The opinion
ACCEPTED
03-14-00706-CV
4407712
THIRD COURT OF APPEALS
AUSTIN, TEXAS
3/6/2015 4:11:28 PM
JEFFREY D. KYLE
CLERK
NO. 03-14-00706-CV FILED IN
3rd COURT OF APPEALS
AUSTIN, TEXAS
3/6/2015 4:11:28 PM
JEFFREY D. KYLE
ENTERGY TEXAS, INC., Clerk
Appellant,
v.
PUBLIC UTILITY COMMISSION OF TEXAS, ET AL.,
Appellees.
B RIEF OF A PPELLEE
Filed by: Public Utility Commission of Texas
KEN PAXTON ELIZABETH R. B. STERLING
Attorney General of Texas Assistant Attorney General
State Bar No. 19171100
CHARLES E. ROY Elizabeth.Sterling@texasattorneyg
First Assistant Attorney General eneral.gov
JAMES E. DAVIS MEGAN M. NEAL
Deputy Attorney General for Assistant Attorney General
Civil Litigation State Bar No. 24043797
JON NIERMANN Environmental Protection
Chief, Environmental Protection Division
Division P.O. Box 12548, MC-066
Austin, Texas 78711-2548
512.463.2012
512.457.4616 (fax)
March 6, 2015
Oral Argument Requested
Identity of Parties and Counsel
Party Counsel
Entergy Texas, Inc., Plaintiff in the Marnie A. McCormick
district court, Appellant and John F. Williams
Appellee before this Court Duggins Wren Mann & Romero,
LLP
P. O. Box 1149
Austin, Texas 78767-1149
512.744.9300
512.744.9399 (fax)
mmccormick@dwmrlaw.com
jwilliams@dwmrlaw.com
(in district court, also Patrick J.
Pearsall)
Public Utility Commission of Texas, Ken Paxton
Defendant in the district court, Attorney General of Texas
Appellee before this Court (in district court, Greg Abbott)
Charles E. Roy
First Assistant Attorney General
(in district court, Daniel Hodge)
James E. Davis
Deputy Attorney General for Civil
Litigation
(in district court, John B. Scott)
Jon Niermann
Chief, Environmental Protection
Division
i
Assistant Attorneys General:
Elizabeth R. B. Sterling
Elizabeth.Sterling@texasattorneyge
neral.gov
Megan Neal
Megan.Neal@texasattorneygeneral.
gov
Environmental Protection Division
Office of the Attorney General
P.O. Box 12548, MC-066
Austin, Texas 78711-2548
512.463.2012
512.457.4616 (fax)
Office of Public Utility Counsel, Ross Wyatt Henderson
Intervenor in the district court and Assistant Public Counsel
Appellee before this Court Office of Public Utility Counsel
P.O. Box 12397
1701 N. Congress Avenue, Ste 9-180
Austin, Texas 78711-2397
512.936.7500
512.936.7520 (fax)
Ross.Henderson@opuc.texas.gov
(in district court, Sara J. Ferris)
ii
State Agencies, Intervenors in the Katherine H. Farrell
district court and Appellees before Assistant Attorney General
this Court Administrative Law Division
Energy Rates Section
Office of the Attorney General
P.O. Box 12548 MC 018-12
Austin, Texas 78711-2548
512.475.4237
512.320.0167 (fax)
katherine.farrell@texasattorneygen
eral.gov
(in district court, Susan M. Kelley
and Bryan L. Baker)
Texas Industrial Energy Rex VanMiddlesworth
Consumers, Intervenors in the Benjamin Hallmark
district court and Interested Parties Thompson & Knight LLP
before this Court 98 San Jacinto Blvd., Ste. 1900
Austin, Texas 78701
512.469.6100
512.469.6180 (fax)
rex.vanm@tklaw.com
benjamin.hallmark@tklaw.com
(in district court, Meghan Griffiths
at Andrews Kurth, LLP)
iii
Table of Contents
Identity of Parties and Counsel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
Table of Contents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
Index of Authorities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viii
Glossary.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi
Statement of the Case. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xii
Statement Regarding Oral Argument. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xii
Issues Presented.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xii
Statement of Facts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
A. The Commission decided Entergy’s rate case, Docket 39896.. . . . . . . 1
B. The Commission addressed the question of Entergy’s rate-case
expenses in this case. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1. The ALJ considered ratepayers’ arguments against some of
Entergy’s requested rate-case expenses. . . . . . . . . . . . . . . . . . . . . . 8
a. Depreciation expenses of Entergy’s affiliated company. . . . . . 9
b. Rate-case expenses to advocate for abandoning the two-
bucket policy for including incentive compensation in rates.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
c. Excessive rate-case expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
d. Adjustments to rate-case expenses. . . . . . . . . . . . . . . . . . . . . . . 15
2. The Commission issued its Order in this case. . . . . . . . . . . . . . . . . 18
C. Entergy appealed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
iv
Summary of the Argument. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Argument. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
I. Standard of Review. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
A. Substantial-evidence Standard. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
B. Arbitrary-and-capricious Standard . . . . . . . . . . . . . . . . . . . . . . . . 23
II. The Commission has discretion to decide that expenses Entergy
incurred making a long-shot argument for overturning a well-
established Commission policy were unreasonable expenses for
ratepayers to reimburse. (Responds to Entergy Issue 1). . . . . . . 24
A. The Commission may allow the utility to recover only
reasonable expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
B. The Commission applied the law to the evidence and
determined that it was unreasonable for Entergy to recover
rate-case expenses incurred to argue that the Commission
should abandon its two-bucket policy concerning incentive
compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
III. The lack of a Commission rule about rate-case expenses for
incentive-compensation arguments did not relieve the
Commission of its statutory duty to allow the utility to recover
only reasonable rate-case expenses. (Responds to Entergy
Issue 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
A. Entergy’s arguments that the Commission departed from
earlier policy in this case are unavailing . . . . . . . . . . . . . . . . . . . . 33
B. The Commission was merely applying the statutes to the
evidence and argument in this case, not promulgating a new
rule. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
C. Entergy’s arguments that the Commission engaged in ad hoc
rulemaking are unavailing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
v
1. This case is distinguishable from Witcher . . . . . . . . . . . . . . . . 35
2. Entergy improperly relies on the irrelevant thought
processes of individual commissioners in the course of the
case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
3. A rule was adopted when the Commission subsequently
conducted formal rulemaking proceedings . . . . . . . . . . . . . . . 38
IV. The Commission’s decision about the amount of rate-case
expenses to exclude should be affirmed. (Responds to Entergy
Issue 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
A. Entergy—the party with the burden to prove rate-case
expenses—failed to provide the information needed to show
exactly how much of its rate-case expenses were incurred to
make the unreasonable long-shot argument. . . . . . . . . . . . . . . . . 39
B. Substantial evidence supports the Commission’s decision about
the amount of rate-case expenses attributable to the
unreasonable argument in the rate case . . . . . . . . . . . . . . . . . . . . 43
C. The Commission’s decision is reasonable—neither arbitrary and
capricious nor an abuse of discretion .. . . . . . . . . . . . . . . . . . . . . . 44
V. Entergy failed to meet its burden under Utilities Code § 36.058 to
prove depreciation charged by its affiliate for rate-case expenses
was reasonable and necessary and no higher than the costs
charged to other affiliates. (Responds to Entergy Issue 4). . . . . . . . 47
A. The Utilities Code imposes additional requirements to show
that amounts paid to affiliates are reasonable expenses . . . . . . . 47
B. Entergy’s evidence is insufficient to meet its burden of proof. . . 48
1. Entergy failed to explain what depreciation expenses of
Service Company were included . . . . . . . . . . . . . . . . . . . . . . . . 49
vi
2. Entergy failed to provide evidence that including Service
Company’s depreciation expense made the expenses
comparable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Prayer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Certificate of Compliance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Certificate of Service. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
APPENDICES
Order. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A
Proposal for Decision.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B
Chart of PUC Dockets Addressing the Two-Bucket Incentive
Compensation Policy Statutes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C
Statutes and Rules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D
Certified Copy of ETI Ex. 41 from Docket 398961. . . . . . . . . . . . . . . . . . . . E
1
ETI Exhibit 41 from Docket 39896 includes an appendix of supporting
information on a CD. That CD is too voluminous to be filed electronically. Therefore,
the Commission has copied only those parts of the CD that it has cited, changed them to
PFD format, and attached them to the body of Exhibit 41. The Commission stands ready
to provide the Court or any other party a copy of the entire CD on request.
vii
Index of Authorities
Cases Pages
Anderson v. R.R. Comm’n,
963 S.W.2d 217 (Tex. App.—Austin 1998, pet. denied). . . . . . . . . . . . 22
Cent. Power and Light Co. v. Pub. Util. Comm’n,
36 S.W.3d 547 (Tex. App.—Austin 2000, pet. denied). . . . . . . . . . . . . 48
Cities of Abilene v. Pub. Util. Comm’n,
146 S.W.3d 742 (Tex. App.—Austin 2004, no pet.).. . . . . . . . . . . . . . . 23
City of El Paso v. Pub. Util. Comm’n,
883 S.W.2d 179 (Tex. 1994). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
City of El Paso v. Pub. Util. Comm’n,
916 S.W.2d 515 (Tex. App.—Austin 1995, writ dism’d).. . . . . . . . . . . . . 16
City of Frisco v. Tex. Water Rights Comm’n,
579 S.W.2d 66 (Tex. Civ. App.—Austin 1979, writ ref’d n.r.e.). . . 29, 37
Indust. Utils. Serv., Inc. v. Tex. Natural Res. Conservation Comm’n,
947 S.W.2d 712 (Tex. App.—Austin 1997, writ denied).. . . . . . . . . . . . 35
McHaney v. Tex. Comm’n on Envtl. Quality,
No. 03-13-00280-CV, 2015 WL 869197 (Tex. App.—Austin February 27,
2015, no pet. h.).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Oncor Elec. Delivery Co. LLC v. Pub. Util. Comm’n,
406 S.W.3d 253 (Tex. App.—Austin 2013, no pet.).. . . . . . . . . . . . . . . 24
Pedernales Elec. Coop., Inc. v. Pub. Util. Comm’n,
809 S.W.2d 332 (Tex. App.—Austin 1991, no writ).. . . . . . . . . . . . . . . . 37
Pub. Util. Comm’n v. Gulf States Utils. Co.,
809 S.W.2d 201 (Tex. 1991). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
viii
Index of Authorities (Cont’d)
Cases (Cont’d) Pages
State of Tex. Agencies and Insts. Of Higher Learning v. Pub. Util. Comm’n,
450 S.W.3d 615 (Tex. App.—Austin 2014, pet. filed). . . . . . . . . . . 31, 32
Tex. Health Facilities Comm’n v. Charter Med.-Dallas, Inc.,
665 S.W.2d 446 (Tex. 1984).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Tex. State Bd. Of Pharmacy v. Witcher,
447 S.W.3d 520 Tex. App.—Austin 2014, pet. filed). . . . . . . . . . . . . . . 35
Statutes
Tex. Gov’t Code
§ 2001.174. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
§ 2001.175(e). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Tex. Util. Code
§ 15.001. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
§ 31.001. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
§ 33.023(b). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
§ 36.002. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
§ 36.051. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
§ 36.058. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21, 47, 48, 49, 53
§ 36.058(c)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
§ 36.061(b)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 24
§ 36.062. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
§ 36.062(4). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
§ 39.451. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
§ 39.452(a).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Rules
16 Tex. Admin. Code
§ 25.231(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ix
Index of Authorities (Cont’d)
Rules (Cont’d) Pages
§ 25.231(b)(2)(J). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
§ 25.245(b)(6). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Other
39 Tex. Reg. 571 (2014), adopted 39 Tex. Reg. 6434 (2014)
(to be codified at 16 Tex. Admin. Code § 25.245). . . . . . . . . . . . . . . . . 38
x
Glossary
ALJ Administrative Law Judge
APA Administrative Procedure Act. Tex. Gov’t Code
§§ 2001.001–.902
Commission or PUC Public Utility Commission of Texas
Docket 39896 Application of Entergy Texas for Authority to Change
Rates, Reconcile Fuel Costs, and Obtain Deferred
Accounting Treatment, P.U.C. Docket 39896, the rate
case that generated the rate-case expenses that
Entergy sought to recover in this case
Entergy Entergy Texas, Inc., the utility that asked the
Commission for rate-case expenses in this case
ERCOT Electric Reliability Council of Texas
OPUC Office of Public Utility Counsel, intervenor at the
Commission, intervenor-defendant at district court,
appellee in this Court
Order The Commission’s order on rehearing that is the
subject of this lawsuit
PFD Proposal for Decision prepared by the ALJ in this case
Service Company Entergy Services, Inc., an affiliate of Entergy that
services the entire family of related companies
State Agencies State Agencies of Texas that are customers of Entergy,
an intervenor at the Commission, intervenor-
defendant in the district court, and appellee before
this Court
TIEC Texas Industrial Electric Consumers, intervenor at the
Commission
xi
Statement of the Case
Entergy challenges the district court’s judgment in an administrative
appeal that affirmed the Public Utility Commission’s order. The
Commission set the rate-case expenses that Entergy is entitled to recover
from ratepayers for reasonable expenses incurred in a prior rate case.
Statement Regarding Oral Argument
Oral argument would be helpful to allow the Court to ask any questions
it may have about the ratemaking or rate-case-expense cases.
Issues Presented
1. Did the Commission have discretion to decide that expenses Entergy
incurred to make an argument in the rate case that it had almost no
chance to win were unreasonable expenses for ratepayers to reimburse?
2. Does the Commission’s statutory duty “not to consider for ratemaking
purposes … any other expenditure … the regulatory authority finds to be
unreasonable, unnecessary, or not in the public interest” authorize it to
exclude Entergy’s unreasonable expenses even though the Commission
had no rule about Entergy making this particular argument?
3. The administrative record shows that, in addition to obtaining expert
testimony to support the unreasonable argument, Entergy included the
argument in its rate-filing package, responded to discovery about the
argument, and filed briefs about the argument. Entergy knew what it
paid expert witnesses but did not track work by its staff and outside
attorneys on an issue-by-issue basis. Was the Commission reasonable to
decide that some of Entergy’s expenses for staff and outside attorneys
were for making the unreasonable argument? Was the Commission
reasonable to estimate the amount of Entergy’s total unreasonable
expenses using a method supported by testimony in the record?
xii
4. Did the Commission reasonably find that Entergy failed to meet its
burden to show that depreciation expenses for unspecified capital assets
of its affiliated Service Company should be included in recoverable rate-
case expenses?
xiii
Statement of Facts
Entergy Texas, Inc. (Entergy) appeals an order of the Public Utility
Commission of Texas (Commission) setting the amount that the utility may
recover from ratepayers for expenses that Entergy incurred in connection
with its rate case, P.U.C. Docket 39896.
A. The Commission decided Entergy’s rate case, Docket
39896.
Entergy initiated a rate case at the Commission. Entergy, an electric
utility that provides service to parts of southeast Texas, is situated outside
the Electric Reliability Council of Texas (ERCOT) and remains a fully
integrated utility—it generates electricity, transmits and distributes
electricity, and sells electricity to retail customers in its service area. That
business remains fully regulated by the Commission, which sets the rates
Entergy can charge.2 So, in 2011 Entergy filed a rate case with the
2
As Entergy explained in its brief, it was initially included among utilities that
were to transition to competition, but is currently subject to regulation under Chapter
36 of the Utilities Code. See Tex. Util. Code §§ 39.451, .452(a). Thus, Entergy’s rates
remain regulated by the Commission. See Tex. Util. Code § 36.002.
1
Commission, Docket 39896.3 Entergy asked to increase rates by over $100
million; the Commission’s order in Docket 39896 allowed the utility to
increase rates by approximately $27.7 million.4
The basic statutory formula the Commission uses to set rates is
(rate of return × invested capital) + reasonable and necessary expenses =
revenue requirement.5
The Commission then designs rates to give the utility a reasonable
opportunity to recover its revenue requirement.6 Although the utility’s
reasonable and necessary expenses included in rates are based on the
utility’s actual expenses over a twelve-month period called the “test year,”7
3
Tex. Pub. Util. Comm’n, Application of Entergy Texas, Inc. for Authority to
Change Rates, Reconcile Fuel Costs, and Obtain Deferred Accounting Treatment,
Docket 39896, (November 28, 2011)(Entergy’s Application of Entergy Texas, Inc. for
Authority to Change Rates, Reconcile Fuel Costs Application of Entergy Texas, Inc. for
Authority to Change Rates, Reconcile Fuel Costs) available at
http://interchange.puc.texas.gov/WebApp/Interchange/application/dbapps/filings/pg
Search_Results.asp?TXT_CNTR_NO=39896&TXT_ITEM_NO=2. (Subsequent
citations to this docket will be listed as “Docket 39896.”)
4
AR Item 32 at 3. Item 32 is the proposal for decision, which will be cited as
“AR, PFD” hereinafter. The administrative record (AR) in this case (Docket 40295) was
admitted into evidence as Joint Exhibits 1 and 2. R.R. at 6:11–6:20. It consists of two
volumes of filings, which are referenced as “item”; one volume of exhibits; and one
transcript that are all contained in one box. Citations to the Administrative Record will
be in the form “AR, Item(s) ___,” for filings, “AR, ___ Ex(s). ___,” for exhibits, and
“AR, Tr. at ___” for transcripts. In the Order, findings of fact will be cited as “FF__”
and conclusions of law will be cited as “CL __.”
5
See Tex. Util. Code § 36.051.
6
Id.
7
See 16 Tex. Admin. Code § 25.231(a).
2
which is used as a predictor of expense that will occur in the future, one
significant expense does not occur every year—the expense of bringing a
rate case. So that amount is usually separately calculated and recovered
from ratepayers through amortization so that the utility will stop recovering
once rate-case expenses are fully recovered. Utilities Code Section
36.061(b)(2) specifically authorizes the Commission to allow a utility to
recover rate-case expenses.8
Originally, Entergy’s request to recover rate-case expenses was part of
the Docket 39896 rate case but the Commission granted the parties’
request to sever it into a separate docket, P.U.C. Docket 40295, the
contested case on appeal in this lawsuit.9 The Commission did not
incorporate the entire record of Docket 39896 into the record of this case,
but, at the hearing on this case, the administrative law judge took official
notice of the Docket 39896 record.10
8
“(b) The regulatory authority may allow as a cost or expense … (2) reasonable
costs of participating in a proceeding under this title not to exceed the amount approved
by the regulatory authority.” Tex. Util. Code § 36.061(b)(2).
9
Docket 39896, (April 4, 2012) (SOAH Order No. 13: Granting Unopposed
Motion to Sever Rate Case Expense Issues) available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_591_7227
42.PDF.
10
AR, Tr. at 16.
3
One issue in the Docket 39896 rate case—whether incentive
compensation for financially based goals should be recovered through rates
as a reasonable and necessary expense—is relevant to the amount of rate-
case expenses awarded in this case. An amount for payroll costs is usually
included among the utility’s reasonable and necessary expenses. Although
some utilities had included incentive compensation for top executives
before, in AEP Texas Central Company’s rate case filed in 2003 (Docket
28840),11 for the first time, a utility asked to include incentive
compensation as part of the payroll costs for all its employees. Most of the
utility’s incentives in that case were paid according to two sets of
performance measures, financial and operational. In that case the
Commission found:
169. The financial measures are of more immediate benefit to
shareholders, and the operating measures are of more
immediate benefit to ratepayers.
11
Tex. Pub. Util. Comm’n, Application of AEP Texas Central Company for
Authority to Change Rates, Docket 28840 available at
http://interchange.puc.texas.gov/WebApp/Interchange/application/dbapps/filings/pg
Control.asp?TXT_UTILITY_TYPE=A&TXT_CNTRL_NO=28840&TXT_ITEM_MATC
H=1&TXT_ITEM_NO=&TXT_N_UTILITY=&TXT_N_FILE_PARTY=&TXT_DOC_TY
PE=ALL&TXT_D_FROM=&TXT_D_TO=&TXT_NEW=true (Subsequent citations to
this PUC Docket will be listed as “Docket 28840.”)
4
170. Incentives to achieve operational measures are necessary and
reasonable to provide T&D utility services, but those to achieve
financial measures are not.12
Thus, the Commission held that AEP proved that incentive compensation
should be included in rates only for operational measures.13 In its brief to
this Court, Entergy refers to this as two buckets of incentive
compensation.14
Evidently, using incentive compensation to pay all employees had
become fashionable, because the Commission was presented with similar
requests by other utilities in subsequent rate cases. The Commission
consistently maintained the distinction between operational-goal and
financial-goal buckets for incentive compensation. Incentive compensation
that belongs in the operational-goal bucket is recoverable, but incentive
compensation that belongs in the financial-goal bucket is not included as a
reasonable and necessary expense in rates because it is of more immediate
benefit to shareholders. Because different utilities can structure incentive
compensation differently, there is always a fact question about whether a
12
Docket 28840(August 15, 2005)(PUC’s Final Order) available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/28840_878_487
259.PDF.
13
Docket 28840 (August 15, 2005)(PUC’s Final Order) CL 45 available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/28840_878_487
260.PDF.
14
Entergy Appellant’s Br. at 14.
5
particular type incentive compensation goes in the operational-goal bucket
or the financial-goal bucket. But the basic policy that only incentive
compensation to meet operational goals can be included in rates remains.
In Docket 39896, Entergy asked the Commission to abandon the
distinction between buckets and allow not only the incentive compensation
in the operational-goal bucket, but also any incentive compensation in the
financial-goal bucket. Entergy’s rate-filing package included testimony by
two different witnesses supporting that argument.15 The issue was hotly
contested; Entergy responded to discovery concerning that argument, and
it filed five separate briefs at the Commission supporting that argument.16
15
See Entergy Appellant’s Br. at 29 (discussing testimony of Mr. Gardner and
Dr. Hartzell about the issue).
16
Docket 39896 (December 20, 2011)(TIEC’s RFIs to Entergy Texas, Inc.)
available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_46_71373
7.PDF; (January 3, 2012) (Cities’ 7th RFI)) available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_62_71465
2.PDF; (January 13, 2012)(Cities’ 10th RFI) available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_141_7155
98.PDF; (January 17, 2012)(Cities’ 12th RFI to Entergy Texas, Inc.) available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_150_7157
44.PDF; (February 1, 2012) (Cities’ 18th RFI to Entergy Texas, Inc.) available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_266_7170
69.PDF; (February 2, 2012) (Commission Staff's 10th RFI to Entergy Texas, Inc.
Question Nos. 10-1 Through 10-8) available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_280_7171
45.PDF; (February 9, 2012) (OPUC’s 10th RFI to Entergy Texas, Inc.) available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_322_7177
21.PDF; (February 21, 2012 (Texas Energy Consumers’ 9th RFI)available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_373_7187
54.PDF; (March 5, 2012)(Cities’ 23rd RFI)available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_415_7199
6
All the other parties opposed eliminating the distinction between the two
buckets.17
The Commission did not agree with Entergy’s argument to eliminate the
two buckets but did find that some of the types of incentive compensation
that other parties claimed were for financial goals really fit in the
operational-goal bucket. The Commission stated in Finding of Fact 129
that “[i]ncentive compensation that is based on financial measures is of
more immediate and predominant benefit to shareholders, whereas
incentive compensation based on operational measures is of more
immediate and predominant benefit to ratepayers.”18 In rate-case Docket
39896, the Commission did not allow Entergy to include $6,196,037 (as
42.PDF; (April 16, 2012) (State’s 11th RFI to Entergy Texas, Inc.) available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_655_723
481.PDF; Docket 39896, (May 18, 2012) (Entergy’s Initial Brief) available at
http://interchange.puc.state.tx.us/WebApp/Interchange/application/dbapps/filings/pg
Search_Results.asp?TXT_CNTR_NO=39896&TXT_ITEM_NO=719; (May 30,
2012)(Entergy’s Reply Brief) available at
http://interchange.puc.state.tx.us/WebApp/Interchange/application/dbapps/filings/pg
Search_Results.asp?TXT_CNTR_NO=39896&TXT_ITEM_NO=754; (July 23,
2012)(Entergy’s Exceptions to Proposal for Decision) available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_775_7318
38.PDF; (October 4, 2012)(Entergy’s Motion for Rehearing)available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_816_738
263.PDF; (November 21, 2012)(Entergy’s 2nd Motion for Rehearing) available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_828_742
851.PDF.
17
AR, PFD at 22.
18
AR, Item 55 (Order) at FF 129.
7
well as the FICA taxes Entergy would have paid on the payroll) in rates
“because it was related to financial measures that are not reasonable and
necessary for the provision of electric service.”19 Entergy did not appeal the
Commission’s order in rate-case Docket 39896 on that issue.
B. The Commission addressed the question of Entergy’s rate-
case expenses in this case.
After it was severed from the rate case, the Commission sent this rate-
case-expense proceeding to the State Office of Administrative Hearings. In
addition to Entergy and the Cities20 that were seeking to recover rate-case
expenses, parties included Commission Staff; the Office of Public Utility
Counsel, which, by statute, represents residential and small commercial
utility customers; Texas Industrial Energy Consumers; and State Agencies.
1. The ALJ considered ratepayers’ arguments against some of
Entergy’s requested rate-case expenses.
Each of the ratepayer groups other than the Cities raised challenges to
some of the rate-case expenses requested by Entergy and the Cities.
Among those challenges, State Agencies claimed that Entergy was not
entitled to recover for the depreciation of assets recorded by its affiliate,
Entergy Services, Inc. (Service Company). OPUC claimed that Entergy
19
Id. at FF 133.
20
Generally, cities that participate in rate cases at the Commission can require
the utility to reimburse their costs. See Tex. Util. Code § 33.023(b).
8
should not recover the expenses it incurred in the rate case arguing that the
Commission should abandon the two-bucket approach to incentive
compensation.
a. Depreciation expenses of Entergy’s affiliated company
State Agencies argued that the Commission should deny Entergy’s
request to include depreciation of assets owned by Entergy’s affiliated
Service Company. Entergy contended that the costs at issue were “a loader
to [Entergy] labor costs covering depreciation on office expenses and
capital.”21 Entergy conceded that such costs would typically be embedded
in a vendor’s labor costs billed to the Company.22
The ALJ recommended that Entergy not be allowed to recover the
depreciation expenses. He not only stated that Entergy had not cited to any
precedent which would justify the recovery of these apparently unusual
rate- case expenses, but also found that Entergy failed to prove the
reasonableness of the expenses under the more stringent standards that are
applicable to affiliate expenses.23
21
AR, Item 25 at 12.
22
Id.
23
Id.
9
b. Rate-case expenses to advocate for abandoning the two-
bucket policy for including incentive compensation in
rates.
Commission Staff, State Agencies, and OPUC argued that Entergy
should not recover any rate-case expenses it incurred in attempting to
eliminate the distinction between operational-goal and financial-goal
buckets of incentive compensation. Commission Staff argued that by
challenging “overwhelming Commission precedent,” Entergy did not act
reasonably.24 Commission Staff contended that the Commission has such
an unequivocal history of denying recovery for financially based incentive-
compensation payments that “[Entergy] should have known that litigating
a position opposed to [it] was not a reasonable use of resources.”25 State
Agencies pointed out that Docket 39896 was merely the latest of three
recent cases in which Entergy sought, but failed to obtain, authority to
charge ratepayers for its financially based incentive costs (the others being
Dockets 34800 and 37744).26
The ALJ, who had also been an ALJ in the Docket 39896 rate case,
agreed with Commission Staff, State Agencies, and OPUC. He noted that
24
AR, Item 30 at 5.
25
AR, Item 24 at 8.
26
AR, Item 23 at 7.
10
throughout the rate case, Entergy took an aggressive position and made a
long-shot argument seeking to eliminate the two-bucket approach to
including incentive compensation in rates.27
The ALJ opined that Entergy’s citation to the cases over the years, where
other utilities requested recovery of financially based incentive
compensation, hurt Entergy’s cause more than it helped because all of the
requests were unanimously denied by the Commission. The ALJ thought
those cases disproved Entergy’s claim that the two-bucket approach was
undergoing continuing clarification.28
The ALJ also found that Entergy overstated and distorted the facts when
it suggested that commissioners have expressed some concern with the
Commission precedent.29 The ALJ noted that the statements Entergy relied
upon all came from a single commissioner, not multiple commissioners.30
Moreover, the comments that Entergy put in evidence show that the
commissioner considered the Commission’s two-bucket precedent binding;
27
AR, PFD at 23.
28
Id.
29
Id.
30
Id. at 23–24.
11
he thought that any change should be accomplished by rulemaking, not an
ad hoc change in a particular rate case.31
The ALJ also found Entergy’s reliance on the recent order at the State
Office of Administrative Hearings in a rate case for SWEPCO to be
misplaced. In the SWEPCO case, the ALJs stated that the utility was not
legally precluded from seeking recovery for its financially based incentive
compensation. The ALJ in this case stated: “It is one thing to acknowledge
that a utility has a legal right to pursue a long-shot theory. It is another
thing entirely, however, to hold that the ratepayers must pay the costs of
the utility’s pursuit of that long-shot.”32
In this case, the Commission did not decide that a utility could never
argue in a contested case that the Commission should change its policy.33
But the Commission did decide that when Entergy argued that the agency
should change such a well-established policy, the argument was such a long
31
Id. at 24.
32
Id.
33
AR, PFD at 24
12
shot—so unlikely to persuade—that it was unreasonable for ratepayers to
bear the expense.34
c. Excessive rate-case expenses
Several parties also claimed that Entergy’s rate-case expenses were
generally too high and that rate-case expenses were high in relationship to
the amount by which Entergy’s rates were raised. Ratepayers also
complained that Entergy had filed three rate cases in the last four years.
Ratepayers were then required to pay rate-case expenses that Entergy
incurred in each of those cases.35
State Agencies expressed concern that, as a general matter, expenses
from rate cases before the Commission appear to be “getting out of hand.”36
Commission Staff “firmly agree[d]” with that concern.37 State Agencies
worried that utilities have no incentive to minimize the number of rate-case
proceedings or the efficiency of rate-case presentation because they assume
their costs will simply be passed on to ratepayers.38 State Agencies urged
34
AR, Order at FF 18f; AR, PFD at 24 (“Simply put, the ALJ concludes that
[Entergy] did not act reasonably when it incurred expenses litigating for recovery of its
financially-based incentive costs in the face of clear and consistent precedent to the
contrary on the issue.”)
35
AR, PFD at 28.
36
AR, Item 23 at 1-2.
37
AR, Item 30 at 13.
38
AR, Item 23 at 1-2.
13
the Commission to allocate rate-case expenses so that the utility was
incentivized to more productively and efficiently use its time in rate cases.39
OPUC agreed that the standard for evaluating the amount of rate-case
expenses to recover from ratepayers ought to give a utility pause before
deciding to pursue overly aggressive or novel arguments.40 Similarly,
Commission Staff and OPUC were concerned about the frequency of
Entergy rate cases over recent years. Docket 39896 was the third Entergy
rate case in four years. Each case resulted in a rate increase and an
obligation for the ratepayers to pay Entergy’s rate-case expenses.41
Staff and OPUC also expressed concern about the overall size of the rate-
case expenses in this case in relation to the outcome of the underlying rate
case. Total rate case expenses ($8.8 million) equal roughly one-third of the
total approved rate increase in Docket 39896 ($27.7 million).42
Commission Staff, State Agencies, and OPUC all expressed the concern that
Entergy was unreasonable because it did not provide good stewardship in
incurring rate-case expenses.43
39
Id. at 5.
40
AR, Item 22 at 8.
41
AR, Item 24 at 3; AR, Item 22 at 2-3, 7-8.
42
AR, Item 24 at 4; AR, Item 22 at 7.
43
See, e.g., AR Item 30 at 13.
14
d. Adjustments to rate-case expenses
The ratepayer parties suggested three ways to adjust Entergy’s rate-
case-expense request to account for problems with Entergy’s request:
• The 50/50 approach. State Agencies’ primary recommendation was to
charge ratepayers for only 50% of total rate case-expenses, arguing that
shareholders, who reap benefits from a rate increase, ought to also share
in the cost of obtaining that rate increase.44
• The Results-Obtained Approach. Alternatively, State Agencies argued
that Entergy should recover only 26.4% of its rate-case expenses—the
ratio between the increase in rates that the Commission authorized in
Docket 39896 ($27.7 million) and the rate increase Entergy asked for in
that case ($104.8 million). OPUC also advocated that approach.45
• The Issue-Specific Reduction Approach. Alternatively, OPUC and
Commission Staff advocated reducing the amount Entergy requested in
rate-case expenses by the ratio between the amounts Entergy sought in
rates for unreasonable, overly aggressive issues and the total rate
increase sought by Entergy. They wanted to include both financially
44
AR, Item 23 at 3.
45
AR, Item 22 at 11.
15
based incentive payments of $6.5 million, and transmission-equalization
payments of $9 million as the numerator of the ratio.
The ALJ agreed with the general concerns raised by Commission Staff,
State Agencies, and OPUC; he believed that a substantial cut to Entergy’s
rate-case expenses was warranted, but only considered the issue-specific
reduction appropriate.46
The ALJ recognized that Section 36.061(b) of the Utilities Code gives the
Commission discretion. He also recognized a number of factors—such as
the time and labor required; the nature of the case; the size of the interest at
stake; and the benefits to the client—that have been deemed relevant to
determining the reasonableness of rate-case expenses. See City of El Paso v.
Pub. Util. Comm’n, 916 S.W.2d 515, 522 (Tex. App.—Austin 1995, writ
dism’d). The ALJ also noted that the parties agreed that Rule 1.04(b) of the
Texas Disciplinary Rules of Professional Conduct provides factors that can
be considered when determining reasonableness of rate case expenses.47
The ALJ rejected the 50/50 approach on the basis that it is contrary to
Commission precedent. He also rejected the results-obtained approach
although he did not find it contrary to Commission precedent. He
46
AR, PFD at 30–32.
47
AR, ETI Ex. 8 at 18-19.
16
considered it a punitive and hindsight-driven approach to cost recovery,
rather than basing cost recovery on whether a utility acted reasonably at the
time it incurred such costs.48
The ALJ found the issue-specific approach entirely consistent with
Commission precedent because the disallowance is a result of specific,
unreasonable actions by Entergy.49
The ALJ found that Entergy bore the burden of proving its reasonable
expenses, and that burden necessarily requires that it separate out any
unreasonable expenses. Having failed to do so with respect to financially
based incentives and transmission equalization payments, he found that it
was reasonable for the Commission to use the issue-specific reduction
approach to calculate those expenses.50
The ALJ proposed that most of the rate-case expenses requested by
Entergy—$7,344,113—be found reasonable and necessary and allowed as a
cost or expense by Entergy. That proposal reduced Entergy’s requested
amount of rate-case expenses for several small specific charges, for
$207,683 in depreciation of office equipment owned by Entergy’s affiliated
48
AR, PFD at 31–32.
49
Id. at 32.
50
AR, Item 24 at 15.
17
company, and for $1,275,738 attributable to “unreasonable and overly
aggressive arguments pursued by [Entergy] in Docket 39896 related to both
financially-based incentive compensation and transmission equalization
payments.”51 The ALJ also proposed a fact finding:
17. The amount of rate case expenses sought by ETI ($8.8 million)
is high, both in absolute terms, and in relation to the rate
increase ultimately obtained by ETI in Docket 39896 ($27.7
million).52
2. The Commission issued its Order in this case.
The Commission considered the ALJ’s proposal for decision and
“adopt[ed] in part and revers[ed] in part.”53 The Commission adopted Fact
Finding 17 about Entergy’s rate-case expenses being excessive. And the
Commission agreed with the proposal to exclude the Service Company’s
depreciation expenses. But the Commission allowed Entergy to recover
expenses incurred for arguments related to transmission-equalization
payments, contrary to the ALJ’s proposal. The Commission did not allow
Entergy to recoup from ratepayers those expenses incurred to argue that
the Commission should abandon its two-bucket policy concerning incentive
compensation included in rates. The Commission stated: “Specifically, the
51
AR, PFD FF 18f.
52
AR, PFD FF 17.
53
AR, Order at 1.
18
Commission agrees with the ALJ that reductions should be made to
Entergy’s recoverable rate-case expenses for Entergy attempting to recover
financially-based incentive compensation in base rates.”54
The Commission further stated that it “has repeatedly ruled that a utility
cannot recover the cost of financially-based incentive compensation because
financial measures are of more immediate benefit to shareholders and
financial measures are not necessary or reasonable to provide utility
services.”55 The Commission concluded “that it should follow its
well-established policy here.”56 The Commission cited four cases
concerning three different utilities from 2005 through 2011 where the
agency refused to allow recovery of incentive compensation based on
financial goals.57
The Commission also adopted the ALJ’s the use of the issue-specific
reduction approach to determine how to calculate an appropriate reduction
in rate-case expenses because the utility took a long-shot position trying to
54
AR, Order at 2.
55
Id.
56
Id.
57
Id.
19
convince the Commission to abandon its well established two-bucket policy
about including incentive compensation in rates.58
C. Entergy appealed.
Entergy filed this suit for judicial review of the Commission’s order to
challenge the amount of rate-case expenses that the Commission ordered.
OPUC, TIEC, and State Agencies intervened in the case. After reviewing the
briefs of the parties and considering their arguments at the hearing on the
merits, the district court, the Honorable Amy Clark Meachum presiding,
affirmed the Commission’s order.59 Entergy appealed to this Court.
Summary of the Argument
In this rate-case-expense proceeding, the Commission reasonably
decided that one of Entergy’s arguments in its related rate case was so
unlikely to prevail that any cost to make the argument was unreasonable.
Thus, the associated expenses were not included in rate-case expenses that
the utility could recover from ratepayers. This decision is reasonable
because the Utilities Code allows only reasonable rate-case expenses to be
recovered, includes a policy of protecting the interests of both the utility and
its customers, and prohibits the Commission from including unreasonable
58
Id.
59
C.R. 232-34.
20
expenses in rates. Moreover, those statutes give the Commission enough
authority to find the expenses unreasonable without first adopting a rule.
And the fact that the Commission subsequently adopted a comprehensive
rule about rate-case expenses shows even more clearly that this contested-
case decision was not improper rulemaking.
Entergy’s expenses to make the argument were not limited to the fees of
expert witnesses on the issue because the issue was included in the utility’s
rate-filing package, the utility responded to numerous discovery requests on
the issue, and the utility filed five briefs addressing the issue at the
Commission. All of that necessarily involved work by Entergy’s staff and
outside attorneys. But Entergy, the party with the burden to prove the
expenses, did not track its expenses for staff and outside attorneys on an
issue-by-issue basis. Thus, the Commission reasonably used a method
proposed by expert testimony in the case to estimate the amount of rate-
case expenses incurred to make the unreasonable long-shot argument.
The Commission properly excluded depreciation expenses of Service
Company, an affiliate of Entergy, from rate-case expenses because Entergy
failed to show that they met the requirements in Utilities Code 36.058.
Entergy did not clearly explain what was being depreciated and why it was a
legitimate rate-case expense nor did Entergy show that the charges were not
21
higher than the charges to other affiliates or third parties for the same type
of services.
Argument
I. Standard of Review
As in any lawsuit, the plaintiff has the burden of proof in a suit for
judicial review of an agency’s order in a contested case. For an
administrative appeal of the Commission’s order in a contested case, that
means that the plaintiff must show reversible error in the Commission’s
order; the substantial-evidence rule described in Section 2001.174 of the
Administrative Procedure Act controls.60 That rule is very deferential to the
agency, but the deference is described differently depending on the type of
error alleged. Complaints in this case invoke the substantial-evidence
standard, and the arbitrary-and-capricious standard.
A. Substantial-evidence Standard
When reviewing an agency’s fact finding, a court uses the deferential
substantial-evidence standard. It prohibits a court from substituting its
judgment for the agency’s as to the weight of evidence.61 “A court that is
reviewing purely factual administrative findings … may determine only
60
See Anderson v. R.R. Comm’n, 963 S.W.2d 217, 219 (Tex. App.—Austin 1998,
pet. denied); Tex. Util. Code § 15.001; Tex. Gov’t Code § 2001.174.
61
Pub. Util. Comm’n v. Gulf States Utils. Co., 809 S.W.2d 201, 211 (Tex. 1991).
22
whether substantial evidence supports those findings.”62 The true test is not
whether the agency reached the correct conclusion, but whether some
reasonable basis exists in the record for the agency’s action.63 “At its core,
the substantial evidence rule is a reasonableness test or a rational basis
test.”64
B. Arbitrary-and-capricious Standard
The Texas Supreme Court has recognized the limits of the arbitrary-and-
capricious standard of review when applied to agency decisions: “The
arbitrary and capricious standard of review historically has been construed
narrowly, and we do not think that the legislature intended it to be
interpreted as a broad, all-encompassing standard for reviewing the
rationale of agency actions.”65 Courts must uphold a Commission decision
if “some reasonable basis exists in the record for the action taken by the
agency.”66
62
Cities of Abilene v. Pub. Util. Comm’n, 146 S.W.3d 742, 748 (Tex.
App.—Austin 2004, no pet.).
63
Tex. Health Facilities Comm’n v. Charter Med.-Dallas, Inc., 665 S.W.2d 446,
452 (Tex. 1984).
64
City of El Paso v. Pub. Util. Comm’n, 883 S.W.2d 179, 185 (Tex. 1994).
65
Charter Med., 665 S.W.2d at 454.
66
City of El Paso, 883 S.W.2d at 185.
23
II. The Commission has discretion to decide that expenses
Entergy incurred making a long-shot argument for
overturning a well-established Commission policy were
unreasonable expenses for ratepayers to reimburse.
(Responds to Entergy Issue 1)
A. The Commission may allow the utility to recover only
reasonable expenses.
The Commission performed its statutory duty to determine whether rate-
case expenses are reasonable, to balance interests of both the utility and its
ratepayers when determining reasonableness, and to allow the utility to
recover only reasonable rate-case expenses.
The Utilities Code gives the Commission discretion when deciding how
much to award a utility in rate-case expenses. In a 2013 appeal of rate-case
expenses for Oncor Electric Delivery Co., LLC, this Court recognized that
“section 36.061(b)(2) gives the Commission the discretion to disallow
improper expenses.”67 And that statute only allows a utility to recover
reasonable rate-case expenses.68 The express purpose of the section of the
Public Utilities Code that applies to electric utilities is “to establish a
comprehensive and adequate regulatory system for electric utilities to
67
Oncor Elec. Delivery Co. LLC v. Pub. Util. Comm’n, 406 S.W.3d 253, 264
(Tex. App.—Austin 2013, no pet.).
68
Tex. Util. Code § 36.061(b)(2) (“The regulatory authority may allow as a cost
or expense … (2) reasonable costs of participating in a proceeding under this title not to
exceed the amount approved by the regulatory authority.” (emphasis added).).
24
assure rates, operations, and services that are just and reasonable to the
consumers and to the electric utilities.”69 Thus, when regulating electric
utilities, the Commission must weigh the interests of both the utilities and
consumers. In addition, the Utilities Code prohibits the Commission from
considering for ratemaking purposes, “any other expenditure … the
regulatory authority finds to be unreasonable, unnecessary, or not in the
public interest.”70
Thus, the Commission may not simply allow a utility to recover expenses
because the utility incurred them to bring a rate case. Instead, the
Commission must determine whether the expenses are reasonable, and the
Commission is prohibited from allowing the utility to recover expenses that
the Commission finds unreasonable. And in deciding what is reasonable,
the Commission must weigh the interests of both the utilities and its
ratepayers. That is exactly what the Commission reasonably did in this case.
69
Tex. Util. Code § 31.001 (emphasis added).
70
Tex. Util. Code § 36.062(4).
25
B. The Commission applied the law to the evidence and
determined that it was unreasonable for Entergy to
recover rate-case expenses incurred to argue that the
Commission should abandon its two-bucket policy
concerning incentive compensation.
Although Entergy incurred expenses to bring the Docket 39896 rate case
and claimed that they were all reasonable, various ratepayer groups
challenged some of those expenses. Commission Staff, State Agencies, and
OPUC all argued that Entergy was unreasonable to incur expenses to argue
in the rate case that the Commission should abandon its two-bucket
approach to incentive compensation.71 They argued that it was so unlikely
that Entergy could prevail on that argument that it was not reasonable for
Entergy to have expended time and expenses to make the argument.72 They
argued that was unreasonable for ratepayers to bear the cost of Entergy
making such a long-shot argument.
The ALJ who heard this rate-case-expense case noted that he had also
heard the Entergy Docket 39896 rate case73 when he called Entergy’s rate-
case argument to abandon the two-bucket approach not only a long shot,
but also overly aggressive.74 He may have been considering both the fervor
71
AR, PFD at 22.
72
Id. at 22–23.
73
Id. at n.87.
74
Id. at 23.
26
of the argument and the amount of time and energy devoted to making the
argument. The record of Docket 39896 reveals
• that in its rate-filing package, the filing that initiated the rate case,
Entergy included testimony of two witnesses arguing that the
Commission should abandon the two-bucket approach, one an outside
expert;75
• Entergy had to respond to nine different discovery requests about the
argument from TIEC (industrial ratepayers), Cities, Commission Staff,
OPUC (representing residential ratepayers), and State Agencies;76 and
75
See Entergy Appellant’s Br. at 29 (listing both Mr. Gardner and Dr. Hartzell as
witnesses on the issue).
76
Docket 39896 (December 20, 2011)(TIEC’s RFIs to Entergy Texas, Inc.)
available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_46_71373
7.PDF; (January 3, 2012) (Cities’ 7th RFI)) available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_62_71465
2.PDF; (January 13, 2012)(Cities’ 10th RFI) available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_141_7155
98.PDF; (January 17, 2012)(Cities’ 12th RFI to Entergy Texas, Inc.) available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_150_7157
44.PDF; (February 1, 2012) (Cities’ 18th RFI to Entergy Texas, Inc.) available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_266_7170
69.PDF; (February 2, 2012) (Commission Staff's 10th RFI to Entergy Texas, Inc.
Question Nos. 10-1 Through 10-8) available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_280_7171
45.PDF; (February 9, 2012) (OPUC’s 10th RFI to Entergy Texas, Inc.) available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_322_7177
21.PDF; (February 21, 2012 (Texas Energy Consumers’ 9th RFI)available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_373_7187
54.PDF; (March 5, 2012)(Cities’ 23rd RFI)available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_415_7199
42.PDF; (April 16, 2012) (State’s 11th RFI to Entergy Texas, Inc.) available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_655_723
27
• Entergy included briefing arguing that the Commission should abandon
its two-bucket approach in five different briefs filed with the
Commission.77
The ALJ and the Commission justly used the term “long shot” to describe
Entergy’s argument that the Commission should abandon its two-bucket
approach to including incentive compensation in rates. Since AEP Texas
Central Company tried to recover incentive compensation for all its
employees in 2004, the Commission has steadfastly maintained a two-
bucket approach—allowing recovery of incentive compensation that fits
within the operational-goal bucket and disallowing recovery of incentive
compensation that fits within the financial-goal bucket.78 Moreover, the
statements from a Commission open meeting that an Entergy witness
481.PDF.
77
Docket 39896, (May 18, 2012) (Entergy’s Initial Brief) available at
http://interchange.puc.state.tx.us/WebApp/Interchange/application/dbapps/filings/pg
Search_Results.asp?TXT_CNTR_NO=39896&TXT_ITEM_NO=719; (May 24,
2012)(Entergy’s Reply Brief) available at
http://interchange.puc.state.tx.us/WebApp/Interchange/application/dbapps/filings/pg
Search_Results.asp?TXT_CNTR_NO=39896&TXT_ITEM_NO=754; (July 23,
2012)(Entergy’s Exceptions to Proposal for Decision) available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_775_7318
38.PDF; (October 4, 2012)(Entergy’s Motion for Rehearing)available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_816_738
263.PDF; (November 21, 2012)(Entergy’s 2nd Motion for Rehearing) available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_828_742
851.PDF.
78
See Appendix C to this brief listing various Commission rate cases from
Docket 28840 forward and the Commission’s treatment of incentive compensation.
28
attached to his testimony do not support Entergy’s position; they were 1)
only the statements of a single commissioner79 and 2) included a statement
that the two-bucket policy was so firmly in place that any change would
need to be done through a rulemaking proceeding.80 Entergy had no
reasonable basis to think it likely that the Commission would abandon the
two-bucket approach to incentive compensation in Docket 39896. Thus, it
was unreasonable for Entergy to have expended so much time and expense
on the argument and unreasonable to require ratepayers to bear the
expense.
Entergy tries to make the Commission’s decision that Entergy’s
argument to abandon the two- bucket approach was such a long shot that
ratepayers should not bear the expenses appear less reasonable by
mischaracterizing the facts. But what Entergy did was to argue that the
well-established policy of dividing incentive compensation into two
buckets—one for operational goals and the other for financial goals—should
79
Such statements are generally irrelevant. “It is immaterial what a
commissioner may have said or thought in the process of arriving at his decision.” City
of Frisco v. Tex. Water Rights Comm’n, 579 S.W.2d 66, 72 (Tex. Civ. App.—Austin 1979,
writ ref’d n.r.e.).
80
AR, ETI Ex. 12, Ex. SFM-R-1, p. 8 of 9 (statements of Commissioner Anderson
at the Commission’s July 30, 2009 open meeting) (“But it seems to be a long and
accepted precedent, and unless we were to open up a separate rulemaking or a project to
change that, to put the—everybody on notice, I’m hesitant to do it in a particular case.”).
29
be abandoned.81 It did not merely argue whether its incentive-
compensation plans fit in the operational-goal bucket or the financial-goal
bucket.
Although Entergy is correct that the question whether a particular form
of incentive compensation belongs in the operational-goal or financial-goal
bucket is a question of fact, that does not change the well-established policy
that there are two buckets: incentive compensation that belongs in the
operational-goal bucket may be recovered in rates and incentive
compensation that belongs in the financial-goal bucket may not. But in its
81
In its initial brief in the rate-case-expense proceeding at the Commission,
Entergy stated:
The Company requests that it be allowed to recover its test year costs of
incentive compensation. The Company recognizes that costs of incentive
compensation tied to financial goals have been disallowed in several prior
rate cases in Texas. The market prevalence of using financial goals as a
part of incentive compensation programs has not been disputed. Rather,
the Commission has previously denied recovery of such costs because of a
lack of evidence showing sufficient customer benefits. In this case,
however, the Company has assembled evidence not previously considered
by the Commission that shows the benefits to customers of using financial
measures in incentive compensation programs. The evidence includes the
testimonies of Company witness Gardner, Vice President of HR Programs
for the Entergy Companies, and Dr. Jay C. Hartzell, who is Chair of the
Finance Department, Professor of Finance, and the Allied Bancshares
Centennial Fellow at the McCombs School of Business at the University of
Texas at Austin. The new evidence also includes empirical studies that
support the Company’s position that customers benefit from incentive
compensation programs that use financial measures and goals that
encourage the financial health of the company.
Docket 39896 (May 18. 2012) (Entergy’s Initial Br.) available at
http://interchange.puc.texas.gov/WebApp/Interchange/application/dbapps/filings/pg
Search_Results.asp?TXT_CNTR_NO=39896&TXT_ITEM_NO=719 at 129–30.
30
brief to this Court, Entergy, after arguing the factual question about which
bucket should hold a particular type of incentive compensation, pivots to the
statement: “The findings that Commission policy was cemented long ago,
and that it was unreasonable for ETI to seek recovery of financially-based
incentives, simply cannot withstand scrutiny.”82 Entergy is wrong. The
Commission can reasonably hold that its policy about two buckets for
incentive compensation is so well-established that it was unreasonable to
ask ratepayers to foot the bill for Entergy challenging the well established
policy even while the Commission entertains fact questions about which
bucket holds individual incentive compensation plans.
This Court has recently acknowledged both the Commission’s long-
standing policy and the fact question that applies to individual types of
incentive compensation. In the Oncor rate case, this Court recognized both
“Commission precedent disallowing compensation payments that are tied to
financial-performance measures rather than those tied to strictly
operational measures”83 and that “the question of whether [a utility’s]
82
Entergy Appellant’s Br. at 16.
83
State of Tex. Agencies and Insts. of Higher Learning v. Pub. Util. Comm’n,
450 S.W.3d 615, 659-60 (Tex. App.—Austin 2014, pet. filed).
31
incentive-compensation payments were ‘financial’ rather than ‘operational’
in nature is one of fact.”84
But the Commission is not saying that a utility cannot recover its
expenses in connection with arguments about incentive compensation. Nor
did the Commission say that the rate-case expenses were unreasonable
merely because Entergy argued against agency precedent. It characterized
Entergy’s arguments as a long shot and overly aggressive. These are
important qualifiers. The two-bucket precedent for including incentive
compensation in rates was well established. Even Entergy in its first issue
in its brief says that the Commission has “historically stated a policy of
disallowing incentive compensation that is tied to “financial” as opposed to
“operational” measures … .”85 Thus, although Entergy does not use the
phrase “well established,” it accepts the premise. Entergy knew that the
Commission had a well-established policy of allowing incentive
compensation in rates only for operational goals, not for financial goals.
Nonetheless, Entergy argued that the two-bucket policy should be
abandoned. The utility should have known that was too much of a long shot
to have any reasonable likelihood of prevailing. The Commission
84
Id. at 660.
85
Entergy Appellant’s Br. at x.
32
reasonably refused to make ratepayers pay the utility to make such a long-
shot argument.
III. The lack of a Commission rule about rate-case expenses for
incentive-compensation arguments did not relieve the
Commission of its statutory duty to allow the utility to
recover only reasonable rate-case expenses. (Responds to
Entergy Issue 2)
Neither Entergy’s arguments that the Commission changed its policy
about rate-case expenses in this case nor its arguments that the Commission
could not decide this case without first adopting a rule stand up to scrutiny.
A. Entergy’s arguments that the Commission departed from
earlier policy in this case are unavailing.
Entergy’s argument that the Commission’s decision to deny the utility’s
expenses to make an unreasonable argument is a change in policy are based
on a mischaracterization of the Commission’s decision. Entergy’s
arguments rely on the Commission previously allowing utilities to argue
about which incentive-compensation expenses belong in the operational-
goal bucket. But that is not the long-shot argument that Entergy made.
Instead, Entergy argued that the Commission should abandon its two-
bucket policy. Entergy shows no examples of allowing rate-case expenses
for arguments to change the two-bucket policy since it became well-
established policy.
33
B. The Commission was merely applying the statutes to the
evidence and argument in this case, not promulgating a
new rule.
The Utilities Code by itself authorizes and requires the Commission to
exclude unreasonable expenses from the rate-case expenses a utility may
collect from ratepayers and put Entergy on notice that unreasonable
expenses could not be recovered.
There was no need for the Commission to adopt a rule before deciding
this case. The Commission cannot avoid its duty to apply the statutes just
because it has not yet adopted a rule to cover every situation that may arise.
The Commission could not dodge the issue and neglect its statutory duty by
noting that it had no rule about how to treat rate-case expenses and
certainly no rule about the very particularized question of how to treat rate-
case expenses incurred to argue about including incentive compensation in
rates. The Commission had to decide the issue based on statutes, the
evidence, and the argument presented in this case.
Applying the statutes to the evidence and arguments in this case, the
Commission recognized that a utility can make arguments in a rate case that
are so unlikely to prevail that it is unreasonable for ratepayers to bear the
burden of the expenses the utility incurred to make those arguments. This
34
is not a new policy of general application; it is merely an outcome from the
statute.
This Court upheld that same outcome in a 1997 water utility case. The
Court upheld denying any rate-case expenses to a utility that brought a rate
case that it wanted to lose. “[T]he Commission could have determined that
any expenses incurred in seeking a surcharge [the utility] did not want were
unreasonable, unnecessary or not in the public interest and that the utility’s
customers should never have to pay them.”86
C. Entergy’s arguments that the Commission engaged in ad
hoc rulemaking are unavailing.
1. This case is distinguishable from Witcher.
Entergy’s reliance on Texas State Board of Pharmacy v. Witcher,87 is
misplaced because the actions of the Commission are entirely different from
the actions of the Texas State Board of Pharmacy. Unlike Witcher, the
Commission had no unstated policy for all cases that it applied to determine
whether Entergy should recover rate-case expenses. Instead, the
Commission had both a statute and a rule that prohibited including
86
Indust. Utils. Serv., Inc. v. Tex. Natural Res. Conservation Comm’n, 947
S.W.2d 712, 718 (Tex. App.—Austin 1997, writ denied).
87
447 S.W.3d 520 (Tex. App.—Austin 2014, pet. filed).
35
unreasonable expenses in rates.88 Once the Commission decided that the
expenses Entergy incurred to make the argument were unreasonable, the
published rule and statute prohibited the Commission from including those
expenses in rates.
The “rule” that the court found to be impermissible ad hoc rulemaking in
Witcher was an unpublished rule, was applied in contravention of the
agency’s published rule as applied to the facts, and was announced in the
order as a policy of general application; in this case, the only rule is a
published rule prohibiting recovery of unreasonable expenses, it was
applied in harmony with the fact findings, and the Commission did not
announce any new policy of general application.
2. Entergy improperly relies on the irrelevant thought
processes of individual commissioners in the course of
the case.
To support its argument that the Commission should have adopted a
rule, Entergy improperly cites the comment of one of the commissioners
during the Commission’s open meeting in this contested case.89 That
quoted language is not part of the administrative record in this case and
therefore not part of the record that the Court should consider. In an
88
Tex. Util. Code § 36.062; 16 Tex. Admin. Code § 25.231(b)(2)(J).
89
Entergy Appellant’s Br. at 18; 21–22.
36
administrative appeal, “[the] court shall conduct the review sitting without a
jury and is confined to the agency record … .”90 And this Court has
explained, “[t]he thought processes or motivations of an administrator are
irrelevant in the judicial determination whether the agency order is
reasonably sustained by appropriate findings and conclusions that have
support in the evidence.”91 The fact that the Commission’s final order does
not reach the same conclusion as the statement of Commissioner Nelson
that Entergy quoted, shows that through the process of deliberation, she
reached a different conclusion. That demonstrates the inappropriateness of
citing to thought processes of an administrator as evidence of what the
Commission actually decided.
And just last week, this Court noted that a statement similar to
Commisisoner Nelson’s request for a rulemaking showed that the agency
was not adopting a rule in its order. In McHaney v. Texas Commission on
Environmental Quality, this Court stated: “The comment made by a TCEQ
commissioner at a hearing that ‘if there is need for clarity in our rules, I
would encourage our staff to look at that and see if we need to go through
90
Tex. Gov’t Code § 2001.175(e).
91
Pedernales Elec. Coop., Inc. v. Pub. Util. Comm’n, 809 S.W.2d 332, 342 (Tex.
App.—Austin 1991, no writ) (quoting City of Frisco v. Tex. Water Rights Comm'n, 579
S.W.2d 66, 72 (Tex. Civ. App.—Austin 1979, writ ref’d n.r.e.)).
37
the rule making or provide some other guidance” (emphasis in original)
strongly implies that rulemaking is not occurring at that hearing.92
3. A rule was adopted when the Commission subsequently
conducted formal rulemaking proceedings.
Although the Commission did not adopt a rule in this case, the
Commission did adopt a rate-case-expense rule through the formal
rulemaking process in 2014.93 That further indicates that the Commission
was not adopting a rule in this case. The actual rulemaking, deciding a rule
of general application for all cases, was done in formal rulemaking. In this
case the Commission merely decided the issues required to determine what
Entergy should receive in rate-case expenses. The Commission utilized both
formal rulemaking and its authority to decide matters that arise in a single
contested case in the proper context.
Entergy’s curious argument—that because it argues that the exceptions to
ad hoc rulemaking do not apply in this case, the Commission adopted a
rule—is illogical. The logical question is whether the Commission actually
adopted a rule in this contested case. It did not; it adopted a rule in a formal
92
McHaney v. Texas Comm’n on Envtl. Quality, No. 03-13-00280-CV, 2015 WL
869197 at *8 (Tex. App.—Austin Feb. 27, 2015, no. pet. h.).
93
39 Tex. Reg. 571 (2014), adopted 39 Tex. Reg. 6434 (2014) (to be codified at
16 Tex. Admin. Code § 25.245).
38
rulemaking. Here the Commission decided only the questions necessary to
resolve this contested case.
IV. The Commission’s decision about the amount of rate-case
expenses to exclude should be affirmed. (Responds to
Entergy Issue 3)
A. Entergy—the party with the burden to prove rate-case
expenses—failed to provide the information needed to
show exactly how much of its rate-case expenses were
incurred to make the unreasonable long-shot argument.
Because Entergy did not track its expenses on an issue-by-issue basis, the
Commission used a proxy to identify the unreasonable expenses Entergy
incurred to make its overly aggressive, long-shot argument that the
Commission should abandon the two-bucket approach to incentive
compensation. Entergy complains that the Commission did not use its
actual expenses, but, because Entergy did not keep track of its expenses on
an issue-by-issue basis, Entergy fails to identify the actual expenses Entergy
incurred in staff and outside counsel expenses to make the unreasonable
argument. Therefore, based on the evidence in the case, the Commission
used a proxy to determine the amount of issue-specific rate-case expenses
that were attributable to the argument. The Commission applied a ratio to
the total amount of rate-case expenses Entergy requested. The ratio
compared disallowed financial-goal bucket incentive-compensation
expenses Entergy requested but did not receive to the total increase in rates
39
that Entergy sought in the Docket 39896 rate case. That resulted in a
$522,244.66 decrease in requested rate-case expenses. The Commission
described that amount as “the amount of rate-case expenses related to
financially-based incentive compensation using the issue-specific reduction
approach.”94
Once the Commission decided that Entergy’s financially based incentive-
compensation arguments were unreasonable and overly aggressive, it
needed to decide how much of the rate-case expenses were attributable to
that argument. The expenses to employ outside expert witnesses in Docket
39896 to support the unreasonable argument could be identified, but the
Commission found that those were not the only expenses. Entergy’s rate-
case expenses included the cost of its staff, the staff of its affiliate Service
Company, and its outside counsel. They decided to make the unreasonable
argument, hired the experts, and included the arguments in the rate-filing
package that initiated the rate case. In addition, they had to respond to
discovery on the issue.95 Finally, Entergy briefed the issue at the State
94
AR, Order at 3.
95
Tex. Pub. Util. Comm’n, Application of Entergy Texas, Inc. for Authority to
Change Rates, Reconcile Fuel Costs, and Obtain Deferred Accounting Treatment,
Docket 39896 (December 20, 2011)(TIEC’s RFIs to Entergy Texas, Inc.) available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_46_71373
7.PDF; (January 3, 2012) (Cities’ 7th RFI)) available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_62_71465
2.PDF; (January 13, 2012)(Cities’ 10th RFI) available at
40
Office of Administrative Hearings and before the Commission.96 To
accomplish all this, some of the time of Entergy and Service Company
employees as well as the time of outside counsel had to have been devoted
to the issue. The fees of the expert witnesses did not capture all these
additional expenses.
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_141_7155
98.PDF; (January 17, 2012)(Cities’ 12th RFI to Entergy Texas, Inc.) available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_150_7157
44.PDF; (February 1, 2012) (Cities’ 18th RFI to Entergy Texas, Inc.) available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_266_7170
69.PDF; (February 2, 2012) (Commission Staff's 10th RFI to Entergy Texas, Inc.
Question Nos. 10-1 Through 10-8) available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_280_7171
45.PDF; (February 9, 2012) (OPUC’s 10th RFI to Entergy Texas, Inc.) available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_322_7177
21.PDF; (February 21, 2012 (Texas Energy Consumers’ 9th RFI)available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_373_7187
54.PDF; (March 5, 2012)(Cities’ 23rd RFI)available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_415_7199
42.PDF; (April 16, 2012) (State’s 11th RFI to Entergy Texas, Inc.) available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_655_723
481.PDF.
96
Tex. Pub. Util. Comm’n, Application of Entergy Texas, Inc. for Authority to
Change Rates, Reconcile Fuel Costs, and Obtain Deferred Accounting Treatment,
Docket 39896, (May 18, 2012) (Entergy’s Initial Brief) available at
http://interchange.puc.state.tx.us/WebApp/Interchange/application/dbapps/filings/pg
Search_Results.asp?TXT_CNTR_NO=39896&TXT_ITEM_NO=719; (May 24,
2012)(Entergy’s Reply Brief) available at
http://interchange.puc.state.tx.us/WebApp/Interchange/application/dbapps/filings/pg
Search_Results.asp?TXT_CNTR_NO=39896&TXT_ITEM_NO=754; (July 23,
2012)(Entergy’s Exceptions to Proposal for Decision) available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_775_7318
38.PDF; (October 4, 2012)(Entergy’s Motion for Rehearing)available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_816_738
263.PDF; (November 21, 2012)(Entergy’s 2nd Motion for Rehearing) available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/39896_828_742
851.PDF.
41
But when Entergy was asked to calculate the amount of rate-case
expenses devoted to any particular issue, the utility’s witnesses repeatedly
testified that Entergy did not keep track of rate-case expenses on an issue-
by-issue basis. At the hearing, Entergy witness Considine testified:
“Employees charge their time and expenses to a rate case project code that’s
set up specifically for Docket 39896.” In response to the question, “But not
issue specific?” Considine replied, “No, ma’am.”97 Again, Considine
testified, “The Company tracks time on a project level basis, and the entire
project related to the rate case as a whole.”98 In response to a question
about separating rate-case expenses concerning another issue in the rate
case, Considine indicated that he would not estimate how much time was
devoted to a particular issue because it would be a guess.99
In response to a request for information about the rate-case expenses
related to a different issue in the rate case, Entergy responded: “Costs
related to the preparation and presentation of testimony are not accounted
for in the manner requested. Costs are accumulated on a project level basis
and related to the rate case as a whole.”100
97
AR, Tr. at 35.
98
Id. at 45.
99
Id. at 45-46.
100
AR, State’s Ex. 4.
42
B. Substantial evidence supports the Commission’s decision
about the amount of rate-case expenses attributable to
the unreasonable argument in the rate case.
Lacking any evidence from Entergy—the party with the burden to prove
that its rate-case expenses were reasonable—that identified the exact
amount of rate-case expenses that Entergy incurred to argue for abandoning
the two-bucket policy, the Commission had to find a way to measure the
rate-case expenses associated with that argument. The Commission looked
to evidence in the administrative record and applied a method supported by
OPUC witness Benedict. He proposed using a percentage; he compared the
amount of disallowed financial-goal bucket incentive compensation that
Entergy sought in the rate case to the total amount by which Entergy wanted
to increase rates in Docket 38986. That ratio was applied to the total
amount of rate-case expenses Entergy requested to find the percentage of
rate-case expenses attributable to Entergy’s unreasonable long-shot
arguments.101 The ALJ and the Commission used this method to determine
how much of Entergy’s rate-case expenses were for the unreasonable and
overly aggressive rate-case expenses.
101
AR, OPUC Ex. 1 at 10.
43
Thus, the way the Commission determined the amount of requested rate-
case expenses attributable to the unreasonable and overly aggressive
argument is supported by substantial evidence in the record.
C. The Commission’s decision is reasonable—neither
arbitrary and capricious nor an abuse of discretion.
Entergy unsuccessfully argues that the Commission’s computation of
unreasonable rate-case expenses is different from the Commission’s usual
practice. But the Commission followed its practice of excluding only that
portion of the expenses that were unreasonable and its method to determine
that amount is similar to that used in an earlier Commission decision, its
2004, Docket 28840 Order.102
Contrary to Entergy’s claims, the Commission’s actions were consistent
with other rate-case-expense cases: The Commission denied the utility’s
rate-case-expense request to the extent it concerned a single, unreasonable
expense—the expense associated with the argument that the Commission
should abandon the two-bucket approach to determining incentive
compensation included in rates. The Commission refused to generally cut
rate-case expenses in half, based on the assumption that half of the costs
benefitted the shareholders or to cut rate-case expenses based on the
102
Docket 28840 (July 2, 2004) (Proposal for Decision) at 125 available at
http://interchange.puc.texas.gov/WebApp/Interchange/application/dbapps/filings/pg
Search_Results.asp?TXT_CNTR_NO=28840&TXT_ITEM_NO=636.
44
utility’s success in raising rates.103 The Commission’s issue-specific
approach is consistent with only denying unreasonable rate-case expenses.
Moreover, the Commission’s decision in this case is remarkably similar
to the way it decided how much of the cities’ requested rate-case expenses
should not be allowed in the earlier case. Although the Commission did not
use the term “proxy” in Docket 28840, the Commission went through an
analysis similar to the one here to determine how much of the rate-case
expenses were reasonable and should be recovered. In Docket 28840, the
Commission decided that a survey that the cities’ expert used was “seriously
flawed and that conclusions drawn from the data cannot reasonably be
supported under current legal standards”104 Without any analysis of the
amount the expert spent on each part of her study or testimony, the ALJs in
that case stated: “Although Dr. Goodfriend’s survey and the portion of her
testimony upon which it is based may be flawed, that criticism does not fit
the remainder of her testimony. Therefore, the ALJs recommend a
disallowance of one-half of Dr. Goodfriend’s expenses … .”105 The
103
AR, PFD at 31.
104
Docket 28840 (July 2, 2004) (Proposal for Decision) at 125 available at
http://interchange.puc.texas.gov/WebApp/Interchange/application/dbapps/filings/pg
Search_Results.asp?TXT_CNTR_NO=28840&TXT_ITEM_NO=636.
105
Id. at 121-22.
45
Commission adopted that decision in its final order.106 Obviously, the
Commission went to less effort in that case than here to identify the amount
of expense to allocate to a single part of rate-case expenses.
And the Commission did not in this case mandate that every utility keep
track of its rate-case expenses on an issue-by-issue basis. It noted that
Entergy could not complain that exact rate-case expenses attributable to the
unreasonable argument were not used because Entergy, the party with the
burden to prove all the reasonable rate-case expenses it seeks to recover
from ratepayers, did not account for its expenses in a way that would allow
the Commission to determine the exact amount.107 But the computation the
Commission makes—using an issue-specific method to determine those
costs that is based on evidence in the record—was reasonable.
Finally, the Commission did not adopt a rule: it made no general
statement in this case that all utilities must keep track of their rate-case
106
Docket 28840 (Mar. 3, 2006) (Order) FF 29, available at
http://interchange.puc.state.tx.us/WebApp/Interchange/Documents/31433_32_50489
0.PDF.
107
The PFD that the Commission adopted states:
Staff counters (and the ALJ agrees)that [Entergy] bore the burden of
proving its reasonable expenses, and that burden necessarily requires that
it separate out any unreasonable expenses. Having failed to do so with
respect to financially-based incentives …, it is reasonable for the
Commission to use the Issue-Specific Reduction Approach as a proxy for
calculating those expenses.
AR, PFD at 32-33.
46
expenses on an issue-by-issue basis. The Commission did address that
question when it formally adopted a new rule.108 Thus, the Commission
properly decided only the case before it and properly went through formal
rulemaking to adopt a rule.
Because the Commission was not making any new policy decision of
general application, it did not adopt a rule in its order in this case. It was
simply using the evidence presented to determine facts in this case.
V. Entergy failed to meet its burden under Utilities Code
§ 36.058 to prove depreciation charged by its affiliate for
rate-case expenses was reasonable and necessary and no
higher than the costs charged to other affiliates. (Responds
to Entergy Issue 4)
A. The Utilities Code imposes additional requirements to
show that amounts paid to affiliates are reasonable
expenses.
Expenses paid to a utility’s affiliate are subject to increased scrutiny to
ensure that no expenses are included that would not be similarly recovered
in an arms-length transaction. Entergy failed to meet the heightened
standard imposed under Utilities Code § 36.058 when it sought
108
16 Tex. Admin. Code § 25.245(b)(6).
47
depreciation of the assets of the Service Company.109 For each item or class
of items, Entergy had the burden to prove that the expenses were
reasonable and necessary, and that the price was not higher than the prices
charged by the supplying affiliate to its other affiliates, or to a nonaffiliated
person within the same market area or under the same market conditions.110
The Commission must presume that affiliate expenses should not be
included in rates unless these conditions are met.111 Thus, Entergy had to
overcome the presumption against affiliate expenses to recover depreciation
expenses for Service Company in rate-case expenses. It failed to do so.
B. Entergy’s evidence is insufficient to meet its burden of
proof.
Regarding depreciation of Service Company’s assets, the Court should
uphold the Commission’s factual determination that Entergy failed to
provide evidence sufficient to meet the level of scrutiny that applies to
109
Tex. Util. Code § 36.058; Cent. Power & Light Co. v. Pub. Util. Comm’n, 36
S.W.3d 547, 564 (Tex. App.—Austin 2000, pet. denied) (“Because of the possibility for
self-dealing between affiliated companies, however, expenses paid to an affiliated entity
are presumptively not included in the rate base. A utility can overcome this
presumption against affiliate expenses only if it demonstrates that its payments are
‘reasonable and necessary for each item or class of items as determined by the
commission.’”).
110
Tex. Util. Code § 36.058.
111
Tex. Util. Code § 36.058; Cent. Power & Light Co., 36 S.W.3d at 564.
48
expenses paid to affiliates, and Entergy’s reliance on the rate case for
support is misplaced.
1. Entergy failed to explain what depreciation expenses of
Service Company were included.
The quality and character of proof of depreciation expenses that Entergy
provided is not the same in both the rate case and the rate-case-expense
docket. The Commission has explained that “independent evidence must be
provided in order to meet the statutory requirement to develop findings of
fact based on an item or class of items basis.”112 Entergy did not provide
sufficient independent evidence to include Service Company’s depreciation
as part of the utility’s rate-case expenses. Entergy failed to include studies,
comparison to affiliates, comparison to alternative providers, and evidence
of costs to Service Company on a stand-alone basis.113 Utility Code § 36.058
requires strict compliance, and Entergy did not meet the statutory standard.
The Commission found: “$207,683 in depreciation of office equipment
owned by [Service Company] (an affiliated company of [Entergy]) and used
112
Tex. Pub. Util. Comm’n, Application of Entergy Gulf States, Inc. For
Approval of its Transition to Competition Plan and the Tariffs Implementing the Plan,
and for the Authority to Reconcile Fuel Costs, to Set Revised Fuel Factors, and to
Recover a Surcharge for Under-Recovered Fuel Costs, Docket No. 16705,(Oct. 13, 1998)
(Second Order on Rehearing) at 85, FF 150. available at
http://interchange.puc.texas.gov/WebApp/Interchange/application/dbapps/filings/pg
Search_Results.asp?TXT_CNTR_NO=16705&TXT_ITEM_NO=5006 . (Subsequent
citations to this PUC Docket will be cited “Docket 16705.”)
113
Id.
49
by [Service Company] employees for their work in Docket 39896 is not
reasonable and is properly disallowed.”114
In this case, Entergy’s witness Considine testified in response to State
Agencies’ challenge to $207,683 in depreciation expense for Entergy’s
affiliate as rate-case expenses.115 State Agencies claimed that the utility
failed to support the amounts with detail. In response, Mr. Considine
attached detail that was supposed to respond to State Agencies’ concern.116
That detail lists many items for depreciation, but the plethora of data still
fails to explain what is being depreciated. Although the spreadsheets
include project code, year, month, resource code, resource description,
monthly amount, and journal ID number, all that data fails to explain why
those depreciation amounts are relevant to Entergy’s participation in the
rate case. The resource code is a number without any key, and the resource
description simply states “Depreciation & Amort Expenses.”117 There is no
way to know whether Entergy’s affiliate is depreciating only property used
to do work necessary for Entergy’s rate case or whether it is depreciating
every asset it owns.
114
AR, Order at FF 18a.
115
AR, Entergy Ex. 7 at 9 of 11.
116
AR, Entergy Ex. 7 at Ex. MPC-R-1.
117
See id.
50
Entergy attempts to support the expenses by relying on Stephanie
Tumminello’s testimony in Docket No. 39896 where she stated that the
depreciable assets “consist primarily of computer equipment, computer
software systems, communications equipment, furniture, fixtures, leasehold
improvements, and aircraft.”118 Entergy’s reliance on this testimony fails
because it refers to expenses during the test year rather than rate-case
expenses, many of which occurred after the test year, during the rate case.119
The rate-case expenses are subject to entirely different project codes and
billing methods.120 And it is not clear that the same assets are being
depreciated in the rate-case expense proceedings as were depreciated in the
test year. For example, Ms. Tumminello testified that test-year expenses
were adjusted to remove depreciation of aircraft,121 but whether it was also
removed from rate-case expenses is a mystery. This borrowed testimony
118
Docket No. 39896, ETI Ex. 41 (Tuminello Direct at 79 of 98)(emphasis
added). (A certified copy is attached as Appendix E.)
119
Id. at 77 of 98.
120
Id. at 8, 45.
121
Id. at 79 of 98.
51
from the rate case fails to meet the standard requiring independent
evidence to support the item or class of items.122
2. Entergy failed to provide evidence that including Service
Company’s depreciation expense made the expenses
comparable.
Further, Entergy failed to provide evidence required by the statute:
Entergy did not demonstrate that the depreciation price Service Company
charged Entergy is no higher than the prices charged to other affiliates.123
For the test-year expenses, Ms. Tumminello’s testimony regarding
depreciation was supported with numerous reports, benchmarks, and
comparisons.124 But there is no such support for the rate-case-expense
depreciation. Although Mr. Considine testified that Service Company
charges Entergy its actual costs, this is insufficient without supporting
evidence showing that the prices charged to Entergy were not higher than
122
Docket 16705(Oct. 14, 1998) (Second Order on Rehearing) at 85, FF 150.
available at
http://interchange.puc.texas.gov/WebApp/Interchange/application/dbapps/filings/pg
Search_Results.asp?TXT_CNTR_NO=16705&TXT_ITEM_NO=5006.
123
Tex. Util. Code § 36.058(c)(2).
124
See Docket No. 39896 ETI Ex. 41 (Tumminello Direct), Ex. SBT-20 Entergy
Arkansas Test Year Billing to Affiliates; Ex. SBT-21 Entergy Gulf States Louisiana Test
Year Billings to Affiliates; SBT-22 Entergy Louisiana Test Year Billings to Affiliates;
SBT-23 Entergy Mississippi Test Year Billings to Affiliates; Ex. SBT-24Entergy New
Orleans Test Year Billings to Affiliates; SBT-25 Non-regulated Test Year Billings to
Regulated Affiliates. (A certified copy is attached as Appendix F.)
52
those charged to its other affiliates.125 There is no information that enables
the Commission to independently evaluate the costs that Service Company
charged to Entergy compared to its other affiliates. Entergy failed to meet
its burden.
The only evidentiary support Entergy offered to prove that depreciation
should be included in its rate-case expenses is a meaningless spreadsheet
and a Service Company employee’s conclusory statement that the
depreciation expense is reasonable and necessary. The Commission
reasonably decided that the evidence failed to meet the heightened standard
for allowing affiliate expenses under Utilities Code § 36.058. The
Commission properly excluded Service Company’s depreciation from rate-
case expenses, and the Commission’s order should be affirmed.
Prayer
The Commission asks the Court to affirm the district court’s judgment,
which affirmed the Commission’s order. The Commission also asks for all
other relief to which it is entitled.
125
Tex. Util. Code § 36.058; see also Docket 16705 (Oct. 14, 1998) (Second Order
on Rehearing) at 85, FF 153. available at
http://interchange.puc.texas.gov/WebApp/Interchange/application/dbapps/filings/pg
Search_Results.asp?TXT_CNTR_NO=16705&TXT_ITEM_NO=5006.
53
Respectfully submitted,
KEN PAXTON
Attorney General of Texas
CHARLES E. ROY
First Assistant Attorney General
JAMES E. DAVIS
Deputy Attorney General for
Civil Litigation
JON NIERMANN
Division Chief
Environmental Protection Division
/s/ Elizabeth R. B. Sterling
Elizabeth R. B. Sterling
Assistant Attorney General
State Bar No. 19171100
MEGAN M. NEAL
Assistant Attorney General
State Bar No. 24043797
Environmental Protection Division
Office of the Attorney General
P.O. Box 12548, MC-066
Austin, Texas 78711-2548
512.463.2012
512.457.4616 (fax)
Elizabeth.Sterling@texasattorneygeneral.gov
COUNSEL FOR PUBLIC UTILITY
COMMISSION OF TEXAS
54
Certificate of Compliance
I certify that the foregoing computer-generated document has 11,080
words, calculated using the computer program WordPerfect 12, pursuant to
Texas Rule of Appellate Procedure 9.4.
/s/ Elizabeth R. B. Sterling
Elizabeth R. B. Sterling
55
Certificate of Service
I hereby certify that on this the 6th day of March 2015, a true and
correct copy of the foregoing document was served on the following counsel
electronically, through an electronic filing service and by email.
/s/ Elizabeth R. B. Sterling
Elizabeth R. B. Sterling
Counsel for Appellant Entergy Texas, Inc.:
Marnie A. McCormick
John F. Williams
Duggins Wren Mann & Romero, LLP
P. O. Box 1149
Austin, Texas 78767-1149
512.744.9300
512.744.9399 (fax)
mmccormick@dwmrlaw.com
jwilliams@dwmrlaw.com
Counsel for Appellant Office of Public Utility Counsel:
Ross Wyatt Henderson
Assistant Public Counsel
Office of Public Utility Counsel
P.O. Box 12397
Austin, Texas 78711-2397
512.936.7500
512.936.7520 (fax)
Ross.Henderson@opuc.texas.gov
56
Counsel for State Agencies:
Katherine H. Farrell
Assistant Attorney General
Administrative Law Division
Energy Rates Section
Office of the Attorney General
P.O. Box 12548 MC 018-12
Austin, Texas 78711-2548
512.475.4237
512.320.0167 (fax)
Katherine.Farrell@texasattorneygeneral.gov
Counsel for Texas Industrial Energy Consumers:
Rex VanMiddlesworth
Benjamin Hallmark
Thompson & Knight LLP
98 San Jacinto Blvd., Ste. 1900
Austin, Texas 78701
512.469.6100
512.469.6180 (fax)
rex.vanm@tklaw.com
benjamin.hallmark@tklaw.com
57
APPENDIX A
Order
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PUC DOCKET NO. 40295 VVV
SOAEI DOCKET NO. XXX-XX-XXXX pt/8,t1c Plf 3:
CL4^ `
APPLICATION OF ENTER(^Y § PUBLIC UTILITY COMMISSI(^N
TEXAS, INC. FOR RATE CASE §
EXPENSES PERTAINING TO PUC § OFTEXAS
DOCKET NO. 39896 §
ORDER
This Order addresses the rate-case expenses pertaining to Docket No. 39896,1 Entergy
Texas, Inc.'s last rate case. Entergy requested $8.8 million in rate-case expenses associated with
Docket No. 39896-$7.6 million for Entergy's own rate-case expenses and $1.2 million for
Cities' rate-case expenses. The proposal for decision in this docket was issued on February 19,
2013. In the proposal for decision, the ALJ recommended allowing Cities' rate-case expenses
incurred through August 31, 2012, plus up to $75,800 in rate-case expenses as they are incurred
after August 31, 2012. The ALJ also recommended that Entergy's rate-case expenses be reduced
to account for Entergy taking certain positions in the rate case regarding financially-based
incentive compensation and transmission equalization expenses. The Commission considered
the proposal for decision at the April 11 and April 25, 2013 open meetings. The Commission
adopts in part and reverses in part the proposal for decision, including findings of fact and
conclusions of law.
1. Estimated Rate-Case Expenses
The Commission reverses the proposal for decision regarding Cities' $75,800 in
estimated rate-case expenses to be incurred after August 31, 2012.2 In Docket No. 37772, the
Commission found that approving estimated rate-case expenses for two different parties
representing Cities is not in the public interest and disallowed their recovery in the rate-case
expense surcharge, but did not prohibit the Cities from seeking recovery of actual rate-case
pplication oJ'Entergy Texas, Inc. for A uthority to Change Rates, Reconcile Fuel Costs, and Obtain
1 Application
Deferred Accounting Treatment, Order on Rehearing, Docket No. 39896 (Nov. 2, 2012).
2 Proposal for Decision at 4-8 ( Feb. 19, 2013).
90
PUC Docket No. 40295 Order Page 2 of 8
SOAH Docket No. XXX-XX-XXXX
expenses in the utility's next rate case.3 The Commission affirms that holding here: Cities
cannot recover for estimated rate-case expenses in this docket, but may seek recovery in
Entergy's next rate case. To reflect its determination on this issue, the Commission adds new
finding of fact 16A, modifies conclusion of law 7, and adds new conclusion of law 10.
II. Proportional Reduction
The Commission affirms the proposal for decision regarding the need to reduce Entergy's
recoverable expenses due to an unreasonable position pursued by Entergy in the rate case4 and
also affirms the use of the "issue-specific reduction approach" to determine how to calculate an
appropriate reduction in rate-case expenses when the utility takes positions that are in conflict
with Commission precedent.5
Specifically, the Commission agrees with the AU that reductions should be made to
Entergy's recoverable rate-case expenses for Entergy attempting to recover financially-based
incentive compensation in base rates. The Commission has repeatedly ruled that a utility cannot
recover the cost of financially-based incentive compensation because financial measures are of
more immediate benefit to shareholders and financial measures are not necessary or reasonable
to provide utility services.6 The Commission concludes that it should follow its well-established
policy here.
However, the AU did not include all of the impacts attendant to the disallowance for
incentive compensation.7 To calculate the amount of the reduction in rate-case expenses related
to financially-based incentive compensation, the Commission starts with Entergy's initial rate-
3 Application qf Southwestern Electric Power Company for Rate Case Expenses Pertaining to Docket No.
37364, Order at 1-2, Docket No. 37772 (Oct. 21, 2010).
4 Proposal for Decision at 29-30.
5 Id. at 32-34.
b Application of AEP Texas Central Company for Authority to Change Rates, Docket No. 28840, Proposal
for Decision at 92-97, Findings of Fact Nos. 164-170, Order at 35 (Aug. 15, 2005); Application of AEP Texas
Central Company for Authority to Change Rates, Docket No. 33309, Proposal for Decision at 116-12 1, Finding of
Fact No. 82, Order on Rehearing at 12 (March 4, 2008); Application of Oncor Electric Delivery Company, LLC, for
Authority to Change Rates, Docket No. 35717, Proposal for Decision at 96-100, Finding of Fact No. 93, Order on
Rehearing at 22 (Nov. 30, 2009); and Application of'CenterPoint Electric Delivery Company, LLC, for Authority to
Change Rates, Docket No. 38339, Proposal for Decision at 66-67, Findings of Fact Nos. 81-83, Order on Rehearing
at 22 (June 23, 2011).
7
Docket No. 39896, Order on Rehearing at 5-6, 7-8 (Nov. 2, 2012).
PUC Docket No. 40295 Order Page 3 of 8
Sf)AH Docket No. XXX-XX-XXXX
case expense request, reduced by $208,494 in disallowances made by the ALJ' and affirmed by
the Commission. The Commission further reduces this amount by an additional $522,244.66,
which is the amount of rate-case expenses related to financially-based incentive compensation
using the issue-specific reduction approach.
The Commission disagrees with the AU that Entergy's rate-case expenses should be
reduced due to Entergy's request for transmission equalization (MSS-2 expenses).`' Even though
Entergy did not meet the burden of proof that the requested expenses were known and
measureable changes to test-year expenses, the request for the MSS-2 expenses did not conflict
with clear Commission precedent.
Accounting for these reductions, the Commission finds that rate-case expenses for ETI in
the amount of $6,896,037.73 are reasonable and necessary. Consequently, the Commission is
approving a total amount of $8,021,806.34 in allowable rate-case expenses in this docket.
To reflect its determinations on the proportional reduction issue, the Commission
modifies finding of fact 18 and conclusion of law 9.
1[I. Affiliate Payments
The Commission also finds that the price for Entergy's affiliate payments 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 nonaffiliated person within the same market area or having the same
market conditions. The Commission adds new finding of fact 19 and new conclusion of law 11
to reflect that Entergy met the requirements in PURA § 36.058 regarding payments to its
affiliates for its rate-case expenses.
The Commission also makes minor corrections to conclusions of law 6 and 8 to
incorporate the statutory reference into the language of the conclusion of law. Consistent with
the discussion above, the Commission adopts the following findings of fact and conclusions of
law:
Proposal for Decision at 33-34.
' /ct at 25-27.
PUC Docket No. 40295 Order Page 4 of 8
SOAII Docket No. XXX-XX-XXXX
IV. Findings of Fact
I. Entergy Texas, Inc. (ETI or the Company) is an investor-owned electric utility with a
retail service area located in southeastern "I'exas.
2. On November 28, 2011, ETI filed an application (the ETI Application) requesting,
among other things, approval of a proposed increase in annual base rate revenues of
approximately $111.8 million over adjusted test year revenues, and a new rider for
recovery of costs related to purchased power capacity.
3. On November 29, 2011, the Public Utility Commission of Texas (Commission or PUC)
referred the ETI Application to the State Office of Administrative Hearings (SOAH) for a
hearing and the matter was assigned docket number 39896 (Docket 39896).
4. On April 4, 2012, in Docket 39896, the ALJs issued SOAH Order No. 13 severing rate-
case expense issues into a new docket, the case at issue here, Application of Entergy
Texas, Inc. for Rate Case Expenses Severed from PUC Docket No. 39896, Docket
No. 40295.
5. The hearing on the merits in Docket 39896 was held in April-May 2012.
6. The Proposal for Decision (PFD) in Docket 39896 was issued July 6, 2012.
7. The Commission issued its final order in Docket 39896 on November 2, 2012.
8. The hearing on the merits in the present docket, Docket 40295, was held on
November 28, 2012. The record closed on December 21, 2012, following the filing of
post-hearing briefs.
9. The following parties were granted intervenor status in this docket: Office of Public
Utility Counsel (OPUC); the cities of Anahuac, Beaumont, Bridge City, Cleveland,
Conroe, Dayton, Groves, Houston, Huntsville, Montgomery, Navasota, Nederland, Oak
Ridge North, Orange, Pine Forest, Rose City, Pinehurst, Port Arthur, Port Neches,
Shenandoah, Silsbee, Sour Lake, Splendora, Vidor, and West Orange (Cities); State
Agencies; and Texas Industrial Energy Consumers (TIEC). The staff (Staff) of the
Commission was also a participant in this docket.
PUC Docket No. 40295 Order Page 5 of'8
SOAH Docket No. XXX-XX-XXXX
10. In Docket 39896, ETI adjusted its request for a proposed increase in annual base rate
revenues to approximately $104.8 million over adjusted Test Year revenues.
11. In the PFD in Docket 39896, the ALJs recommended an overall rate increase of
$28.3 million.
12. In its final order in Docket 39896, the Commission largely followed the
recommendations contained in the PFD, but reduced ETI's overall rate increase to $27.7
million.
13. In this docket, ETI seeks to recover $8.8 million in rate-case expenses associated with
Docket 39896.
14. Of that total, $7.6 million was incurred by ETI and $1.2 million was incurred by Cities.
15. Cities proved that, through August 31, 2012, they reasonably incurred rate-case expenses
of $1,125,768.61 in Docket 39896 and this docket.
16. Cities reasonably estimated that their total rate-case expenses in Docket 39896 and this
docket after August 31, 2012 will total $75,800.
16A. The Commission finds that Cities' estimated expenses are not recoverable as rate-case
expenses in this docket.
17. The amount of rate-case expenses sought by ETI ($8.8 million) is high, both in absolute
terms, and in relation to the rate increase ultimately obtained by ETI in Docket 39896
($27.7 million).
18. Rate-case expenses for ETI in the amount of $6,896,037.73 are reasonable and necessary
and should be allowed as a cost or expense by the Company. This amount is calculated
by reducing the requested amount by the amounts listed and for the reasons stated below:
a. $207,683 in depreciation of office equipment owned by Entergy Services, Inc.
(ESI) (an affiliated company of ETI) and used by ESI employees for their work in
Docket 39896 is not reasonable and is properly disallowed.
b. $281 for meals over $25 was erroneously sought by ETI, is not reasonable, and is
properly disallowed.
PUC Docket No. 40295 Order Page 6 of 8
SOAN Docket No. XXX-XX-XXXX
c. $10 for clothing purchased by an attorney for ETl is not reasonable and is
properly disallowed.
d. $40 for laundry charges by an attorney for ETI is not reasonable and is properly
disallowed.
e. $480 for a lodging charge unsupported by receipts is not reasonable and is
properly disallowed.
f. $522,244.66 attributable to unreasonable and overly aggressive arguments
pursued by ETI in Docket 39896 related to tinancially-based incentive
compensation is properly disallowed.
19. The price for Entergy's affiliate payments 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 nonaffiliated person within the same market area or having the same market conditions.
V. Conclusions of Law
1 ETI is a "public utility" as that term is defined in the Public Utility Regulatory Act
(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 §§ 32.001, 32.101, 33.002, 33.051, and
36.101-111.
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 § 2003.049.
4. This docket was processed in accordance with the requirements of PURA and the Texas
Administrative Procedure Act, Tex. Gov't Code Chapter 2001.
5. Pursuant to PURA § 33.051, the Commission has jurisdiction over an appeal from a
municipality's rate proceeding.
6. Pursuant to PURA § 33.023, Cities bore the burden to prove that the rate-case expenses
they incurred were reasonable.
PUC Docket No. 40295 Order Page 7 of 8
SOAH Docket No. XXX-XX-XXXX
7. Cities are entitled to reimbursement by ETI for rate-case expenses of $1,125,768.61
incurred in Docket 39896 and this docket through August 31, 2012.
8. Pursuant to PURA § 36.061(b), ETI bore the burden of proving that the rate-case
expenses it incurred in Docket No. 39896 were reasonable.
9. ET I proved the reasonableness of its rate-case expenses in the amount of $6,896,037.73,
and is entitled to claim that amount as a cost.
10. Consistent with Commission precedent, it is not in the public interest to permit recovery
of estimated rate-case expenses.
11. Entergy met the requirements of PURA § 36.058 regarding payments to its affiliate for its
rate-case expenses.
VI. Ordering Paragraphs
In accordance with these findings of fact and conclusions of law, the Commission issues
the following orders:
l. The Proposal for Decision prepared by the SOAH ALJs is adopted to the extent
consistent with this Order.
2. All other motions, requests for entry of specific findings of fact and conclusions of law,
and any other requests for general or specific relief, if not expressly granted, are denied.
3. Cities' and ETI's requests to recover rate-case expenses are granted to the extent
consistent with this Order.
PUC Docket No. 40295 Order Page 8 of 8
SOAFi Docket No. XXX-XX-XXXX
S"1
SIGNED AT AUSTIN, TEXAS the % day of May 2013
PUBLIC UTILITY COMMISSION OF TEXAS
DONNA L. NELSON, CHAIRMAN
KENNETH W. ANDER,40+; J"lT, COMMISSIONER
y-\cadm\orders\tinal\40000\402951'o.docz
APPENDIX B
Proposal for Decision
State Office of Administrative Hearings
2DI3 FEB 19 PH 3: 24
Cathleen Parsley
Chief Administrative Law Judge
February 19, 2013
TO: Stephen Journeay, Director Courier Pick-up
Commission Advising and Docket Management
William B. Travis State Office Building
1701 N. Congress, 7th Floor
Austin, Texas 78701
RE: SOAH Docket No. XXX-XX-XXXX
PUC Docket No. 40295
Application of Entergy Texas, Inc. for Rate Case Expenses Pertaining to PUC
Docket No. 39896
Enclosed is the Proposal for Decision (PFD) in the above-referenced case. By
copy of this letter, the parties to this proceeding are being served with the PFD.
Please place this case on an open meeting agenda for the Commissioners'
consideration. There is no deadline in this case. Please notify me and the parties of the
open meeting date, as well as the deadlines for filing exceptions to the PFD, replies to the
exceptions, and requests for oral argument.
Sincerely,
unt
Administrative Law Judge
HB/mle
Enclosure
xc: All Parties of Record
300 W. 15th Street, Suite 502, Austin, Texas 78701/ P.O. Box 13025, Austin, Texas 78711-3025
512.475.4993 (Main) 512.475.3445 (Docketing) 512.322.2061 (Fax)
6o7
www.soah.state.tx.us
SOAH DOCKET NO. XXX-XX-XXXX
PUC DOCKET NO. 40295
2 I1 F E B 19 P P', 3: 24
APPLICATION OF ENTERGY §§ BEFORE THt STATE OFFICE tf F ti
TEXAS, INC. FOR RATE CASE
EXPENSES PERTAINING TO PUC § OF
DOCKET NO. 39896 §
§ ADMINISTRATIVE HEARINGS
TABLE OF CONTENTS
I. BACKGROUND ....................................................................................................................... 1
II. JURISDICTION, NOTICE, AND PROCEDURAL HISTORY ........................................ 2
III. PARTIES ............................................................................................................................... 2
IV. DISCUSSION ........................................................................................................................ 3
A. Overview .................................................................................................................... 3
B. Cities' Rate Case Expenses ....................................................................................... 4
C. ETI's Rate Case Expenses ........................................................................................ 8
1. Challenges to Specific ETI Rate Case Expenses That are
Relatively Quantifiable ... .............................................................................. 8
a. Costs Associated with Gerald Tucker, ETI's
Consulting Expert ............................................................................ 8
b. Costs Associated with "Lessons Learned" .................................. 10
c. ESI Depreciation Costs .................................................................. 11
d. Miscellaneous Internal Rate Case Expenses ............................... 13
e. Costs Associated with the Calpine-Carville PPA ........................ 13
f. Specific Items That State Agencies Contend Cast Doubt on
ETI's Overall Scrutiny of Its Expenses ....................................... 15
(1) External Legal Fees .......................................................... 16
(2) Meals and Snacks ............................................................. 17
(3) Courier and Taxi Services ............................................... 18
(4) Meals Over $25 ................................................................. 19
(5) Clothing and Laundry Service ........................................ 20
(6) Airfare and Lodging ........................................................ 20
SOAH DOCKET NO. XXX-XX-XXXX TABLE OF CONTENTS PAGE 2
PUC DOCKET NO. 40295
2. Challenges to Specific ETI Rate Case Expenses That are Difficult to
Quantify ....................................................................................................... 21
a. Financially-Based Incentive Compensation ................................ 21
b. Transmission Equalization (MSS-2) Expenses ........................... 25
c. Purchased Power Capacity Rider ................................................. 27
3. Proportional Reduction .............................................................................. 28
D. Recovery Method ..................................................................................................... 34
1. Rate Case Expense Allocation and the Recovery Mechanism ................ 34
2. ETI's Request to Earn a Return on the Unpaid Balance of Rate
Case Expenses .............................................................................................. 35
V. CONCLUSION ..................................................................................................................... 36
VI. PROPOSED FINDINGS OF FACT, CONCLUSIONS OF LAW, AND
ORDERING PARAGRAPHS .. .......................................................................................... 36
A. Findings of Fact ....................................................................................................... 36
B. Conclusions of Law ................................................................................................. 38
C. Proposed Ordering Paragraphs ............................................................................. 39
SOAH DOCKET NO. XXX-XX-XXXX
PUC DOCKET NO. 40295
APPLICATION OF ENTERGY § BEFORE THE STATE OFFICE
TEXAS, INC. FOR RATE CASE §
EXPENSES PERTAINING TO PUC § OF
DOCKET NO. 39896 §
§ ADMINISTRATIVE HEARINGS
PROPOSAL FOR DECISION
1. BACKGROUND
Entergy Texas, Inc. (ETI) is an investor-owned electric utility with a retail service area
located in southeastern Texas. ETI serves retail and wholesale electric customers in Texas. On
November 28, 2011, ETI filed an application requesting approval of an increase in annual base rate
revenues, a reconciliation of fuel costs, and authority to defer costs for the transition to the Midwest
Independent System Operator (the ETI Application). On November 29, 2011, the Commission
referred the ETI Application, PUC Docket No. 39896, to SOAH (Docket 39896). On April 4, 2012,
the Administrative Law Judges (ALJs) presiding over pocket 39896 issued an order severing from
Docket 39896 the issues relating to ETI's request to recover its rate case expenses and creating this
docket, Docket 40295, for consideration of the rate case expenses.
In this Proposal for Decision (PFD), the ALJ recommends as follows:
That Cities' be allowed to recover from ETI a total of $1,201,569 in rate case expenses
(representing $1,125,769 in rate case expenses incurred through August 31, 2012, plus up to
$75,800 in rate case expenses as they are incurred after August 31, 2012); and
• That ETI be allowed to recover a total of $7,344,113 in rate case expenses.
` The Cities are: the Cities of Anahuac, Beaumont, Bridge City, Cleveland, Conroe, Dayton, Groves, Houston,
Huntsville, Montgomery, Navasota, Nederland, Oak Ridge North, Orange, Pine Forest, Rose City, Pinehurst, Port Arthur,
Port Neches, Shenandoah, Silsbee, Sour Lake, Splendora, Vidor, and West Orange.
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II. JURISDICTION, NOTICE, AND PROCEDURAL HISTORY
The Public Utility Commission of Texas (Commission or PUC) has jurisdiction over ETI and
this rate case expenses hearing pursuant to Texas Utility Code, Public Utility Regulatory Act
(PURA) §§ 32.001, 33.002, and 35.004. The State Office of Administrative Hearings (SOAH) has
jurisdiction over the contested case hearing, including the preparation of the proposal for decision
(PFD) pursuant to PURA § 14.053 and Texas Government Code § 2003.049(b). ETI's notice of its
application and notice of the hearing were not contested and, therefore, do not require further
discussion here but will be addressed in the proposed findings of fact and conclusions of law.
The hearing on the merits in Docket 39896 was held in April-May, 2012. The PFD was
issued on July 6, 2012. A Final Order in Docket 39896 was issued by the Commission on September
14, 2012. In response to motions for rehearing submitted by multiple parties, the Commission issued
an Order on Rehearing on November 2, 2012, in Docket 39896.2
The hearing on the merits in the present docket, Docket 40295, was held on
November 28, 2012. The record remained open for the filing of post-hearing briefs. The record
closed on December 21, 2012.
III. PARTIES
In addition to ETI, the following entities were granted party status in this case: Texas
Industrial Energy Consumers (TIEC); State of Texas agencies and institutions of higher education
(State Agencies); Office of Public Utility Counsel (OPUC); Cities; and the staff of the Public Utility
Commission (Staff).
2 Multiple second motions for rehearing were denied by the Commission on December 4, 2012.
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The following is a list of the parties who participated in the hearing and their counsel:
PARTIES REPRESENTATIVES
ETI Steven H. Neinast, Wajiha Rizvi, and George Hoyt
Cities Stephen Mack
TIEC Meghan Griffiths
State Agencies Susan Kelley
OPC Sarah Ferris
Staff Brennan Foley
IV. DISCUSSION
A. Overview
In the ETI Application, ETI requested, among other things, approval of an increase in annual
revenues of approximately $104.8 million, proposed tariff schedules including new riders to recover
costs related to purchased-power capacity and renewable-energy credit requirements, and final
reconciliation of its fuel costs. Prior to the hearing, the Commission effectively denied ETI's request
for a purchased-power capacity rider by removing it as an issue to be addressed in the hearing on the
ETI Application. In their PFD, the ALJs recommended an overall rate increase for ETI of
$28.3 million, did not recommend approving the renewable-energy credit rider sought by ETI, and
recommended approving ETI's request to reconcile fuel and purchased power costs during the
Reconciliation Period.3 Ultimately, the Commission largely followed the recommendations
contained in the PFD, but reduced the overall rate increase to $27.7 million.4
In this docket, Michael P. Considine, a Manager in the Regulatory Accounting Department of
Entergy Services, Inc. (ESI), ETI's service company affiliate, testified in support of the company's
claim for recovery of rate case expenses. He explained that ETI is seeking authority to recover its
3 Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and Obtain Deferred
Accounting Treatment, Docket 39896, Proposal for Decision (July 6, 2012).
4 Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and Obtain Deferred
Accounting Treatment, Docket 39896, Order on Rehearing (November 1, 2012).
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rate case expenses over a three-year period, while earning a return on the unamortized balance.' ETI
seeks to recover $8,752,5456 in rate case expenses associated with Docket 39896 that were incurred
and paid as of September 30, 2012.7 Of that total, $7,635,236 was incurred by ETI and $1,117,309
was incurred by Cities. Of the total amount, ETI classifies $3,908,214 as "external" rate case
expenses (i.e., those expenses paid to outside accounting services, outside counsel, and outside
consultants), and $4,844,362 as "internal" rate case expenses (i.e., those expenses related to direct
expenses, payroll, benefits, and taxes of ETI and Entergy Services, Inc. (ESI), an affiliated company
of ETI).8 Mr. Considine offered the opinion that all of ETI's internal rate case expenses were
reasonable and necessary.9 Another ETI witness, Stephen F. Morris, offered his opinion that all of
ETI's external rate case expenses were reasonable and necessary.10 Mr. Morris is an attorney and
certified public accountant who was retained by ETI to review the company's external rate case
expenses.' l ETI also seeks authority to defer until its next rate case all rate case expenses incurred in
Docket 39896 after September 30, 2012.12
B. Cities' Rate Case Expenses
Pursuant to PURA § 33.023, any municipality participating in a ratemaking proceeding may
engage attorneys, consultants, and others to assist it, and the electric utility "shall" reimburse the
municipality for its "reasonable cost" of participating in the ratemaking proceeding "to the extent the
[Commission] determines is reasonable."
5 ETI Ex. 1 (Considine Direct) at 62.
6 Initially, ETI sought recovery of $8,752,576. In its briefing, however, ETI explains that it is reducing the amount it
seeks to $8,752,545 (a reduction of $31) to account for two excessive charges for meals. ETI Init. Br. at 1 n. 1.
7 ETI Ex. 6 (Considine Supp.) at 1.
8 ETI Ex. 6 (Considine Supp.) at 3, 5, and attachment MPC-SD-5. The $1,117,309 in expenses incurred by Cities is
included as part of ETI's "internal" expenses.
9 ETI Ex. 6 (Considine Supp.) at 7.
10 ETI Ex. 8 (Morris Direct) at 18.
11
ETI Ex. 8 (Morris Direct) at 1-2.
12 Transcript from Hearing on the Merits (Tr.) at 17.
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In this case, Cities seek reimbursement for rate case expenses totaling $1,201,568.61. Cities
identify this amount as the "total actual and estimated rate case expenses" incurred by Cities in four
forums: (1) ETI's base rate cases before the municipalities; (2) participation in Docket 39896;
(3) participation in any appeals of Docket 39896; and (4) participation in the present case,
Docket 40295.13 Of the $1,201,568.61 total, $1,125,768.61 represents actual expenses incurred by
Cities through August 31, 2012, while $75,800 represents Cities' estimated expenses through
completion of Dockets 39896 and 40295, and any appeal. 14 Cities offered the expert testimony of
Amalija "Amy" Hodgins, a former ALJ, who opined that these expenses were reasonable and should
be reimbursed. 15
No party challenged the reasonableness of Cities' expenditures through August 31, 2012
(i.e., $1,125,768.61), and the AU can find no reason to do so either.
Staff challenges, however, Cities' attempt to recover their estimated expenses after that date
(i.e., $75,800). Cities seek to be reimbursed for these estimated expenses only "if and when they
occur," up to the maximum of $75,800.16 Ms. Hodgins offered her opinion that the amount of the
estimated expenses is reasonable. 17 In reliance upon Commission precedent from 2005,
Ms. Hodgins argued that estimated rate case expenses are reimbursable. Ms. Hodgins testified as
follows:
Projected rate case expenses can be, and routinely have been, found reasonable and
reimbursable by this Commission. The fact that a municipality's rate case expenses
have not all been incurred, as of the date of the determination of the reasonableness
of rate case expenses, does not render them unreasonable. Expenses need only be
reasonable and incurred to be recoverable.
13
Cities Init. Br. at 2.
14
Cities Init. Br. at 5.
15 See Cities Ex. No. 1(Hodgins Direct) and Ex. No. 2 (Hodgins Supp.).
16
Cities Ex. 2 (Hodgins Supp.) at n. 6.
17 Cities Ex. 2 (Hodgins Supp.) at 13-14.
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The future activities and corresponding costs, that are the subject of estimation, are
necessary to complete a proceeding before the Commission. The Commission in
CenterPoint's CTC case found estimated costs to complete a case were recoverable
once the estimated expenses were incurred and known and measurable. ...
Accordingly, it is reasonable for the Commission, in this proceeding, to consider and
allow the Cities to recover the estimated costs to complete this proceeding, including
possible judicial appeals, if and when those expenses are incurred.18
Staff argues, based upon Commission precedent, that Cities are not entitled to reimbursement
for estimated future rate case expenses.19 Staff does not challenge the reasonableness of the amount
of estimated expenses, nor does any other party. Rather, Staff asserts that the Commission precedent
relied upon by Ms. Hodgins has been superseded by more recent precedent. Specifically, in 2010,
the Commission decided a case in which it disallowed estimated rate case expenses. In
Docket 37772, the Commission disallowed recovery of estimated expenses, holding that "approving
estimated rate-case expenses is not in the public interest," but allowed the cities involved in that case
to seek "recovery of actual rate-case expenses included in the estimates in [the utility's] next rate
case."20 Thus, Staff argues that Cities' attempt to obtain its estimated expenses should be disallowed.
Staff further argues that Cities should not be entitled to recover the expenses associated with
the preparation of the portion of Ms. Hodgins' testimony in which she advocates in support of the
recovery of Cities' estimated expenses. By Staffs calculation, this reduction amounts to $1,208.42
(representing Cities' actual costs for Ms. Hodgins' testimony related to the recovery of estimated
expenses).21 No other party joins Staff in its opposition to Cities' estimated expenses.
The ALJ recommends that Cities' request with regard to its estimated expenses be granted.
Pursuant to Section 33.023 of PURA, Cities are entitled to reimbursement for their expenses
18 Cities Ex. 1(Hodgins Direct) at 6-7; citing Application of CenterPoint Energy Houston Electric, LLCfor Competition
Transition Charge, Docket No. 30706, Order at 31 and FOFs 72-74 (Jul. 14, 2005)(Docket 30706).
19 Staff Init. Br. at 6.
20 Application of Southwestern Electric Power Company for Rate Case Expenses Pertaining to Docket No. 37364,
Docket 37772, Order at 1-2 (Oct. 21, 2010)(emphasis in original)(Docket 37772).
21
Staff Init. Br. at 7.
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reasonably incurred in this case. As noted above, no party challenged the reasonableness of Cities'
estimation that its expenses after August 2012 would total $75,800. The ALJ concludes that the
estimate is reasonable.22 Most importantly, the ALJ notes that Cities are not actually seeking
reimbursement of estimated rate case expenses. Rather, Cities asks for: (1) approval now of the
reasonableness of its estimated expenses; but (2) reimbursement of those expenses only after they are
incurred, and only up to the estimated amount of $75,800. Cities argue that, from a policy
standpoint, it is more economical and efficient for Cities to request reimbursement of reasonable
estimated rate case expenses to the extent they are incurred in this case, rather than requiring Cities
to wait and ask for reimbursement of those expenses when ETI files a new rate case at some point in
the future, a contingency which might not occur for many years. The ALJ agrees. The ALJ further
believes that it would be unfair if Cities were obligated to wait until ETI files a new rate case in order
to recover its estimated expenses from the present case. Any such arrangement would delay,
potentially for years, Cities' recovery of its actual expenses in the present rate case, a result which
seems contrary to the clear intent expressed in PURA § 33.023 that municipalities are entitled to
reimbursement for their reasonable rate cases expenses. Moreover, such an arrangement would
obligate Cities to participate in a future ETI rate case that they might otherwise have no interest in
becoming a party to.
For these reasons, the ALJ recommends:
(1) that Cities' rate case expenses be found to be reasonable in the amount of
$1,201,568.61 (consisting of $1,125,768.61 in actual expenses incurred by Cities
through August 31, 2012, and $75,800 in estimated expenses to be incurred by Cities
after August 31, 2012 through completion of Dockets 39896 and 40295, and any
appeal);
(2) that ETI be ordered to reimburse Cities for $1,125,768.61 in actual expenses incurred
by Cities through August 31, 2012; and
22 Indeed, the ALJ notes that Cities attached to their Reply Brief an affidavit from Ms. Hodgins attesting to the fact that,
from September through November 2012, Cities actually incurred expenses of $43,525.45 (or 57% of the estimated
$75,800). Cities Reply Br. at 4-5, and attached affidavit.
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(3) that ETI be ordered to reimburse Cities for actual expenses incurred by Cities after
August 31, 2012, through completion of Dockets 39896 and 40295 and any appeal up
to a maximum possible amount of $75,800.
C. ETI's Rate Case Expenses
Pursuant to PURA Section 36.061(b), the Commission "may" allow a utility to recover its
"reasonable costs of participating in a [ratemaking proceeding] not to exceed that amount approved"
by the Commission.
ETI seeks recovery of $8,752,545 in rate case expenses associated with Docket 39896 that
were incurred and paid as of September 30, 2012. However, that total includes only the
$1,125,768.61 in expenses incurred by Cities through August 31, 2012, but does not also include the
$75,800 in expenses estimated for Cities as discussed above. Because the ALJ is recommending that
Cities' estimated expenses be approved as outlined above, the ALJ deems ETI's overall request to
have been increased by $75,800 to a total amount of $8,828,345.
The parties other than ETI challenged various components of ETI's rate case expenses.
Those challenges are discussed as follows.
1. Challenges to Specific ETI Rate Case Expenses That are Relatively Quantifiable
a. Costs Associated with Gerald Tucker, ETI's Consulting Expert
In Docket 39896, ETI retained Gerald Tucker as a consulting expert to assist in the
preparation of the utility's case dealing with affiliate transactions. Mr. Tucker is an accountant who
has experience regarding affiliate costs in Commission rate cases and who has commonly assisted
ETI in its rate cases.23
23
ETI Ex. 8 (Morris Direct) at 29-30.
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State Agencies contend that Mr. Tucker's fees should be disallowed. No party other than
State Agencies challenged Mr. Tucker's expenses. State Agencies complain that Mr. Tucker: (1) did
not testify; (2) provided services that were described by ETI in only "the most general terms;" and
(3) provided services (such as reviewing witness testimony, reviewing discovery responses,
benchmarking, and assisting in preparing witnesses for deposition) that were duplicative of services
provided by ETI's legal counsel or other consultants. Accordingly, State Agencies argue that the
$116,119 representing Mr. Tucker's fees should be excluded from rate case expenses.24
ETI responds by contending that, over the last 20 years or so, the Commission has, at times,
disallowed large percentages of utility companies' affiliate expenses, based upon the fact that ALJs
and the Commissioners have had difficulty understanding the complex information supplied by
utilities concerning affiliate transactions. In light of that history, ETI contends that it reasonably
relied upon the expertise and accounting experience of Mr. Tucker to assist it in preparing and
presenting information about the company's affiliate transactions in order to assure that it was
understandable. According to ETI, Mr. Tucker has been involved in all rate cases of ETI and its
predecessor since in 1997. ETI contends that Mr. Tucker's participation in Docket 39896 enabled
the company to present clearer and more accurate information about its affiliate transactions.
Moreover, ETI disputes that Mr. Tucker's work was duplicative of the work performed by the
company's attorneys, pointing out that Mr. Tucker provided expertise from the accounting
perspective, rather than from the legal perspective.25
The AU recommends that Mr. Tucker's fees be included in the rate case expenses. State
Agencies are essentially arguing that it was solely the job of ETI's attorneys and its testifying experts
to prepare the case regarding affiliate transactions and, therefore, any work performed by Mr. Tucker
with regard to affiliate transactions was purely duplicative. The AU disagrees. As pointed out by
ETI, the notion that multiple people with varied expertise cannot provide valuable input on a
complex issue like affiliate transactions is overly simplistic. ETI demonstrated that Mr. Tucker
24
State Agencies Init. Br. at 18-19.
25
ETI Init. Br. at 10-11; ETI Ex. 7 (Considine Supp.) at 9-10.
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provided real expertise that benefited the company in the presentation of its case. In other words,
ETI proved the reasonableness of Mr. Tucker's expenses.
b. Costs Associated with "Lessons Learned"
In Docket 39896, ETI included several charges from its law firm, Duggins, Wren, Mann &
Romero (Duggins Wren), for "lessons learned," as shown in a July 26, 2011 invoice from the law
firm. The charges total $5,743.50.26 According to ETI, the charges relate to a memo provided to
ETI by the firm which contained a "detailed analysis of developments in ETI's last rate case as well
as developments in four recent pertinent cases at the PUCT that had taken place since the last ETI
rate case."27 The memo identified procedural and substantive issues for ETI to consider while
preparing its rate case in Docket 39896.28
State Agencies contend that any "lessons learned" should have already been learned in the
prior rate case and, therefore, any "refreshing [ofJ the learning curve ... should be a shareholder, not
ratepayer, expense. Bringing one's attorneys `up to speed' for the third rate case filed in five years
ought to be regarded as the legal equivalent of a`luxury item. `29 No party other than State Agencies
challenged the "lessons learned" expenses.
ETI responds by contending that State Agencies are essentially seeking to punish the
company for its efforts to learn from the past. ETI also contends that State Agencies' argument
would have the perverse effect of increasing, rather than decreasing rate case expenses. According to
ETI:
26
ETI Ex. 8 (Morris Direct) at 29-30.
27 ETI Ex. 12 (Morris Rebuttal) at 28-29 (Attachment SFM-R-3).
28 ETI Ex. 12 (Morris Rebuttal) at 28-29 (Attachment SFM-R-3).
29 State Agencies Init. Br. at 19.
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Incurring these costs to analyze lessons learned from litigating prior rate cases and
important aspects of non-ETI Commission rate cases, if anything, reduces overall rate
case expenses by supporting a more efficient case presentation and avoiding prior
issues that lead to contention among the parties.30
The ALJ agrees and recommends that the "lessons learned" expenses be included in the rate
case expenses. ETI demonstrated that the expenses were reasonable because they benefited the
company in the presentation of its case.
c. ESI Depreciation Costs
ETI identified, as part of its "internal" rate case expenses, $207,683 in "Depreciation &
Amort" expenses. 31 As explained by ETI witness Considine, the expenses are for the depreciation of
assets (apparently office equipment) used by ESI employees who participated in the rate case.32
Mr. Considine further testified that the costs were a reasonable and necessary part of ESI providing
services for the rate case.33
State Agencies contend that recovery of such depreciation expenses should be denied
because: (1) such a recovery is unprecedented; (2) ETI has failed to prove that the expenses were
reasonable and necessary; and (3) the expenses were not "incurred" for the rate case. As to the last
point, State Agencies explains: "ESI's depreciable property exists, and is presumably depreciated,
whether or not proceedings in Texas take place. As such, this `cost' was not necessary for ETI's
participation in the rate case and should be disallowed."34 No party other than State Agencies
challenged the depreciation expenses.
30 ETI Init. Br. at 13.
31
ETI Ex. 7(Considine Rebuttal) at 9-11 and Attachment MPC-R-1.
32 ETI Ex. 7 (Considine Rebuttal) at 11.
33 ETI Ex. 7 (Considine
Rebuttal) at 11.
34 State Agencies Init. Br. at 20.
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ETI responds by explaining that the costs at issue are "a loader to ESI labor costs covering
depreciation on office expenses and capital." Notably, however, ETI also concedes that such costs
would "typically [be] embedded in a vendor's labor costs billed to the Company. ,35
The AU recommends that the depreciation expenses be disallowed. ETI has not cited to any
precedent which would justify the recovery of these apparently unusual rate case expenses.
Moreover, ETI has failed to prove the reasonableness of the expenses under the more stringent
standards that are applicable to affiliate expenses. As explained in Railroad Comm 'n v. Rio Grande
Valley Gas Company, unlike
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