# Entergy Texas, Inc. v. Public Utility Commission of Texas, Office of Public Utility Counsel, and State of Texas Agencies and Institutions of Higher Education > Texas Court of Appeals, 3rd District (Austin) · March 6, 2015 URL: https://www.frixlaw.com/law-library/cases/4052560 ## Case - **Court:** Texas Court of Appeals, 3rd District (Austin) - **Decided:** March 6, 2015 - **Precedential status:** Published - **Opinion:** Opinion - **Cited by:** 0 later opinions in the Frix Law Library ## Citator (automated) - No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases. - Full citator and citing cases: https://www.frixlaw.com/law-library/cases/4052560 ## Opinion text 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 ^ k+qn m "R N *` , 4 d !.il! 1©!^ 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. SOAH DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGE 2 PUC DOCKET NO. 40295 II. JURISDICTION, NOTICE, AND PROCEDURAL HISTORY The Public Utility Commission of Texas (Commission or PUC) has jurisdiction over ETI and this rate case expenses hearing pursuant to Texas Utility Code, Public Utility Regulatory Act (PURA) §§ 32.001, 33.002, and 35.004. The State Office of Administrative Hearings (SOAH) has jurisdiction over the contested case hearing, including the preparation of the proposal for decision (PFD) pursuant to PURA § 14.053 and Texas Government Code § 2003.049(b). ETI's notice 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. SOAH DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGE 3 PUC DOCKET NO. 40295 The following is a list of the parties who participated in the hearing and their counsel: PARTIES REPRESENTATIVES ETI Steven H. Neinast, Wajiha Rizvi, and George Hoyt Cities Stephen Mack TIEC Meghan Griffiths State Agencies Susan Kelley OPC Sarah Ferris Staff Brennan Foley IV. DISCUSSION A. Overview In the ETI Application, ETI requested, among other things, approval of an increase in annual revenues of approximately $10 [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/4052560. Public record. Not legal advice.