has determined in

rate cases that ETI reasonably and necessarily incurred them to serve customers.

51

Id. at 36-38.

52

AR Part I, Binder 2, Item 119 (Final Order at FOF 41(C)(2)-(4)).

20

4. If the statute inescapably dictates an

unpalatably unfair result, the solution was to

decline to adopt the program.

If the CGS program cannot fairly be implemented with full adherence to

statutory parameters, then the Commission could and should have declined to

adopt a CGS program. PURA expressly authorizes the Commission to take that

route. Tex. Util. Code Ann. § 39.452(b). The Commission may not instead ignore

the language of the statute to create a program that it perceives to be better (but

detrimental to ETI). The legislature clearly said ETI gets to recover its costs, and

the Commission cannot ignore that mandate simply because it believes the

mandate was “absurd” or difficult to comply with.

E. Other traditional ratemaking principles do not trump the

plain language of the CGS statute.

1. The CGS statute is an exception to the

traditional regulatory scheme.

OPUC ignores that the legislature, in enacting the CGS statute, created an

exception to the traditional regulatory scheme. A specific statutory provision

prevails as an exception over a conflicting general provision. E.g., Jackson v. State

Office of Administrative Hearings, 351 S.W.3d 290, 297 (Tex. 2011). Moreover,

“if statutes are irreconcilable, the statute latest in date of enactment prevails.”

Jackson, 351 S.W.3d at 297. The CGS statute is irreconcilable with traditional

21

ratemaking principles in several respects. Because it is more specific and more

recently enacted, it controls in these respects.

OPUC argues that a statutory exception to a general rule must be “strictly”

or “narrowly” construed.53 Courts have construed certain statutory “exceptions”

narrowly, but only when the language of those statutes – or some other legal

provision – has required it. Again, the principle rule of statutory construction is to

give effect to the legislature’s expression of its intent through the words it enacted.

No rule of statutory construction is paramount to that one.

2. PURA 11.002 does not shed any light on the

proper interpretation of the CGS statute.

OPUC nevertheless argues that PURA section 11.002, assuring rates that are

reasonable to both customers and utilities, supports the Commission’s decision.54

See Tex. Util. Code Ann. § 11.002(a). OPUC ignores that the outcome here is not

fair to the utility, which is mandated to propose this program and statutorily

entitled to recover costs unrecovered as a result of it. PURA section 11.002

weighs against the Commission’s decision as much as it supports it.

53

OPUC’s Brief at 7.

54

Id.

22

3. The concept of “regulatory lag” does not

absolve the Commission of its duty to follow the

plain language of the statute.

OPUC says the “harm” from the Commission’s decision can be ameliorated

in ETI’s next rate case.55 This statement ignores not only the effects of regulatory

lag, but also the language in the CGS statute requiring that CGS rates be set “in the

proceeding in which the [CGS] tariff is adopted.” See Tex. Util. Code Ann.

§ 39.452(b).

OPUC begrudgingly acknowledges this problem, and says ETI could have

avoided it by requesting an adjustment to test-year billing determinants in its last

rate case.56 But as the Commission found and no one disputes, it is not possible to

know the full effects of the CGS program until customers sign up and start taking

service.57

OPUC ultimately argues that it is perfectly reasonable to saddle ETI with

losses that occur during the regulatory lag period, because that is a known risk

borne by utilities subject to traditional ratemaking.58 But again, the legislature in

the CGS statute crafted an exception to traditional ratemaking, and entitled ETI to

its otherwise unrecovered costs. This entitlement to full cost recovery is

necessarily an exception to the risk of regulatory lag.

55

Id. at 13.

56

Id. at 14.

57

AR Part I, Binder 2, Item 119 (Final Order at FOF 57(E)).

58

OPUC’s Brief at 15 & 18.

23

This statutory entitlement is also why the High Plains case is especially

relevant. That case confirms that a ratemaking agency must give a utility an

opportunity to recover 100% of its reasonably incurred costs. Railroad Comm’n of

Tex. v. High Plains Natural Gas Co., 628 S.W.2d 753 (Tex. 1981). In the same

way the Railroad Commission did in High Plains, the Commission here has

eliminated the opportunity to recover a portion of the reasonable and necessary

costs the utility will incur. OPUC and the Commission point out that PURA

contains a prohibition on the use of some automatic adjustment clauses, while the

Gas Utility Regulatory Act (“GURA”) administered by the Railroad Commission

does not.59 See Tex. Util. Code Ann. § 36.201. That fact is irrelevant because it

was not a basis of the Court’s decision in High Plains. The decision was based

upon a GURA section that has a materially identical counterpart in PURA section

36.051. See High Plains, 628 S.W.2d at 753. Both provisions require the agencies

to afford utilities a reasonable opportunity to recover their costs. The Commission

did not do that here.

4. The reference to discount rates in the CGS

statute supports ETI’s argument.

OPUC and the Commission contend the legislature’s reference to PURA

section 36.007 in the CGS statute does not support ETI’s argument. First, ETI’s

argument is based upon the legislature’s mandate that ETI recover its unrecovered

59

Id. at 26; PUCT’s Brief at 43.

24

costs. The reference to section 36.007 simply supports that mandate, by allowing

costs avoided by CGS customers to be allocated to other customers. See Tex. Util.

Code Ann. § 36.007(d).

Second, appellees stretch to come up with another meaning for the reference.

They contend it harks to other aspects of PURA section 36.007, which contemplate

that discounted rates may not be less than a utility’s marginal costs. They contend

the legislature, by referring to section 36.007, simply meant that CGS rates can be

less than a utility’s marginal costs, to enable CGS customers to negotiate their own

deals. Either way, OPUC and the Commission argue, ETI may be forced to absorb

the costs it incurs to serve customers that migrate to the CGS program.

These musings are not supported by the language of the CGS statute. It does

not refer to one particular aspect of PURA section 36.007. It renders the whole of

section 36.007 inapplicable, and in the same sentence says ETI gets to recover any

unrecovered costs. The whole sentence reads:

The tariffs subject to this subsection may not be considered to offer a

discounted rate or rates under Section 36.007, and the utility’s rates

shall be set, in the proceeding in which the tariff is adopted, to recover

any costs unrecovered as a result of the implementation of the tariff.

Id. § 39.452(b). The legislature obviously meant to remove the CGS program from

all the limitations of the discount rate statute, including the prohibition on

recovering discounts from other customers.

25

III. The Commission’s decision not to allow ETI to recover all of its costs of

implementing the CGS tariff is reversible because it, too, contradicts the

plain language of the statute.

The Commission and TIEC contend that the CGS statute does not authorize

ETI to recover the costs of developing the CGS program because they are just a

“cost of doing business.”60 But development of a CGS program is not a cost of

doing business under traditional rate regulation. The legislature mandated ETI to

design this program, and authorized ETI to recover all the costs that result from

implementing it.

Appellees also argue that adopting a rider that allows ETI to recover costs

incurred before the program goes live would enable ETI to over-recover the costs,

because some early costs were included in base rates.61 But ETI recognized this

issue and proposed to credit any of these costs that were included in base rates, so

the costs will not be recovered twice.62

The Commission says it refused to do that because it would constitute

improper retroactive ratemaking.63 The rule against retroactive ratemaking

prohibits a utility commission from making a retrospective inquiry to determine

whether a prior rate was reasonable and imposing a surcharge when rates were too

low or a refund when rates were too high. State v. Public Util. Comm’n, 883

60

PUCT’s Brief at 46; TIEC’s Brief at 39.

61

PUCT’s Brief at 46; TIEC’s Brief at 40.

62

AR Part II, Binder 3, ETI Exh. 101 (Supp. Direct Testimony of D. Roach at 15); AR Part II,

Binder 3, ETI Exh. 103 (Supp. Rebuttal of D. Roach at 3).

63

PUCT’s Brief at 47.

26

S.W.2d 190, 199 (Tex. 1994). The rule requires only that the Commission and

courts abide by an administrative determination that a particular rate is just and

reasonable. Office of Public Util. Counsel v. Texas-New Mexico Power Co., 344

S.W.3d 446, 453 (Tex. App. – Austin 2011, pet. denied). ETI’s request, which it

made when it first proposed the CGS program in Docket No. 37744, and before the

costs at issue were even incurred, does not implicate a “prior rate.” The

Commission itself has recognized – and this Court has affirmed – that authorizing

recovery of costs in an analogous circumstance does not constitute retroactive

ratemaking. Office of Public Util. Counsel, 344 S.W.3d at 454. Indeed, the tariff

adopted in this case contemplates a future recovery of past expenses, as it

authorizes ETI to accrue implementation costs but wait 6 months to file the CGSC

rider.64 This is no basis upon which to sustain the Commission’s misapplication of

the CGS statute.

IV. The Commission’s decision not to allow ETI to recover interest on its

unrecovered costs is reversible because the CGS statute entitles ETI to

all of its unrecovered costs.

Because the CGS statute entitles ETI to recover all of its costs that are

unrecovered as a result of implementation of the CGS program, ETI is entitled to

recover interest on the balance of those costs until they are recovered. The

Commission offers several purported justifications for denying ETI that interest.

64

AR Part I, Binder 2, Item 119 (Final Order at FOFs 54(A), 57(A) & (E)).

27

First, the Commission says the unrecovered balance is “relatively small” and

will be recouped “quickly” so should be treated consistently with rate case

expenses, upon which the Commission has not historically allowed interest to

accrue.65 The Commission’s historical treatment of rate case expenses is not

persuasive in this context. The Commission may award rate case expenses. See

Tex. Util. Code Ann. § 36.061(b). But the CGS statute does not give the

Commission any discretion not to allow ETI’s unrecovered costs. And the statute

does not say ETI may recover only its “sizable” or “significant” costs – it says

“any” of its costs. Id. § 39.452(b).

Second, the Commission argues that ETI is not entitled to earn interest on

unrecovered expenses under the traditional ratemaking construct.66 As explained

above, the CGS statute is a marked departure from that construct. In traditional

ratemaking, a utility bears some risk that its rates will not cover its actual expenses.

The CGS statute, in contrast, says ETI gets to recover costs that are unrecovered as

a result of the implementation of the CGS program.

When PURA entitles a utility to recover its costs dollar for dollar, PURA

impliedly requires the Commission to award interest on those costs until they are

recovered. CenterPoint Energy, Inc. v. Public Util. Comm’n of Tex., 143 S.W.3d

81, 84 (Tex. 2004). The Commission misstates the basis of the Texas Supreme

65

PUCT’s Brief at 48.

66

Id. at 49.

28

Court’s holding in CenterPoint Energy, Inc. The Court reversed the Commission’s

refusal to allow utilities to accrue interest on stranded cost balances for the whole

time they were on the books. The Court expressly said that was error because

requiring a utility to wait two or three years before interest began would contradict

the utility’s statutory entitlement to recover of all its stranded costs. Id. at 84. The

Court so held even though PURA did not expressly authorize utilities to earn

interest on their unrecovered stranded costs.

The same is true here. The CGS statute does not expressly authorize ETI to

accrue interest on its unrecovered cost balance. But because the statute entitles

ETI to all of its unrecovered costs, ETI will not be made whole unless it is able to

accrue interest while the balances are unrecovered.

CONCLUSION AND PRAYER

For all these reasons, Entergy Texas, Inc. respectfully requests that the Court

reverse the district court’s judgment insofar as it upholds the Commission’s

decision in the respects discussed above. ETI requests that this Court remand the

case to the Commission for further proceedings consistent with the Court’s

decision. Finally, ETI requests its costs of court and any other relief to which it

may show itself justly entitled.

29

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 7,460 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

30

CERTIFICATE OF SERVICE

As required by Texas Rule of Appellate Procedure 9.5, I certify that on the

5th day of March, 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

Megan M. Neal

Environmental Protection Division

Office of the Attorney General

P.O. Box 12548

Austin, TX 78711-2548

Counsel for the Public Utility Commission of Texas

Rex VanMiddlesworth

Benjamin Hallmark

Thompson & Knight LLP

98 San Jacinto Blvd., Ste. 1900

Austin, TX 78701

Counsel for Texas Industrial Energy Consumers

Sara J. Ferris

Office of Public Utility Counsel

1701 N. Congress Ave., Ste. 9-180

P.O. Box 12397

Austin, TX 78711-2397

Counsel for Office of Public Utility Counsel

/s/ Marnie A. McCormick

Marnie A. McCormick

31

PUC DOCKET NO. 37744 .. ;.

SOAH DOCKET NO. 473-10-1962-

b • C"^

APPLICATION OF ENTERGY TEXAS, § PUBLIC UTILITY COMMISSION

INC. FOR AUTHORITY TO CHANGE §

RATES AND RECONCILE FUEL § OF TEXAS

COSTS §

ORDER

This Order addresses the application of Entergy Texas, Inc. (ETI) for authority to change

rates and reconcile fuel costs. ETI, Commission Staff, the Office of Public Utility Counsel

(OPUC), the Steering Committee of Cities Served by ETI (Cities),' Texas Industrial Energy

Consumers (TIEC), The Kroger Company (Kroger), and Wal-Mart Stores Texas, LLC and

Sam's East, Inc. (collectively Wal-Mart), through their duly authorized representatives entered

into and filed a stipulation and settlement agreement that resolves all of the issues in this

proceeding except the issues related to ETI's proposal for competitive generation service.

Cottonwood Energy, L.P. and the State of Texas agencies and institutions of higher education

( State Agencies) did not join but do not oppose the stipulation.

The Commission severed the competitive generation service issues into Docket

No. 389512 in Order No. 14.

The Commission adopts the following findings of fact and conclusions of law:

1 Steering Committee of Cities is comprised of the Cities of Anahuac, Beaumont, Bridge City, Cleveland,

Conroe, Groves, Houston, Huntsville, Montgomery, Navasota, Nederland, Oak Ridge North, Orange, Pine Forest,

Pinehurst, Port Arthur, Port Neches, Rose City, Shenandoah, Silsbee, Sour Lake, Splendora, Vidor, and West

Orange.

2

Application of Entergy Texas, Inc. for Approval of Competitive Generation Service Tariff (Issues Severed

From Docket No. 37744), Docket No. 38951.

iq

PUC Docket No. 37744 Order Page 2 of 15

SOAH Docket No. XXX-XX-XXXX

1. Findings of Fact

Procedural Histo

1. On December 30, 2009, ETI filed an application requesting approval of (1) base rate

tariffs and riders designed to collect an overall revenue requirement of $1,758.4 million,

which includes a total non-fuel retail revenue requirement of $838.3 million (base rate

revenues of $486 million plus revenue from riders of $352.3 million); (2) a set of

proposed tariff schedules presented in the Electric Utility Rate Filing Package for

Generating Utilities (RFP) accompanying ETI's application; (3) a request for final

reconciliation of ETI's fuel and purchased power costs for the reconciliation period from

April 1, 2007 to June 30, 2009; and (4) certain waivers to the instructions in RFP

Schedule V accompanying ETI's application.

2. The 12-month test year employed in ETI's filing ended on June 30, 2009.

3. ETI provided notice by publication for four consecutive weeks before the effective date

of the proposed rate change in newspapers having general circulation in each county of

ETI's Texas service territory. ETI also mailed notice of its proposed rate change to all of

its customers. Additionally, ETI timely served notice of its statement of intent to change

rates on all municipalities retaining original jurisdiction over its rates and services. ETI

also published one-time supplemental notice by publication in newspapers and by bill

insert.

4. The following parties were granted intervenor status in this docket: OPUC, Cities,

Cottonwood, Kroger, State Agencies, TIEC, and Wal-Mart. Commission Staff was also a

participant in this docket.

5. On January 4, 2010, the Commission referred this case to the State Office of

Administrative Hearings (SOAH) for processing.

6. On February 19, 2010, the ALJs issued Order No. 3, which approved an agreement

between ETI, Staff, Cities, State Agencies, OPUC, TIEC, Kroger, and Wal-Mart, to

(1) establish an interim rate increase of $17.5 million annually above ETI's then-existing

base rates commencing with service rendered on and after May 1, 2010 subject to

true-up and refund for service rendered prior to September 13, 2010 to the extent final

PUC Docket No. 37744 Order Page 3 of 15

SOAH Docket No. XXX-XX-XXXX

overall rates established by the Commission amounted to less than a $17.5 million rate

increase; (2) extend the jurisdictional deadline by which the Commission must issue a

final order on the Company's rate request from July 5, 2010 to November 1, 2010;

(3) establish a September 13, 2010 effective date for rates such that, notwithstanding the

extension of the jurisdictional deadline, the final overall rates established by the

Commission would relate back to service rendered on and after September 13, 2010;

(4) require ETI to publish supplemental notice, once in newspapers and by a bill insert,

setting forth the effect of its proposed rate change in terms of the percentage increase in

non-fuel revenues; and (5) establish a procedural schedule and discovery deadlines for

this proceeding. Order No. 3 also granted Mr. Kurt Boehm's motion for admission

pro hac vice as counsel for Kroger and ETI's February 3 and February 11, 2010 petitions

for review of cities' ordinances and motions to consolidate with respect to the rate

decisions adopted by the Cities of Ames, Anderson, Bedias, Bevil Oaks, Bremond,

Caldwell, Calvert, Chester, China, Colmesneil, Corrigan, Cut and Shoot, Daisetta,

Dayton, Devers, Franklin, Groveton, Hardin, Hearne, Iola, Kosse, Kountze, Liberty,

Lumberton, Madisonville, Midway, New Waverly, Normangee, Nome, Patton Village,

Plum Grove, Riverside, Rose Hill Acres, Somerville, Taylor Landing, Todd Mission,

Trinity, and Woodville.

7. On June 14, 2010, the ALJs issued Order No. 6 granting Staff's June 1, 2010 motion and

severing rate case expense issues to Docket No. 38346.3 Through Order No. 6, the ALJs

also granted ETI's March 12, April 29, and May 17 petitions for review and motions to

consolidate with respect to the rate decisions adopted by the Cities of Anahuac,

Beaumont, Bridge City, Cleveland, Conroe, Groves, Houston, Huntsville, Montgomery,

Navasota, Nederland, Oak Ridge North, Orange, Panorama Village, Pine Forest,

Pinehurst, Port Arthur, Port Neches, Roman Forest, Rose City, Shenandoah, Shepard,

Silsbee, Sour Lake, Splendora, Vidor, West Orange, Willis, Woodbranch Village, and

Woodloch.

3 Application of Entergy Texas, Inc. for Rate Case Expenses Severed from PUC Docket No. 37744,

Docket

No. 38346.

PUC Docket No. 37744 Order Page 4 of 15

SOAH Docket No. XXX-XX-XXXX

8. The hearing on the merits commenced on July 13, 2010 and was immediately recessed in

order to facilitate settlement negotiations. The hearing was again convened on

July 15, 2010, at which time the signatories announced their intent to continue settlement

discussions to resolve all issues related to the Company's application with the exception

of those related to ETI's proposal for competitive generation service (CGS) and

associated riders.

9. On August 6, 2010, the signatories submitted the stipulation resolving all outstanding

issues regarding the Company's application with the exception of those related to ETI's

CGS proposal. Under the stipulation, ETI will be allowed to implement base rate tariffs

and riders designed to collect an overall revenue requirement of $1,614.9 million,4 which

includes a total non-fuel retail revenue requirement of $694.9 million (base rate revenues

of $599 million plus revenue from riders of $95.9 million). The signatories also

submitted, on August 6, 2010, an agreed motion to revise interim rates and to consolidate

the severed rate-case expense docket. The interim rates requested in the agreed motion

mirrored the final rates proposed for Commission approval in the stipulation. The agreed

motion further requested that the ALJs consolidate with the instant proceeding Docket

No. 38346, related to severed Docket No. 37744 rate case expense issues, and admit the

parties' pre-filed exhibits into evidence.

10. On July 16 and July 20, 2010, the ALJs held the hearing on the merits with respect to

ETI's CGS proposal.

11. On August 9, 2010, the ALJs issued Order No. 12, granting approval of revised interim

rates for usage on and after August 15, 2010.

12. On October 5, 2010, the ALJs issued a proposal for decision regarding issues related to

ETI's CGS proposal.

13. On October 5, 2010, the ALJs issued Order No. 13, ordering the consolidation of Docket

No. 38346, related to severed rate-case expense issues, into the instant proceeding,

4 This figure includes fuel at test year prices. If current fuel prices are substituted for test year fuel prices,

the overall revenue requirement figure would be $1,504.0 million.

PUC Docket No. 37744 Order Page 5 of 15

SOAH Docket No. XXX-XX-XXXX

admitting evidence, and returning this docket to the Commission consistent with the

agreed motion filed on August 6, 2010.

14. The Commission considered this Docket at the November 10, 2010 and

December 1, 2010 open meetings.

15. On November 30, 2010 ETI filed an unopposed motion to sever the competitive CGS

issues from the settled issues in this docket. The Commission granted the motion at the

December 1, 2010 open meeting and the Commission's decision was memorialized in

Order No. 14 issued on December 3, 2010. The CGS issues were severed into Docket

No. 38951 in Order No. 14.

Description of the stipulation and Settlement Agreement

16. The signatories to the settlement stipulated that ETI should be allowed to implement an

initial overall increase in base-rate revenues of $59 million for usage on and after

August 15, 2010. The signatories further stipulated that they would request approval of

interim rates by the ALJs presiding or by the Commission, as necessary, to ensure timely

implementation of this initial rate increase. The signatories further stipulated that ETI

should be allowed to implement an additional overall increase in base-rate revenues of

$9 million on an annualized basis effective for bills rendered on and after May 2, 2011,

the first billing cycle for the revenue month of May.

17. The signatories agreed that ETI's authorized return on equity shall be 10.125% and its

weighted average cost of capital shall be 8.5209%.

18. The signatories stipulated that the amount of rate increase authorized under finding of

fact 16 includes rate-case expenses and contemplates their full amortization in 2010, and

that this amount constitutes the full and final recovery of all rate-case expenses relating to

Docket No. 37744.

19. The signatories stipulated to the amount of transmission and distribution invested capital

by function as of June 30, 2009 as set out in attachment 1 to the stipulation.

PUC Docket No. 37744 Order Page 6 of 15

SOAH Docket No. XXX-XX-XXXX

20. The signatories stipulated that the Company's proposed purchased-power recovery rider

will not be approved in this docket, and purchased capacity costs will be included in

base rates.

21. The signatories stipulated that the Company's proposed transmission cost recovery factor

(TCRF) will not be approved in this docket. The signatories stipulated to the baseline

values as shown in attachment 2 to the stipulation to be used in the Company's request, if

any, for a TCRF in a separate proceeding.

22. The signatories agreed that ETI's proposed cost-of-service adjustment rider and formula

rate plan will not be approved in this docket.

23. The signatories stipulated that the Company's proposed renewable-energy-credit rider

will not be approved in this docket, and the Company's renewable-energy-credit costs

shall be recovered in base rates. The signatories further stipulated that a transmission

customer that opts out pursuant to P.U.C. SUBST. R. 25.173(j) shall receive a credit that

offsets the amount of renewable-energy-credit costs that are recovered in base rates from

the transmission customer.

24. The signatories agreed that ETI's proposed remote-communications-link rider should be

approved as filed by the Company.

25. The signatories agreed that ETI's proposed market-valued-energy-reduction service rider

will not be approved in this docket.

26. The signatories reached the following specific agreements regarding rate design as a part

of the overall resolution of this docket:

a. Rate Schedule IS. Rate Schedule IS will be opened to new business. In the

Company's next base-rate case, the amount of interruptible credits recoverable

from Texas retail customers shall be limited to an increase of $1 million more

than the amount requested in this docket (or a total of $6.8 million); provided,

however, that in the next rate case, the Company may request an exception to this

limitation upon a showing that the test-year credit amount in excess of the

$6.8 million cap is both cost effective and necessary to meet the Company's

generation reserve margin requirement. The signatories further agreed that the

PUC Docket No. 37744 Order Page 7 of 15

SOAH Docket No. XXX-XX-XXXX

Company will not offer additional interruptible service if the availability of total

interruptible service supplied by the Company under all interruptible service

riders exceeds 5% of the projected aggregate Company peak demand unless the

additional level of interruptible service offered in excess of the 5% cap is both

cost effective and necessary to meet the Company's generation reserve margin

requirement. To the extent that the credit amount or participation level exceeds

the limitations described in this paragraph and the Company includes test-year

credits over the $6.8 million credit-amount cap or additional participation in

excess of the 5% participation-level cap in its next rate case, the Company shall

have the burden to prove whether those test-year credits or participation levels

meet the standards established in this paragraph for inclusion in the test year. The

standards in this paragraph are in addition to any requirements in PURA for

inclusion of costs in rates. The signatories further agreed to the Schedule IS

revisions shown on attachment 3 to the stipulation.

b. Rate Schedule IHE. The signatories agreed that no change shall be made to rate

schedule IHE in this docket.

c. Lighting Class Rates. The signatories stipulated that the language under the

paragraph relating to rate group C in rate schedule SHL will be revised to reflect

that, where the Company agrees to install facilities other than its standard street

light fixture and lamp as provided under Rate Group A, a lump sum payment will

be required, based upon the installed cost of all facilities excluding the cost of the

standard street light fixture and lamp, and the customer will be billed under rate

group A.

e. Electric Extension Policy. The signatories agreed to the line-extension terms and

conditions as reflected in attachment 4 to the stipulation.

f. Life-of-Contract Demand Ratchet. The signatories agreed that the

life-of-contract demand ratchet provision in rate schedules Large Industrial Power

Service, Large Industrial Power Service-Time of Day, General Service, General

Service-Time of Day, Large General Service, and Large General Service-Time of

PUC Docket No. 37744 Order Page 8 of 15

SOAH Docket No. XXX-XX-XXXX

Day shall be excluded from rate schedules in ETI's next rate case. The

signatories further stipulated that the foregoing rate schedules will be revised so

that the life-of-contract demand ratchet provision shall not be applicable to new

customers and shall not exceed the level in effect on August 15, 2010 for existing

customers.

g. Residential Customer Charge. The signatories agreed that the residential

customer charge shall be increased to $5.00.

h. Non-Sufficient Funds Char^e. The signatories agreed that the non-sufficient

funds charge shall be increased to $15.00.

27. The signatories agreed to the class cost allocation set forth in attachment 5 to

the stipulation.

28. The signatories stipulated that the appropriate allocation between ETI's wholesale and

retail jurisdictions of baseline values and costs to be included in a TCRF is to be

addressed in the proceeding, if any, in which ETI seeks approval of a TCRF.

29. The signatories stipulated that no party waives its right to address in any subsequent

proceeding the appropriate treatment for Texas retail ratemaking purposes of power sales

between ETI and Entergy Gulf States Louisiana, L.L.C.

30. The signatories reached the following specific agreements regarding fuel-related issues as

part of the overall resolution of this docket:

a. Agreed Fuel Disallowance. The Company stipulated to a fuel disallowance of

$3.25 million not associated with any particular issue raised by the signatories.

The disallowance will be allocated pro rata with interest over each month of the

reconciliation period and reflected in the refund in Docket No. 38403.5 The

signatories stipulated that the Company's fuel costs shall be finally reconciled for

the reconciliation period of April 1, 2007 through June 30, 2009.

b. Rider IPCR. The signatories agreed that ETI's eligible Rider IPCR costs for the

5 Application of Entergy Texas, Inc. to Implement an Interim Fuel Refund,. Docket No. 38403, Order

(Sept. 16, 2010).

PUC Docket No. 37744 Order Page 9 of 15

SOAH Docket No. XXX-XX-XXXX

period April 1, 2007 through the date the rider terminated shall be finally

reconciled with a disallowance of $300,000. The signatories further agreed that

the under-recovered balance of Rider IPCR costs shall be booked as fuel expense

in the month in which the Commission issues an order adopting the stipulation;

provided, however, that the under-recovered balance shall be allocated to

customer classes using A&E4CP.

c. Rough Production Cost Equalization (RPCE) Payments. The signatories agreed

that ETI will credit an additional $18.6 million to Texas fuel-factor customers,

which the signatories stipulated represents the remaining portion of RPCE

payments ETI received in 2007 that were at issue in Docket No. 35269.6 The

RPCE credit shall be allocated to rate classes based on loss-adjusted kilowatt

hours at plant for calendar year 2006. For customers in the Large Industrial

Power Service rate class, the credit will be refunded based on the customer's

actual kWh usage during the billing months of January 2006 through

December 2006. Upon issuance of a final order approving the stipulation, the

RPCEs shall be credited to customers as a separate one-month bill credit in the

same form as the RPCEA Rider last approved in Docket No. 38098.7 ETI agreed

that it will terminate all appeals related to Docket No. 35269.

31. The signatories agreed that ETI will continue its accrual of storm-cost reserves at the

level of $3.65 million annually and that this amount shall be subsumed in the base-rate

revenue increase described in finding of fact 16 above.

32. The signatories agreed that ETI shall maintain River Bend depreciation rates at current

levels, i.e., based on a 60-year life. River Bend decommissioning costs will be set at

$2,019,000 annually, which is based upon a labor-factor escalation rate of 1.67%, an

energy-factor escalation rate of 0.25%, and a waste-burial-factor-escalation rate of

6 Compliance Filing of Entergy Texas, Inc. Regarding Jurisdictional Allocation of 2007 System Agreement

Payments, Docket No. 35269, Order (Jan. 7, 2009).

7 Application of Entergy Texas, Inc. for Authority to Implement New RPCEA Rate, Docket No. 38098,

Order (July 1, 2010).

PUC Docket No. 37744 Order Page 10 of 15

SOAH Docket No. XXX-XX-XXXX

1.71%, resulting in an overall escalation rate of 3.62%, and net investment yields as

follows:

Nuclear-Decommissioning-Trust Projected Returns

Tax- ualified Non-Tax-Qualified

Investments Investment

2010 5.475% 5.057%

2011 5.837% 5.236%

2012 6.306% 5.567%

2013 6.304% 5.607%

2014 6.481% 5.896%

2015 6.493% 5.909%

2016 6.412% 5.826%

2017 6.412% 5.830%

2018 6.364% 5.790%

2019 6.316% 5.748%

2020 6.268% 5.712%

2021 6.220% 5.670%

2022 2.503% 5.458%

2023 5.817% 5.055%

2024 5.382% 4.628%

2025 5.036% 4.516%

2026-2034 4.920% 4.409%

33. The signatories stipulated that the Company's depreciation rates for non-River Bend

production plant, transmission, distribution, and general plant will remain at current

levels and the Company will maintain its accounting records on a prospective basis for

purposes of depreciation accrual, depreciation reserve, retirements, additions, salvage,

and cost of removal by FERC account.

Consistency of the AQreement with PURA and the Commission Requirements

34. Considered in light of (1) the pre-filed testimony by the parties entered into evidence and

(2) the additional evidence and testimony admitted during the course of the hearing on

the merits on the Company's application, the stipulation is the result of compromise from

each signatory, and these efforts, as well as the overall result of the stipulation viewed in

light of the record evidence as a whole, support the reasonableness and benefits of the

terms of the stipulation.

PUC Docket No. 37744 Order Page 11 of 15

SOAH Docket No. XXX-XX-XXXX

35. The evidence addressed in finding of fact 34 demonstrates that the rates, terms, and

conditions resulting from the stipulation are just and reasonable and consistent with the

public interest.

36. The total level of the Texas retail revenue requirement contemplated by the stipulation

will allow ETI the opportunity to earn a reasonable return over and above its reasonable

and necessary operating expense.

37. The stipulated revenue requirement is consistent with applicable provisions of PURA

chapter 36 and the Commission's rules.

38. To the extent that affiliate costs are included in the stipulated revenue requirement and

fuel expense, they are reasonable and necessary for each class of affiliate costs presented

in ETI's application.

39. To the extent that affiliate costs are included in the stipulated revenue requirement and

fuel expense, the price charged to ETI is not higher than the prices charged by the

supplying affiliate for the same item or class of items to its other affiliates or divisions, or

a non-affiliated person within the same market area or having the same market

conditions.

40. The retail revenue requirement in the stipulation does not include any expenses

prohibited from recovery under PURA.

41. A return on equity of 10.125% and a weighted average cost of capital of 8.5209% for ETI

should be adopted consistent with the stipulation.

42. The agreed rate-design provisions and terms and conditions of service included in the

stipulation are just and reasonable.

43. The treatment of rate-case expenses described in the stipulation is reasonable.

44. The Company's proposed remote-communications-link rider as filed by the Company

is reasonable.

45. The depreciation rates agreed to in the stipulation are just and reasonable.

PUC Docket No. 37744 Order Page 12 of 15

SOAH Docket No. XXX-XX-XXXX

46. The recovery of $2,019,000 annually for decommissioning costs of nuclear production

assets based on the factors agreed to in the stipulation is reasonable.

47. A $3.65 million annual storm cost accrual is reasonable.

48. The class allocation methodologies described in the stipulation are just and reasonable.

49. The fuel and IPCR-related provisions of the stipulation are reasonable.

H. Conclusions of Law

1. ETI is a public utility as that term is defined in PURA § 11.004(1) and an electric utility

as that term is defined in PURA § 31.002(6).

2. The Commission exercises regulatory authority over ETI and jurisdiction over the subject

matter of this application pursuant to PURA §§ 14.001, 32.001, 32.101, 33.002, 33.051,

36.001-.111, 36.203, 39.452, and 39.455.

3. SOAH has jurisdiction over matters related to the conduct of the hearing and the

preparation of a proposal for decision in this docket, pursuant to PURA § 14.053 and

TEx. Gov'T CODE ANN. § 2003.049.

4. This docket was processed in accordance with the requirements of PURA, the Texas

Administrative Procedure Act,g and Commission rules.

5. ETI provided notice of its application in compliance with PURA § 36.103, P.U.C. PROC.

R. 22.51(a), and P.U.C. SUBST. R. 25.235(b)(1)-(3).

6. This docket contains no remaining contested issues of fact or law.

7. The stipulation, taken as a whole, is a just and reasonable resolution of all issues it

addresses; results in just and reasonable rates, terms, and conditions; is supported by a

preponderance of the credible evidence in the record; is consistent with the relevant

provisions of PURA; and is consistent with the public interest.

8. ETI has properly accounted for the amount of fuel and IPCR-related revenues collected

pursuant to the fuel factor and Rider IPCR.

8 TEX. Gov'T CODE ANN. Chapter 2001 (Vernon 2007 and Supp. 2009).

PUC Docket No. 37744 Order Page 13 of 15

SOAH Docket No. XXX-XX-XXXX

9. The revenue requirement, cost allocation, revenue distribution, and rate design

implementing the stipulation result in rates that are just and reasonable, comply with the

ratemaking provisions in PURA, and are not unreasonably discriminatory, preferential, or

prejudicial.

10. Based on the evidence in this docket, the overall total invested capital through the end of

the test year meets the requirement in PURA § 36.053(a) that electric utility rates be

based on the original cost, less depreciation, of property used by and useful to the utility

in providing service.

11. ETI has met its burden of proof in demonstrating that it is entitled to the level of retail

base rate and rider revenue set out in the stipulation.

12. ETI has met its burden of proof in demonstrating that the rates resulting from the

stipulation are just and reasonable, and consistent with PURA.

III. Ordering Paragraphs

1. ETI's application seeking authority to change its rates; reconcile its fuel and purchased

power costs for the Reconciliation Period from April 1, 2007 to June 30, 2009; and for

other related relief is approved consistent with the above findings of fact and conclusions

of law.

2. Rates, terms, and conditions consistent with the stipulation are approved.

3. The tariffs and riders consistent with the stipulation are approved for the initial and

second step rate increases.

4. ETI's request for waivers of RFP instructions (RFP Schedule V) is granted.

5. ETI shall adjust decommissioning expense related to the River Bend Nuclear Generating

Station consistent with the terms of this Order.

6. Neither the stipulation and settlement agreement nor this Order constitutes the

Commission's agreement with, or consent to, the manner in which ETI, or any entity

affiliated with ETI, has interacted with any decommissioning trust to which ETI or its

ratepayers have made contributions or provided funds. Furthermore, this Order in no

Order Page 14 of 15

PUC Docket No. 37744

SOAH Docket No. XXX-XX-XXXX

way constitutes a waiver or release of any conduct, whether or not such conduct occurred

before the date of this Order, that may constitute a violation of any provision of state law,

including, without limitation, the rules and regulations of this Commission relating to

nuclear decommissioning trust funds; or prevents the Staff of the Commission from

opening an investigation and taking enforcement action relating to violations of such

rules and regulations.

7. Nothing contained in this Order constitutes the consent or approval, explicit or implied,

of any modification, amendment or clarification of any power purchase agreement

between ETI and any other Entergy entity relating to the River Bend Station. Without

limiting the foregoing, nothing contained in this Order shall constitute the consent or

approval of any modification, amendment, or clarification of any power purchase

agreement between ETI and any other Entergy entity relating to the River Bend Station,

which is made to address any concerns raised by the NRC in its Request for Additional

Information regarding the River Bend Station dated March 11, 2010.

8. The Rider IPCR costs and eligible fuel costs requested by ETI are, consistent with this

Order, reconciled through June 30, 2009, and are approved consistent with the

stipulation.

9. ETI shall adjust its fuel over/under recovery balance consistent with the findings in this

Order.

10. ETI shall file an RPCEA Rider consistent with the above findings of fact and conclusions

of law to be effective with the first billing cycle of the billing month immediately

following the effective date of this Order..

11. Because the final approved rates are equal to or higher than the interim rates adopted in

Order No. 3, no refund of the interim rates authorized by Order No. 3 is necessary.

12. The interim rates approved in Order No. 12 are herby approved for the initial step rate

increase contemplated by the stipulation, and ETI shall implement the second step rates

for bills rendered on and after May 2, 2011, the first billing cycle for the revenue month

of May.

PUC Docket No. 37744 Order Page 15 of 15

SOAH Docket No. XXX-XX-XXXX

13. Within 30 days of the date of this Order, ETI shall file a clean copy of all of the tariffs

and schedules approved in this docket and a clean copy of the attachments to the

stipulation.

14. The entry of this Order consistent with the stipulation does not indicate the Commission's

endorsement of any principle or method that may underlie the stipulation. Neither should

entry of this Order be regarded as a precedent as to the appropriateness of any principle

or methodology underlying the stipulation.

15. All other motions, requests for entry of specific findings of fact, conclusions of law, and

ordering paragraphs, and any other requests for general or specific relief, if not expressly

granted in this order, are hereby denied.

SIGNED AT AUSTIN, TEXAS the ^C> I day of December 2010

PUBLIC UTILITY COMMISSION OF TEXAS

d ^

BA . SMITHERMAN, CHAIRMAN

DONNA L. NELSON, COMMISSIONER

y:\cadm\orders\final\37000\37744fo.docx

State Office of Administrative Hearings

Cathleen Parsley

Chief Administrative Law Judge

October 4, 201 0

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. 37744

Application of Entergy Texas, Inc. for Authority to Change Rates and to Reconcile Fuel

Costs

Enclosed are two copies of the Proposal for Decision (PFD) in the above-referenced case.

Please file-stamp and return a copy to the State Office of Administrative Hearings for our records. 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. The

deadline by which a final order must be issued in this case is. November 1, 2010. It is my

understanding that you will be notifying 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,

~---

Travis Vickery

Administrative Law Judge

Enclosure

xc: All Parties ofRecord

300 West 15 th Street Suite 502 Austin, Texas 78701/ P.O. Box 13025 Austin, Texas 78711-3025

512.475.4993 (Main) 512.475.3445 (Docketing) 512.475.4994 (Fax)

www.soah.state.tx.us

SOAR DOCKET NO. XXX-XX-XXXX

PUC DOCKET NO. 37744

APPLICATION OF ENTERGY TEXAS, § BEFORE THE STATE OFFICE

INC. FOR AUTHORITY TO CHANGE §

RATES AND TO RECONCILE FUEL § OF

COSTS §

§ ADMINISTRATIVE HEARINGS

TABLE OF CONTENTS

I. INTRODUCTION 1

II. PROCEDURAL HISTORY 1

III. SUMMARY 2

IV. BACKGROUND 3

A. The CGS Legislation 3

B. The Company's CGS Proposal 5

1. The CGS Tariff 6

2. The CGSC Rider 7

3. The CGSUSC Rider 7

4. The System Agreement 7

V. ARGUMENT AND ANALySIS 9

A. The CGS Tariff 9

1. Eligible Customers 9

2. Eligible Suppliers 12

a. Expanding the Supply to Include IPPs 13

b. Expanding the Supply to Include Cottonwood 15

c. Expanding the Supply to Include Out-of-State QFs 15

B. Cost Recovery Riders 17

1. CGSC Rider 18

2. CGSUSC Rider 21

8. Cost Estimates 24

SOAR DOCKET NO. XXX-XX-XXXX TABLE OF CONTENTS PAGE 2

PUC DOCKET NO. 37744

b. Annual True-ups Should Account for Load Growth 26

c. Potential Benefits of the CGS Program 30

i. Capacity Savings 30

ii. Potential Average Fuel Cost Savings 37

C. ETI May Recover its Costs Through a Rider 38

D. The UBserved Energy Rate 39

VI. CONCLUSION 41

VII. PROPOSED FINDINGS OF FACT AND CONCLUSIONS OF LAW 42

A. Findings of Fact on ETl's CGS Proposal 42

B. Conclusions of Law on ETl's CGS Proposal. 44

ATTACHMENT A

SOAH DOCKET NO. XXX-XX-XXXX

PUC DOCKET NO. 37744

APPLICATION OF ENTERGY TEXAS, § BEFORE THE STATE OFFICE

INC. FOR AUTHORITY TO CHANGE §

RATES AND TO RECONCILE FUEL § OF

COSTS §

§ ADMINISTRATIVE HEARINGS

PROPOSAL FOR DECISION

I. INTRODUCTION

On December 30, 2009, Entergy Texas, Inc. (ETl or Company) filed its application for

authority to change rates and reconcile fuel costs (Application). On July 13, 2010, the parties

appeared for the hearing on the merits. At the beginning of the hearing, the parties informed the

Administrative Law Judges (ALJs) that they were engaged in settlement negotiations. On

July 15, 2010, the parties advised the ALJs that there was a settlement in principle on all issues

in the case except for ETl's Competitive Generation Service (CGS) proposal. Concurrent with

this Proposal for Decision (PFD) the AU is forwarding to the Commission the parties'

Stipulation and Settlement Agreement and Proposed Final Order filed on August 6, 2010. The

ALJ recommends that the Commission reject ETl's CGS proposal. However, the Commission

may disagree. As a result, the ALJ provides a full discussion of the parties' arguments.

II. PROCEDURAL HISTORY

On July 16 and July 20, 2010, the parties attended a limited hearing on the merits for

issues solely related to CGS. 1 ALJ Travis Vickery presided and drafted this PFD. The following

parties attended the hearing on the merits and submitted post-hearing briefing: ETl, Staff of the

Public Utility Commission of Texas (PUC or Commission), Office of Public Utility Counsel of

Texas (OPUC), State of Texas' Agencies and Institutions of Higher Education (State),

Cottonwood Energy Company, L.P. (Cottonwood), and Texas Industrial Energy Consumers

I In the interests ofjudicial economy, the AU has borrowed liberally from the parties' briefing.

SOAH DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGE 2

PUC DOCKET NO. 37744

(TIEC),z The parties submitted post-hearing briefing and the record closed on August 26, 2010.

Other procedural matters are dealt with in the proposed Findings of Fact and Conclusions of

Law. 3

III. SUMMARY

All parties that participated in the hearing, except TIEC and Cottonwood, oppose ETI's

CGS proposal, including Staff (referred to generally as opponents). In general, the opponents

argue that the Company's proposed CGS tariff runs contrary to legislative intent and sound

economic and public policy. These parties, however, also make arguments in the alternative.

Cottonwood argues only that independent power producers (IPPs) be included as eligible

suppliers. TIEC argues that the program should be approved with certain modifications.

Although the ALJ offers a discussion of the major Issues raised by the parties, he

recommends rejection ofETI's CGS proposal. ETI, as a regulated member ofa multi-state set of

related utilities, is limited in its ability to propose a CGS program that offers somewhat

competitive choice to a limited class of customers. The ALJ finds that ETI's CGS proposal

reflects a good faith attempt to navigate the conflicting interplay of its status within the Entergy

system, principles of traditional ratemaking, and the competitive goals of the CGS legislation.

The ALJ's primary reasons for recommending rejection of the proposal echoes the opponents'

arguments: the anticipated costs are not ascertainable until the program has been implemented;

and these potentially substantial costs are shifted to parties who may chose not to, or are not

eligible to, participate in the program.

Although ETI is a necessary third party to any transaction between a CGS supplier and

customer, it has attempted to render itself neutral by adopting a pass-through rate for supplier

and customer. The fundamental problem is, for every customer that migrates to the program,

ETI loses a customer that contributes to the recovery of its embedded production costs. As

2 The following parties intervened or participated in this docket: Staff, OPUC, the State, Cities,

Cottonwood, TIEC, Kroger Co., and Wal-Mart Stores Texas, LLC and Sam's East, Inc. (Wal-Mart).

3 Although a number of parties proposed Findings of Fact and Conclusions of Law, the ALJ adopted

Staffs with limited modifications.

SOAR DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGE 3

PUC DOCKET NO. 37744

explained below, the CGS legislation makes clear ETl is not to bear any costs as a result of the

implementation of the program. As a result, ETl's proposal shifts the bulk of these unrecovered

costs to all non-participating customers. This cost-shifting violates the basic principal of cost-

causation. Although the parties offered some discussion of legislative intent, the ALJ is not

convinced that this cost-shifting was intended by the Legislature. It is clear, however, that the

drafters sought to create a program that offers competitive choice to certain ETl customers.

Although the ALJ recommends rejection, he also understands the Commission may find, as a

matter of policy, that the Legislature's intent to develop a competitive set of suppliers overrides

the principal of cost-causation.

IV. BACKGROUND

A. The CGS Legislation

The Company's proposed CGS program in this proceeding is the product of legislation

first enacted in 2005 as House Bill 1567. 4 The bill addressed a number of issues related to the

timing of rate cases and cost recovery during Entergy Gulf States, Inc.'s (EGSI) efforts to

transition to retail open access. The legislation authorized EGSI to file a rate proceeding with an

effective date no earlier than June 30, 2008, and stipulated that as a part of that rate proceeding:

[t]he utility shall propose a competitive generation tariff to allow eligible

customers the ability to contract for competitive generation. The commission

shall approve, reject, or modify the proposed tariff The tariffs subject to this

subsection may not be considered to offer a discounted rate or rates under Section

36.007, and the utility's rates shall be set, in the proceeding in which the tariff is

adopted, to recover any costs unrecovered as a result of the implementation of the

tariffS

4 Public Utility Regulatory Act, TEX. UIIL. CODE ANN., §§ 39.451 - 39.463 (Vernon 1998 & Supp. 2005)

(PURA 2005).

5 PURA 2005 at § 39.452(b).

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PUC DOCKET NO. 37744

To comply with HB 1567, EGSI submitted a CGS proposal as part of its application in

Docket No. 34800. 6 In that proposal, CGS customers were to be treated as wholesale

transmission customers so they could seek competitive wholesale generation supply on the same

tenns as other wholesale market participants. The Commission approved a settlement of that

proceeding whereby the Company's CGS proposal was severed into a separate proceeding, 7

Docket No. 36713. 8

Soon after the resolution of Docket No. 34800 and initiation of Docket No. 36713, the

Texas Legislature enacted House Bill 1492, which, among other things, altered the Company's

obligations with regard to the transition to retail open access and significantly amended the

provisions of PURA § 39.452(b) that addressed the requirements of a proposed competitive

generation tariff, which now reads:

An electric utility subject to this subchapter shall propose a competItIve

generation tariff to allow eligible customers the ability to contract for competitive

generation. The commission shall approve, reject, or modify the proposed tariff

not later than September 1,2010. The tariffs subject to this subsection may not be

considered to offer a discounted rate or rates under Section 36.007, and the

utility's rates shall be set, in the proceeding in which the tariff is adopted, to

recover any costs unrecovered as a result of the implementation of the tariff. The

commission shall ensure that a competitive generation tariff shall not be

implemented in a manner that harms the sustainability or competitiveness of

manufacturers that choose not to take advantage of competitive generation.

Pursuant to the competitive generation tariff, an electric utility subject to this

subsection shall purchase competitive generation service, selected by the

customer, and provide the generation at retail to the customer. An electric utility

subject to this subsection shall provide and price retail transmission service,

including necessary ancillary services, to retail customers who choose to take

advantage of the competitive generation tariff at a rate that is unbundled from the

utility's cost of service. Such customers shall not be considered wholesale

transmission customers. Notwithstanding any other provision of this chapter, the

commission may not issue a decision relating to a competitive generation tariff

6 Application of Entergy Gulf States, Inc. for Authority to Change Rates and Reconcile Fuel Costs, Docket

No. 34800 (Mar. 16,2009).

7 Id., Final Order at FoF 32, Ordering Paragraph No.5.

8 Application of Entergy Texas, Inc. for Approval of Competitive Generation Services Tariff, Docket

No. 36713 (pending). Other than the Control Number Request filed on February 18, 2009, no other documents have

been filed in Docket No. 36713.

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PUC DOCKET NO. 37744

that is contrary to an applicable decision, rule, or policy statement of a federal

9

regulatory agency havingjurisdiction.

A comparison ofthe two statutes reveals that the amended PURA § 39.452(b) retains key

components of the prior statute, as shown below:

• The Company shall propose a CGS program;

• The CGS program shall be available only to "eligible customers";

• The Commission may approve, reject, or modify the proposal;

• The tariff shall not constitute a discount rate under PURA § 36.007; and

• The rates shall be set in the proceeding in which the CGS tariff is adopted to

recover any unrecovered costs resulting from implementation.

The new statute also adds several new provisions, summarized as follows:

• The tariff shall not result in harm to "manufacturers" that choose not to

participate in the CGS program;

• The Company must purchase the energy selected by the CGS customer;

• The CGS customer shall not be considered a wholesale transmission

customer; rather, the Company must provide the purchased energy through

unbundled retail transmission service; and

• The Commission's decision regarding the Company's proposal must not be

contrary to a decision, rule, or policy statement of the Federal Energy

Regulatory Commission (FERC).

B. The Company's CGS Proposal

Pursuant to PURA § 39.452, ETl proposed a CGS tariff as part of its Application. The

Company's CGS proposal consists of a CGS Tariff, a CGS Cost Rider (CGSC) and a CGS

Unrecovered Service Cost Rider (CGSUSC). In its initial brief, ETl provided a diagram to

illustrate the mechanics of the tariff and how costs are handled under the Company's proposed

9 PURA § 39.452(b).

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PUC DOCKET NO. 37744

COS program. For the benefit of the Commission, the diagram is attached to the PFD as

Attachment A.

1. The CGS Tariff

ETl's proposed COS tariff provides eligible customers with the opportunity to have ETl

purchase competitive generation selected by the COS customer and provide the selected

generation at retail to the COS customer. Under the proposal, the eligible customers are Large

Industrial Power Service (LIPS) and LIPS Time-of-Day rate schedule customers. A cas

customer would have the ability to contract with a participating COS supplier (an eligible QF

located in ETl's service territory) that puts energy to ETl for a set amount of load at an agreed

upon price. The cas customer must designate what portion of its load will be served by its cas

supplier under the COS tariff and what portion will be served under the applicable LIPS tariff

rate.

So long as the COS supplier provides the energy contracted by the cas buyer, ETI will

continue to purchase energy from the QF at the avoided cost rate and the COS customer will pay

ETl the avoided cost rate for the level contracted for in place of all generation related

components that would otherwise be billed under the LIPS tariff. A cas customer and a QF

supplier are free to contract, without ETl's participation, for a price other than avoided cost, in

which case, the costs above or below the avoided costs would be accounted for in payments

between the COS customer and COS supplier, or vice versa, as prescribed by the contract. 10

ETl explains that the COS customer could avoid costs it would otherwise incur under the

Company's fixed fuel factor, along with the portion of the Company's retail rates that represent

embedded production costs. Transmission service associated with the delivery of power would

be provided at an unbundled retail rate. In the event the QF with whom the COS customer has

contracted fails to deliver the contracted-for power, the Company would provide service at an

"Unserved Energy" rate. The initial period of implementation would be one-year, beginning in

January 2011, followed by a Company report to the Commission. ETl anticipates possible

10 ETI Ex. 3 at ETI Rate Schedule LQF; ETI Ex. 9 at 9-10, Ex. PRM-l; ETI Ex. 52 at 34-36.

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PUC DOCKET NO. 37744

unforeseen issues that may require modification or supplementation of the CGS program's tenns

or reconsideration of the program altogether. 11

2. The CGSC Rider

The CGSC rider is designed to recover costs related to the start-up and ongomg

operations incurred to implement the CGS. Costs will be based on estimates and ETI proposes

they be trued-up on an annual basis to match what the Company has actually incurred as a result

of the program. As proposed, the costs would be recovered from all CGS eligible customers

12

(LIPS) through Rider CGSC regardless of whether they actually take the CGS service.

3. The CGSUSC Rider

ETI proposes the CGSUSC rider to recover avoided embedded generation costs that

would have been allocated to LIPS customers under ETI's retail base rates, had those customers

not elected to participate in CGS. Rider CGSUSC is designed to recover the difference between

what would have been billed by ETI under traditional LIPS service and what is billed under the

combined CGS tariff and modified LIPS service. Rider CGSUSC would recover embedded

generation costs and ',Uly other related base rate costs and would apply to all non-participating

customers across all classes, including LIPS customers not participating in the CGS program,

through a rider that will be trued-up against the actual avoided embedded generation costs and

reset on an annual basis. 13

4. The System Agreement

ETI developed its CGS proposal under constraints associated with its relation to the

Entergy System (System), the Entergy Operating Committee, and the Entergy System

Agreement (System Agreement). The System Agreement is a PERC-approved tariff governing

II PURA § 39.452(b); ETI Ex. 52 at 37; ETI Ex. 9 at 15,22-24, Ex. PRM-l; ETI Ex. 52 at 44-46.

12 ETI Ex. 9 at 14, 19,20, Ex. PRM-l.

13 ETI Ex. 9 at 14-15, 21-22, Ex. PRM-l; Tr. at 348, 356

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PUC DOCKET NO. 37744

the manner in which the Entergy System is operated and resources are selected for serving the

energy and capacity needs of the six Entergy Operating Companies. The Entergy Operating

Committee is the entity charged by the FERC with administering the Entergy System

Agreement. The System Agreement vests the Operating Committee with the discretion to

allocate QF put energy among the Operating Companies. The Operating Committee has

,

exercised that discretion and determined that QF put should be allocated to the host Operating

Company. 14

The Supreme Court has held that matters delegated to the Entergy Operating Committee

as part of its duty to administer the System Agreement are matters of exclusive FERC

jurisdiction. IS PURA § 39.452(b) explicitly prohibits the Commission from issuing a decision

addressing the Company's CGS program "that is contrary to an applicable decision, rule, or

policy statement of a federal regulatory agency having jurisdiction.,,16 The System Agreement

constitutes an applicable decision, rule, or policy statement of a federal regulatory agency having

jurisdiction, within the meaning of that provision. Because the System Agreement prohibits a

single Operating Company, such as ETI, from unilaterally selecting and purchasing a resource to

supply its energy needs, ETI posits that the CGS program cannot: (1) result in the purchase of

resources other than those that would have been selected and purchased pursuant to the System

Agreement; or (2) require a different economic dispatch of resources or allocation of power and

associated costs among the Operating Companies than would occur pursuant to the System

Agreement. 17

ETI generally asserts that its CGS proposal complies with the statute by making QF put

to the Entergy System from ETl's service territory available to participating customers at the

avoided cost rate paid to QFs for that energy. Limiting the available CGS resources to such QF

put avoids interference with the System Agreement because these Texas QF resources have

14 ETl Ex. 9 at 12-13, Ex. JPH-R-2.

15. Entergy Louisiana, Inc. v. Louisiana Pub. Servo Comm'n, 539 U.S. 39,49-50 (2003).

16 PURA § 39.452(b).

17 ETl Ex. 5 at 41-42; ETI Ex. 52 at 34.

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PUC DOCKET NO. 37744

already been assigned to the Texas jurisdiction by the Operating Committee,IS to comply with

the requirement of the Public Utility Regulatory Policies Act (PURPA) that a utility purchase the

energy that is put to it by QFs. Thus, the Company contends that it designed the CGS proposal

9

consistent with the System Agreement. This contention has been acknowledged by Staff.I

v. ARGUMENT AND ANALYSIS

A. The CGS Tariff

1. Eligible Customers

Participation in the CGS tariff is limited to LIPS customers. The parties, however,

disagree over the definition of "eligible customers" under PURA § 39.452(b). Cities and the

State propose expanding the program to include additional and perhaps all customer classes. ETI

counters that the limitation to LIPS is supported by the statute and practical constraints on the

makeup of a customer class. Although the ALJ ultimately recommends rejection of ETl's CGS

proposal, in the event the Commission approves the tariff, the limitation to LIPS customers is

acceptable for initial implementation of the program. 20

ETI argues that the term "eligible" naturally implies a limitation on customer class and

that the provision is not explicit as to the parameters of eligibility. However, based on the

background and context ofPURA § 39.452(b), ETI argues that the term "manufacturers" should

be viewed as a reference to large manufacturing concerns such as industrial customers. 21 ETI

also argues that the limitation to LIPS was based on a number of practical factors, including:

18 ETI Ex. 73 at 13, Ex. JPH-R-2.

19 ETI Ex. 52 at 43-44; Staff Ex. 3 at 6-7.

20 State Ex. 1 at 36-39; Cities Ex. 6 at 57; Cities Initial Brief at 8-9.

21 State v. Hodges, 92 S.W.3d 489, 494 (Tex. 2002) (even where statute is clear and unambiguous, courts

may consider the statute's objectives and the consequences of a particular construction).

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PUC DOCKET NO. 37744

• presumed technical expertise of LIPS customers to enter into

sophisticated contractual arrangements with Texas QFs;

• the need for interval data recorder meters and backup meters to measure

consumption, which LIPS customers have already installed;

• the increased start-up and ongoing administrative costs that would be

passed on to non-participating customers if the CGS program were opened

up to a larger pool of potential participants; and

• in terms of demand, the minimum block needed to attract suppliers would

be 5 MW. 22

According to ETI, limiting the pool of eligible customers to those most likely to

participate necessarily limits the amount of the Company's unrecovered costs. Based on ETl's

proposal, a limited pool of eligible customers also results in allocating unrecovered costs across a

larger pool of non-participants. This will mitigate the potential impact on all customers,

including, as required by the statute, non-participating manufacturers. On the flipside, ETI

argues that expanding the pool of eligible customers would increase start-up and implementation

costs, spread over a smaller pool of non-participants -- something Cities concedes. 23 According

to established rate setting principles, ETI argues those increased costs should be borne by the

larger pool of eligible customers. ETI notes, however, there is little to no likelihood, and no

evidence that Cities' proposed expanded customer class would actually participate in the

program. Finally, under the current proposal, any increase in the amount of unrecovered costs

would also be borne by non-participants, including manufacturers.

Although the State's witness also testified that the customer class should be expanded,

Cities framed strong arguments that the LIPS limitation should be rejected. Cities propose that

the program be available to any customer who has the demand and resources to contract for

CGS. Cities acknowledges not every customer will possess the means to contract for or accept

such service. Nevertheless, Cities contend that ETl's limit to the LIPS class is too narrow.

22 ETI Ex. 9 at 10-11; Tr. at 253.

23 Cities Initial Brief at 8-9.

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PUC DOCKET NO. 37744

First, Cities argue that LIPS class customers do not possess a monopoly of sophistication

to contract for CGS service. Where demand is concerned, Cities note that some non-LIPS

customers' combined demand may exceed 5 MW, in addition to the fact that some suppliers may

be willing to contract for less than 5 MW. As for interval data recording meters, Cities argue

that some customers' demand is constant, such as the City of Beaumont, which has some 10,000

street lights for which billing is unmetered. Although Cities provided no record cites for these

propositions, its main point is that certain customers outside the LIPS class may be in a position

to contract for and benefit from the CGS program. Finally, with regard to increased startup and

administration costs associated with an expanded customer class, Cities proposes that only

participants be responsible for cost recovery on a kWh basis.

Staffs position is that, while the term "eligible" is a limitation on the customer class, the

provision's reference to "manufacturers" does not mandate the program's limitation to LIPS

customers. Not all LIPS customers are manufacturers and some manufacturers may be members

of commercial classes. 24 Nevertheless, Staff also acknowledges there may be other issues which

justify ETI's limitation to customers in the LIPS class.

The ALl agrees with ETI and Staff that the term "eligible" in PURA § 39.452(b) implies

ETI should limit participation in the program to certain customers. Although the provision does

not define the terms of eligibility, the reference to "manufacturers" suggests that the program

should be extended to ETI's larger customers, but as noted by Cities, Staff, and other opponents,

the LIPS class is not a perfect fit for all of ETI's customers engaged in manufacturing.

Nevertheless, the ALl finds that ETI has articulated a reasonable and practical limit on the CGS

eligible customer class for the implementation of the program. Based on the uncertain nature of

ETI's cost estimates and unknown levels of participation, there are too many unexplored

variables involved in expanding the customer class beyond LIPS customers at this time. In the

event the Commission approves the CGS proposal, the ALl recommends eligible customers be

limited to the LIPS class, leaving open the possibility for further expansion as the program

develops.

24 Cities share this view.

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PUC DOCKET NO. 37744

2. Eligible Suppliers

As proposed by ETI, eligible suppliers for the CGS program are limited to fourteen QFs

within ETl's service territory.25 These QFs are facilities that generate power for their own use,

and then sell their excess power to ETI. ETI is required by federal law to purchase that excess

power regardless of the CGS program. 26 ETI claims that QF suppliers within its own service

area are the only source of power it could incorporate into the CGS program without running

afoul of the System Agreement, because energy put by QFs located in ETl's service territory is

allocated to ETI through the System Agreement, so that dedicating that energy to CGS supply

does not upset the allocation of energy or costs among the Entergy Operating Companies. 27 ETI

also describes QF put as a viable supply option for the CGS program because the delivery of that

energy can be controlled by the CGS customer and the QF.

Cities and other intervenors generally argue that the limitation on eligible suppliers does

not do enough to bring competition to the market. TlEC witness Jeffry Pollock echoed this

concern when he testified that there is simply not enough capacity available in ETl's plan to

allow for true competition. 28 Aside from the limited number of QFs eligible to participate,

competition is further limited because QFs must first meet their own power needs before they put

to ETI. 29 And Cities argue that even if IPPs currently dedicated to serving ETI are added to the

supply, there is still too little competition, because that power is already under contract by ETI or

is required to be purchased by ETI.

ETI responds, and the ALJ agrees, that PURA § 39.452(b) does not require ETI to

develop a CGS program that mimics an open market. That would be impossible. ETI is a

regulated entity and part of a multi-state utility system, whose available resources and resource

and cost allocations are governed by the Operating Committee as sanctioned by the FERC. It is

25 TIEC Ex. 1 at 14.

26 Tr. at 51,67-68.

27 ETI Ex. 73 at 11-12.

28 TIEC Ex. 1 at 38.

29 TIEC Ex. 1 at 67-68.

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PUC DOCKET NO. 37744

a reality that ETI has very limited resource options available for customer choice through the

CGS program. Instead, the CGS program is intended to give eligible customers a supply

alternative to ETI's generation. It is not intended to be retail open access, and the amendments

to the CGS provision in the 2009 legislation law make it clear that the program should not make

the CGS customer a wholesale market participant.

a. Expanding the Supply to Include IPPs

TIEC proposes that CGS suppliers be expanded to include IPPs currently dedicated to

serving ETI. ETI argues, however, that while this proposal would avoid interference with the

resource allocation principles of the System Agreement, it still runs afoul of the economic

dispatch requirements of the System Agreement. ETI points out that the System Agreement

dictates the dispatch of System resources using the lowest cost resources capable of reliably

serving load for the System as a whole and without regard to which Operating Company owns or

controls the resource. The System Agreement does not permit the dispatch of certain resources

out of order for the benefit of a single Operating Company or customers in a particular

jurisdiction.30

ETI argues that including IPP suppliers would be detrimental to CGS customers because

they have no control over the delivery of energy from IPPs. Because System economics dictate

the scheduling of energy from IPPs, System needs may not align with the needs CGS customers

in any given hour. Under these circumstances, the System's economic dispatch decisions for

IPPs would prevail and CGS customers would incur significant Unserved Energy costs when IPP

resources selected by a CGS customer are not included in economic dispatch for a period of

3

time. ! Cities made the same argument in briefing, also noting "CGS must be limited to power

that is already allocated to ETI under the terms of the System Agreement.,,32 The ALJ agrees

with ETI that using QF put allows the CGS customer and QF to agree on delivery terms that

30 ETI Ex. 41 at 9-10.

31 ETI Ex. 73 at 11-16.

32 ETI Ex. 73 at 11-12.

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PUC DOCKET NO. 37744

meet the needs of the COS customer in a manner that will not be superseded by the System

Agreement.33

Cities are also concerned that if IPPs are included, COS customers would skim the lowest

cost resources away from captive retail customers. 34 As a result, Cities propose that supply

options be expanded to IPPs and QFs not currently under capacity contracts with ETI. Cities

point out that, at most, the Company only has capacity contracts with two-fifths of the IPPs in its

service territory.35

There is insufficient evidence, however, to determine what the impact of including IPPs

in the COS power supply would be. IPPs could presumably be a source of firm power under the

program, which would allow the Company to eliminate the costs it would have incurred to

provide firm power to its COS customers rather than simply passing those costs on to ineligible

customers. On the other hand, the Company claims that its System Agreement precludes it from

including IPPs in its pool of eligible suppliers,36 and including IPPs could raise fuel costs for

other customers because COS customers could effectively skim the lower-priced fuel out of

ETI's supply.37 OPUC witness Clarence Johnson pointed out that the impact of including IPPs

as eligible suppliers may be to increase purchased power costs for non-COS customers. 38 To the

extent that including IPPs in the COS power supply would harm non-participating customers,

Cities opposes such a modification to the CGS tariff. If, however, the CGSUSC rider were either

rejected or modified so that it does not shift unrecovered costs to ineligible customers and other

protections were put in place, Cities would recommend including IPPs as a way to make the

COS program truly competitive. As explained below, however, if such costs are recovered from

COS participants, there is little conceivable incentive for participation in the program. The ALJ

concludes that expanding the pool of suppliers to IPPs and QFs not currently under capacity

33 !d.

34 Tr. at 129-130.

35 Tr. at 54.

36 ETI Ex. 52 at 36, note 4.

37 Tr. at 129.

38 OPC Ex. 4 at 10, Ex. CJ-Reb-2.

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PUC DOCKET NO. 37744

contracts with ETI, should be avoided as it would likely result in higher purchased power and

fuel costs for non-participating customers.

b. Expanding the Supply to Include Cottonwood

Cottonwood seeks to participate in the CGS program as a supplier. Cottonwood argues

that it is on equal footing with QFs. ETl argues, however, that PURPA only requires the

Company to purchase QF put, not that of an independent generator like Cottonwood.

Cottonwood also argues that ETl would not actually purchase QF put for CGS customers. ETl

and the ALl disagree. PURA § 39.452(b) states: "pursuant to the competitive generation tariff,

an electric utility subject to this subsection shall purchase competitive generation service ... ,,39

Finally, Cottonwood suggests that the System Agreement be amended to permit Cottonwood to

participate in the CGS program. As noted by ETl, this would interfere with the FERC-approved

System Agreement, which is specifically prohibited by PURA § 39.452(b). The ALl concludes

that Cottonwood's proposal to be included as an eligible CGS supplier should be denied.

c. Expanding the Supply to Include Out-of-State QFs

TIEC proposes to expand the CGS supply pool by including QFs located elsewhere on

the Entergy System. Under that proposal, a CGS customer in Texas would be permitted to

contract for energy supply from a QF in Louisiana. ETI opposes this proposal, arguing that it

would upset energy allocation under the System Agreement because it would require allocation

of energy put by a Louisiana QF to ETl. ETl argues that the Operating Committee has already

exercised its discretion on this issue and determined that QF put is to be allocated to the host

Operating Company.40 ETI notes that the Operating Committee has never allocated QF put from

one Operating Company's service area to an Operating Company in another jurisdiction. 41 ETl

argues that implementation of the CGS program does not justifies such a change. The ALl

agrees.

39 PURA § 39.452(b).

40 ETI Ex. 73 at 12-13, Ex. IPH-R-2.

41 Tr. at 89.

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PUC DOCKET NO. 37744

As explained above, the Operating Committee is charged by the FERC with

administering the System Agreement, which vests the Operating Committee with the discretion

to allocate QF put energy among the Operating Companies. The Supreme Court has held that

matters delegated to the Operating Committee as part of its duties to administer the System

Agreement are matters of exclusive FERC jurisdiction.42 As a result, there is no basis for a state

regulator to direct how QF put should be allocated among the Entergy Operating Companies.

ETl argues that even TIEC's expert witness Jeffry Pollock acknowledged that the

reallocation of lower-cost QF put from Louisiana customers to Texas customers could raise costs

to Louisiana customers to benefit Texas CGS customers. 43 ETl witness John Hurstell testified

that expanding the pool of CGS energy suppliers as proposed by TIEC requires abandonment of

the System Agreement to allocate out-of-state QF pUt,44 The ALJ agrees with ETl that, even if

TIEC's proposal did not violate the System Agreement, it makes little sense for the Operating

Committee to reallocate QF put for the sole purpose of expanding the CGS supply pool for the

benefit of a small number of Texas industrial customers and the detriment of customers in other

Entergy System jurisdictions. Finally, ETl questions whether the Commission could even

enforce such an obligation.

Cities note that including QFs outside of ETl's servIce area may benefit eligible

customers by increasing the diversity of available power and providing a more competitive

market,45 Cities, however, only supports the inclusion of QFs outside ETl's service area, if it

would not increase costs to non-participating customers. This is not likely under the CGS

program, because supply options are still limited to QFs, which have discretion to put energy to

ETl. As explained below, ETl's current proposal contemplates no system capacity cost savings,

because it considers QF put as non-firm and must plan its resources as if the CGS customer

46

remains a normal LIPS customer. Cities and OPUC argue that any additional QF put may

42 Entergy Louisiana, Inc. v. Louisiana Pub. Servo Comm'n, 539 U.S. 39, 49-50 (2003).

43 Tr. at 313.

44 ETI Ex. 73 at 13.

45 TIEe Ex. 1 at 41.

46 Tr. 50-51.

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PUC DOCKET NO. 37744

expose non-participating customers to additional unrecovered costs under the CGSUSC rider. 47

As a result, Cities and OPUC do not support TIEC's proposal, unless the CGSUSC rider is

rejected or modified to avoid shifting unrecovered costs to non-participating customers.

B. Cost Recovery Riders

ETI's two cost-recovery riders are based on forecasted data, in amounts unspecified at

hearing, and to be updated through an annual true-up proceeding. Opponents of the program

focus on the prospective nature of these riders and ETI's inability to provide accurate or final

cost figures. They argue that both riders should be rejected as piecemeal, premature, and not

based on costs that are known and measurable. Opponents propose that any costs may be

captured in a subsequent proceeding based on a historical test year once they are known and

48

measurable. They argue that allowable expenses are limited under PUC SUBST. R. 25.231(b) to

expenses that are reasonable and necessary to provide service.

ETI argues that the opponents' proposals to defer recovery of costs do not comply with

PURA § 39.452(b)'s directive that rates be set in this proceeding to recover ETI's unrecovered

costs as a result of the CGS tariff. ETI also argues that deferral of cost recovery does not

constitute rate setting under Texas Supreme Court precedent. ETI points out that the Texas

Supreme Court specifically rejected claims that deferred accounting should be considered as the

setting of rates. The court ruled that deferral of costs was no more than setting aside the costs, so

that a rate for their recovery could be considered in a future proceeding. 49

Under normal rate-making standards, the ALI would be inclined to agree with the

opponents. However, the plain language of PURA § 39.452(b) requires that "the utility's rates

shall be set, in the proceeding in which the tariff is adopted, to recover any costs unrecovered as

a result of the implementation of the tariff," and the CGS tariff "may not be considered to offer a

47 OPC Ex. 4 at 10.

48 TIEC Ex. 1 at 10.

49 State v. Public Utility Comm 'n, 883 S.W.2d 190, 197-198 (Tex. 1994). ETI notes that TIEC witness

Pollock was unaware of this decision in making his recommendations. Tr. at 264.

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PUC DOCKET NO. 37744

discounted rate or rates under Section 36.007.,,50 Unfortunately, ETI was unable to provide fixed

cost figures upon which to base its riders, but this is due primarily to the unknown level of

participation. s1 And this does not mean ETI failed to establish it will incur costs as a result ofthe

program - it has. The ALJ finds that the CGS legislation requires that the rate set in this matter

include the recovery of any cost ETI reasonably anticipates incurring as a result of the CGS

program, based on the Company's estimates, to be trued-up with actual costs in one year.

However, opponents ofETl's proposal are correct that there may be benefits to non-participating

customers or reduced costs to ETI, that should also be accounted for at the annual true-up

contemplated by both cost-recovery riders.

1. CGSC Rider

Rider CGSC is designed to recover costs related to implementation and administration

costs incurred to support the CGS program. These costs would be recovered from all CGS

eligible (LIPS) customers through Rider CGSC, regardless of whether they actually take the

CGS service. Because the costs are currently estimated, the CGSC Rider is set for an annual

true-up to costs actually incurred. 52

While no party argues that ETI should not be able to recover its startup and

administration costs, the parties disagree with the timing and specifics of ETl's proposed CGSC

Rider. Opponents argue PURA § 36.003 requires an electric utility's rates to be just and

reasonable and that the utility has the burden to show its rate change is just and reasonable.

These parties contend that ETI failed to meet that burden, because it provided insufficient

evidence of specific costs, opting instead for estimates. In other words there are currently no

costs upon which to base a rate and State witness Pevoto testified that estimates should not be

used to establish rates in this proceeding. 53 As a result, the parties argue that Rider CGSC is

premature and should be delayed until specific figures are available.

50 PURA § 39.452(b).

51 ETI Ex. 9 at PRM-1 at 7; Tr. at 20, 161, 175.

52 ETl Ex. 9 at 14,20.

53 State Ex. 1 at 41-42.

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PUC DOCKET NO. 37744

ETI argues that the text ofPURA § 39.452(b) requires a non-discounted rate be set in the

same proceeding as the program's implementation:

The tariffs subject to this subsection may not be considered to offer a discounted

rate or rates under Section 36.007, and the utility's rates shall be set, in the

proceeding in which the tariff is adopted, to recover any costs unrecovered as a

54

result of the implementation of the tariff.

The ALl agrees that the clear language ofPURA § 39.452(b) requires that ETI recover all CGS

program start-up and administrative costs through tariffs established in this proceeding and to do

otherwise would result in a prohibited discount rate. The ALl notes that fuel reconciliations

occur with regularity at the Commission and are analogous to the Company's proposed true-up

mechanism for the cas program.55 The ALl recommends that ETI recover in this proceeding,

its estimated startup and administrative costs through Rider casc, to be trued-up with actual

costs in one year.

TIEC and Staff also seek to limit the application of Rider casc

to customers that elect to

participate in the CGS program. 56 This argument has merit, because there is no discemable

benefit to the LIPS class customers who do not participate in the CGS program. As noted by

Staff witness Stephen Mendoza, the rider "would seem to go against a cost causation principle

whereby costs are allocated to those customers who cause the costs to be incurred.,,57

There is also the possibility that non-participating LIPS class manufacturers would suffer

a competitive disadvantage. PURA § 39.452(b) specifically requires that:

The commission shall ensure that a competitive generation tariff shall not be

implemented in a manner that harms the sustainability or competitiveness of

manufacturers that choose not to take advantage of competitive generation.58

54 PURA § 39.452(b).

55 ETl Ex. 76 at 32.

56 Staff Ex. 3 at 12-13; TlEC Ex. 1 at 46-47.

57 Staff Ex. 3 at 12.

58 PURA § 39.452(b).

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PUC DOCKET NO. 37744

Although the recovery of CGS startup and administration costs may not affect the sustainability

of non-participating manufacturers, it may affect their competitiveness relative to CGS

participants, because non-participant manufacturers under the LIPS tariff will contribute to cost

recovery while not receiving the benefits of the program. ETI witness Phillip May justified

recovering these costs from LIPS class customers who decide not to participate because "those

customers have the opportunity to sign up for and benefit from the CGS program."S9 But this

argument ignores the plain language of PURA § 39.452(b) that prohibits competitive

disadvantage to those manufacturers who elect not to participate. The parameters of competitive

harm, however, were not spelled-out in the provision, nor is there specific evidence in the record

of such harm.

ETI also points out that limiting Rider CGSC to participants may result in the Company

incurring the costs of implementation. ETI witness May testified that, because there is a

possibility that no customers will participate, the Company would be unable to recover its start-

up and administrative costs if the rider is limited to CGS participants. 6o

This raises a potential conflict brought about by the language ofPURA § 39.452(b), and

another reason the ALJ recommends against implementation of the program. Nevertheless, if

PURA § 39.452(b) is to be read in a manner to avoid conflict, the ALJ recommends that ETI has

proposed a reasonable compromise. The ALJ agrees that requiring any non-participant in the

CGS program to share in its costs violates the principle of cost causation. Yet, even Staff agrees

that PURA § 39.452(b) states the CGS tariffs "may not be considered to offer a discount rate or

rates under Section 36.007." PURA § 36.007(d) reads:

Notwithstanding any other provision of this title, the commission shall ensure that

the electric utility's allocable costs of serving customers paying discounted rates

under this section are not borne by the utility's other customers.

As a result, Staff acknowledges the prohibition against "other customers" bearing the costs of a

discounted rate appears not to apply here. Assuming this is the legislature's intent, ETI could

59 ETI Ex. 9 at 19,20.

60 ETI Ex. 76 at 32-33.

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PUC DOCKET NO. 37744

charge other ratepayers its unrecovered CGS program costs, despite the principal of cost-

causation.

Second, based on the record, the extent of competitive harm non-participant

manufacturers would suffer is unclear. What is clear, however, is that if Rider- CGSC applies

only to participants and no entities participate, the Company would be left with unrecovered

startup costs, a result expressly prohibited by PURA § 39.452(b). If the Commission approves

ETI's proposal, the ALl supports limiting Rider CGSC to CGS participants. However, to

address ETI's legitimate concern over the potential of being left with the costs, the ALl

recommends that Rider CGSC initially be implemented as proposed by ETI. However, once the

program has participants, all costs should be shifted to those participants immediately or at the

annual true-up. A refund could be issued to non-participants concurrent with the cost

reallocation. The ALl understands that this issue has not been fully explored, but ETI indicated

in briefing that it is open to suggestions.

2. CGSUSC Rider

Rider CGSUSC provides for the Company's recovery from non-participating customers

of the embedded generation costs that it will lose from customers that elect to participate in the

CGS program. It is intended to recover embedded generation costs and any other related base

rate costs and would apply to all non-participating customers across all classes, including LIPS

customers not participating in the CGS program. 61 As with Rider CGSC, the Company proposes

an annual true-up of estimated unrecovered costs to the costs actually unrecovered. 62 ETI notes

the annual true-up will also provide an opportunity to consider potential adjustments in light of

the level of participation in CGS and its impact on other classes. 63

61 ETI Ex. 9 at 14, 15,21.

62 ETI Ex. 9 at 21-22.

63 ETI Ex. 9 at 23-24. While the Company has not proposed a cap on the level of CGS participation, it

recognized that this is a means oflimiting the exposure of non-participating classes to unrecovered costs. Tr. at 182.

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PUC DOCKET NO. 37744

A number of parties argue that ETl is not entitled to recover embedded generation costs

or other base rate costs at all. These parties contend that ETl is essentially seeking to recover

lost revenues, not costs. Parties opposed to the rider argue no rate should be set in this case to

account for unrecovered costs. Instead, such unrecovered costs should be recovered from

increased revenues from load growth, or from other savings that may be associated with the CGS

program.

ETl argues these positions should be rejected because they are at odds with the

requirements of the governing statute and with fundamental rate setting principles. As argued by

ETI the "unrecovered costs" referenced in PURA § 39.452(b) and the "lost revenue" that ETI has

calculated as the measure of the unrecovered costs are one and the same in the ratesetting

context. ETl points out that OPUC witness Johnson acknowledged in his direct testimony that

"[r]evenues are intended to equal embedded cost of service for the adjusted test year.,,64 TIEC

witness Pollock also agreed at hearing the Company's unrecovered revenues calculation would

account for the migrating customers' share of the Company's embedded fixed production costS. 65

The ALJ agrees with ETl that PURA § 39.452(b) requires that "the utility's rates shall be

set, in the proceeding in which the tariff is adopted, to recover any costs unrecovered as a result

of the implementation of the tariff," and that the CGS legislation specifically authorizes the

Company to recover any unrecovered costs as "a result of' implementation of the CGS

program. 66 ETI is entitled to collect unrecovered embedded generation costs and any other

related base rate costs as a result of customer migration to the CGS program.

The ALJ agrees that ETI's revenue requirement is based on and designed to recover such

costs. With every customer that migrates to the CGS program, ETl loses a customer and suffers

"load loss." That is, the pool of customers contributing to the recovery of ETl's embedded

64 Tr. at 350-351.

6S Tr. at 261-262,356.

66 ETI Ex. 76 at 28-29.

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PUC DOCKET NO. 37744

generation costs shrinks with each new COS participant. Load loss is detrimental to the

Company in the opposite manner that load growth benefits the Company. Additional customers

mean the base rate quantum is spread over a larger pool. Furthermore, the same parties who

oppose Rider CGSUSC also contend ETl should offset the rider with load growth. Under normal

circumstances, the ALJ would agree with those parties opposed to COSUSC, because ETl is only

entitled to seek, but is not guaranteed a set return on its investment. However, PURA

§ 39.452(b) mandates ETI recover "any" of its unrecovered costs as a result of the

implementation of the program. Opponents of Rider COSUSC have failed to identify any

caveats to this expansive language. As a result, the ALJ concludes that ETl is entitled to recover

the unrecovered embedded generation costs and any related base rate costs as a result of

customer migration to the COS program. As discussed below, however, that recovery should be

offset against load growth and any identifiable capacity savings at the annual true-up.

The most troubling aspect of Rider COSUSC is that it recovers the unrecovered costs

from all non-participating ratepayers. As with the arguments for and against Rider CGSC, Staff

and a number of intervenors argue Rider COSUSC should be rejected because it is inconsistent

with the principal of cost-causation. Although the migrating COS customers cause the costs to

be incurred, Rider COSUSC recovers ETl's unrecovered embedded generation costs from all

other ratepayers, including non-LIPS class customers who are not eligible to participate in the

COS program. 67

Furthermore, having non-COS participants pay for costs related to the COS program may

contradict the statutory requirement that the COS tariff not harm the "sustainability or

competitiveness of manufacturers that choose not to take advantage of competitive generation"

although there is no evidence on whether this might occur. 68 All of the arguments regarding

Rider CGSC's potential competitive harm to non-participating manufacturers apply with greater

force to Rider COSUSC. Not all man

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