# 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/4052563 ## 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/4052563 ## Opinion text ACCEPTED 03-14-00706-CV 4408166 THIRD COURT OF APPEALS AUSTIN, TEXAS 3/6/2015 4:23:10 PM JEFFREY D. KYLE CLERK No. 03-14-00706-CV __________________________________________________________________ FILED IN 3rd COURT OF APPEALS IN THE COURT OF APPEALS AUSTIN, TEXAS FOR THE THIRD DISTRICT OF TEXAS 3/6/2015 4:23:10 PM AUSTIN, TEXAS JEFFREY D. KYLE Clerk __________________________________________________________________ ENTERGY TEXAS, INC., Appellant, v. PUBLIC UTILITY COMMISSION OF TEXAS, ET AL., Appellees. __________________________________________________________________ Appealed from the 345th Judicial District Court of Travis County, Texas The Honorable Amy Clark Meachum, Judge Presiding Trial Court Cause No. D-1-GN-13-002623 __________________________________________________________________ BRIEF OF APPELLEE STATE AGENCIES __________________________________________________________________ KEN PAXTON KATHERINE H. FARRELL Attorney General of Texas State Bar No. 24032396 CHARLES E. ROY SARA R. HAMMOND First Assistant Attorney General State Bar No. 24081003 JAMES E. DAVIS Assistant Attorneys General Deputy Attorney General for Civil Office of the Attorney General Litigation Energy Rates Section Administrative Law Division DAVID A. TALBOT, JR. P. O. Box 12548 Chief, Administrative Law Division Austin, Texas 78711-2548 Telephone: (512) 475-4173 Facsimile: (512) 320-0167 March 6, 2015 TABLE OF CONTENTS TABLE OF CONTENTS .................................................................................................... ii INDEX OF AUTHORITIES .............................................................................................. iv ISSUES PRESENTED ...................................................................................................... vii STATEMENT REGARDING ORAL ARGUMENT ...................................................... viii BRIEF OF APPELLEE STATE AGENCIES ..................................................................... 1 STATEMENT OF FACTS .................................................................................................. 2 SUMMARY OF THE ARGUMENT .................................................................................. 4 STANDARD OF REVIEW ................................................................................................. 6 ARGUMENT AND AUTHORITIES ................................................................................. 8 1. The Commission’s disallowance of expenses incurred advocating for financial-based incentive compensation was reasonable and supported by substantial evidence. (Addresses ETI’s Issues 1 and 2) ........................................... 8 A. The Commission has broad discretion to disallow expenses that it determines are unreasonable. .............................................................................. 8 B. The Commission’s finding that ETI was unreasonable to expend resources on the incentive compensation issue was reasonable and supported by substantial evidence. ................................................................... 10 C. Having properly determined ETI’s argument was unreasonable, the Commission’s disallowance of expenses arising therefrom was proper. ......... 14 i. Disallowance of expenses unreasonably incurred is consistent with previous Commission actions...................................................................... 15 ii. No new standard was applied ...................................................................... 17 iii. The Commission properly took action in a contested case hearing. No new policy was created; no rulemaking occurred ....................................... 19 ii 2. The Issue-Specific Method of determining disallowance amounts is reasonable and did not require a rulemaking proceeding. (Addresses ETI’s Issue 3).................................................................................................................... 24 A. ETI’s evidence did not allow for an exact accounting of actual costs.............. 25 B. Quantification by proportion is neither novel nor outside Commission discretion ........................................................................................................... 26 C. No new standard was imposed; no rulemaking was required........................... 29 3. The Commission properly disallowed depreciation expenses of an ETI affiliate company. (Addresses ETI’s Issue 4) ........................................................ 30 PRAYER ........................................................................................................................... 34 CERTIFICATE OF COMPLIANCE ................................................................................ 36 CERTIFICATE OF SERVICE .......................................................................................... 36 APPENDICES ................................................................................................................... 38 iii INDEX OF AUTHORITIES Cases Butnaru v. Ford Motor Co., 84 S.W.3d 198 (Tex. 2002)................................................ 6, 7 Cent. Power & Light Co. v. Pub. Util. Comm’n, 36 S.W.3d 547 (Tex. App.—Austin 2000, pet. denied). ........................................................................ 32 City of Amarillo v. R.R. Comm’n, 894 S.W.2d 491 (Tex. App.— Austin 1995, writ denied). ....................................................................................... 25, 32 City of El Paso v. Pub. Util. Comm’n, 344 S.W.3d 609 (Tex. App.— Austin 2011, no pet.)........................................................................................................ 2 City of El Paso v. Pub. Util. Comm’n, 883 S.W.2d 179 (Tex. 1994)......................... passim City of El Paso v. Pub. Util. Comm’n, 916 S.W.2d 515 (Tex. App.— Austin 1995, writ dism’d by agr.) .................................................................................... 9 El Paso Hosp. Dist. v. Tex. Health & Human Servs. Comm’n, 247 S.W.3d 709 (Tex. 2008) ......................................................................................... 20 Entergy Gulf States, Inc. v. Public Utility Comm’n, 173 S.W.3d 199 (Tex. App.—Austin 2005, pet. denied) ................................................................... 23, 30 Entergy Tex., Inc. v. Pub. Util. Comm’n, No. D-1-GN-13-002623 (345th Dist. Ct., Travis County, Tex. Oct. 10, 2014) .................................................... vii Gerst v. Nixon, 411 S.W.2d 350 (Tex. 1966) ...................................................................... 7 Hinkley v. Tex. State Bd. Of Med. Exam’rs, 140 S.W.3d 737 (Tex. App.—Austin 2004, pet. denied) ........................................................................... 7 Indus. Utils. Serv., Inc., et al., v. Tex. Natural Res. Conservation Comm’n, 947 S.W.2d 712 (Tex. App.—Austin 1997, writ denied) ........................................ 10, 15 Nucor Steel v. Pub. Util. Comm’n, 168 S.W.3d 260 (Tex. App.—Austin 2005, no pet.) ............................................................................ 7, 28 Oncor Electric Delivery Co., LLC v. Pub. Util. Comm’n, 406 S.W.3d 253 (Tex. App.—Austin 2013, no pet.) ............................................... 18, 19 iv Pedernales Elec. Coop. v. Pub. Util. Comm’n, 809 S.W.2d 332 (Tex.App.—Austin 1991, no writ).). ............................................................................. 28 Pioneer Natural Res. USA, Inc. v. Pub. Util. Comm’n, 303 S.W. 3d 363 (Tex. App.— Austin 2009, no pet.). .......................................................................... 9, 27 Pub. Util. Comm’n v. Gulf State Utils. Co., 809 S.W.2d 201 (Tex. 1991) ......................... 7 R.R. Comm’n v. Rio Grande Valley Gas Co., 683 S.W.2d 783 (Tex. App.—Austin 1984, no writ). .............................................................................. 32 R.R. Comm’n v. WBD Oil & Gas Co., 104 S.W.3d 69 (Tex. 2003) .................................. 20 Reliant Energy, Inc. v. Pub. Util. Comm’n, 153 S.W.3d 174 (Tex. App.—Austin 2004, pet. denied) ..................................................................... 7, 16 Sec. & Exch. Comm’n v. Chenery Corp., 332 U.S. 194 (1947) .................................. 24, 30 State Bd. of Ins. v. Deffebach, 631 S.W.2d 794 (Tex. App.—Austin 1982, writ ref’d n.r.e.)............................................................. 24, 30 State v. Thomas, 766 S.W.2d 217 (Tex. 1989) .................................................................... 1 Tex. Health Facilities Comm’n v. Charter Med.-Dall., Inc., 665 S.W.2d 446 (Tex. 1984) ........................................................................................... 7 Tex. State Bd. of Pharmacy v. Witcher, 447 S.W.3d 520 (Tex. App.—Austin 2014, pet. filed) ....................................................................... 21, 22 Statutes PURA § 36.006 .............................................................................................................. 8, 25 PURA § 36.051 ........................................................................................................ 8, 22, 31 PURA § 36.058.................................................................................................................. 32 PURA § 36.061(b)(2) ........................................................................................ 8, 17, 22, 31 Tex. Gov’t Code § 2001.174 (West 2008) ...................................................................... 6, 7 Tex. Gov’t Code. § 2001.003(6)(A) (West 2008) ............................................................. 20 v Tex. Util. Code §§ 11.001–66.016 (West 2007 & Supp. 2014) .......................................... 8 Other Authorities Application of AEP Texas Central Company for Authority to Change Rates, PUC Docket No. 28840 (2003) .............................................................................................. 12 Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and Obtain Deferred Accounting Treatment, Docket No. 39896 ....................... 11 Proceeding to Consider Rate Case Expenses Severed from Docket No. 28840 (Application of AEP Texas Central Company for Authority to Change Rates), Docket No. 31433, Order at 3 (March 3, 2006)............................................................. 15 Rules 16 Tex. Admin. Code § 25.231 ........................................................................................... 2 16 Tex. Admin. Code § 25.231(a) ..................................................................................... 31 16 Tex. Admin. Code § 25.245 ......................................................................................... 22 vi ISSUES PRESENTED The Public Utility Commission of Texas (PUC or Commission) denied recovery of some of the rate case expenses sought by Entergy Texas, Inc. (ETI or Entergy) in PUC Docket No. 40295. The Travis County District Court affirmed the PUC’s decision in all respects.1 ETI appeals the District Court’s decision, giving rise to the following issues: 1) Did the Commission act within its discretion when it ordered that ETI could not recover from its ratepayers the cost of its unsuccessful attempt to reverse well-established Commission precedent regarding recovery of incentive compensation based on financial measures? (Addresses ETI’s Issues 1 and 2.) 2) In the absence of evidence showing all of ETI’s expenses related to the incentive compensation issue, did the Commission act reasonably in using an alternative method (an issue-specific reduction) to calculate the appropriate reduction of ETI’s requested rate case expenses? (Addresses ETI’s Issue 3.) 3) Did the Commission act reasonably and within its discretion when it determined that it was not reasonable for ETI to recover from its ratepayers an internal cost generally described as “depreciation and amortization”? (Addresses ETI’s Issue 4.) 1 Entergy Tex., Inc. v. Pub. Util. Comm’n, No. D-1-GN-13-002623 (345th Dist. Ct., Travis County, Tex. (Oct. 10, 2014); Final Judgment attached hereto as Appendix A. vii STATEMENT REGARDING ORAL ARGUMENT State Agencies believe that the issues in this appeal are sufficiently straightforward and can be decided on the briefs alone. However, ETI seeks oral argument. If oral argument is granted, State Agencies request that its counsel be afforded a full opportunity to respond to oral arguments made to the tribunal by any or all parties who seek to overturn the district court’s decision. viii No. 03-14-00706-CV __________________________________________________________________ IN THE COURT OF APPEALS FOR THE THIRD DISTRICT OF TEXAS AUSTIN, TEXAS __________________________________________________________________ ENTERGY TEXAS, INC., Appellant, v. PUBLIC UTILITY COMMISSION OF TEXAS, ET AL., Appellees. __________________________________________________________________ Appealed from the 345th Judicial District Court of Travis County, Texas The Honorable Amy Clark Meachum, Judge Presiding Trial Court Cause No. D-1-GN-13-002623 __________________________________________________________________ BRIEF OF APPELLEE STATE AGENCIES Appellee State of Texas Agencies and Institutions of Higher Education (State Agencies)2 provide this Brief on the Merits. Pursuant to Tex. R. App. Proc. 38.6(b), this Brief is timely filed. Herein, State Agencies respond to arguments made by Entergy Texas, Inc. (ETI or Entergy) regarding recovery of electricity ratemaking proceeding expenses (rate case expenses) from ratepayers. The Public 2 State Agencies as customers of ETI and the PUC as a regulatory authority are each represented in this appeal by the Office of the Attorney General (OAG). State Agencies are represented by the OAG’s Administrative Law Division, Energy Rates Section, while the Commission is represented by the Environmental Protection Division. See State v. Thomas, 766 S.W.2d 217 (Tex. 1989). 1 Utility Commission of Texas (Commission or PUC) properly disallowed recovery of certain rate case expenses requested by ETI. Appellant ETI opposes the Commission’s disallowance; State Agencies support the Commission’s decision in its entirety. State Agencies respectfully request that this Court affirm the judgment of the district court dated October 10, 2014. STATEMENT OF FACTS The Statement of Facts provided by Appellant is generally accurate. State Agencies agree, for example, that ETI is an investor-owned electric utility, subject to traditional rate regulation. ETI’s description of a utility’s revenue requirement is accurate, but incomplete: revenue requirement, or cost of service, is comprised of the sum of the utility’s reasonable expenses and a reasonable return on investment.3 These modifiers, omitted in ETI’s statement, are essential to the issues in this case. Additionally, State Agencies agree with ETI’s procedural history of the underlying rate case, Docket No. 39896, and the severance of rate case expenses into Docket No. 40295, the final order of which is being appealed here. Facts Omitted. ETI’s statement of facts provides ample information about Docket No. 39896, ETI’s rate case, but omits pertinent details about the rate case 3 City of El Paso v. Pub. Util. Comm’n, 344 S.W.3d 609, 613 (Tex. App.—Austin 2011, no pet.); 16 Tex. Admin. Code § 25.231. 2 expenses proceeding underlying this appeal, Docket No. 40295. In its rate case, ETI requested a $104.8 million annual base rate increase; the Commission approved $27.7 million of that request, a reduction of nearly 75%. 4 In the severed expenses case, ETI sought to recover $8,752,545 in rate case costs associated with Docket No. 39896, plus carrying charges. Of that total, $7,635,236 was incurred by ETI and $1,117,309 was incurred by cities in Entergy’s service area (Cities).5 Thus, the $7.6 million in rate case expenses sought by ETI, exclusive of the Cities’ share, is more than one-fourth of the $28 million ETI was awarded as an annual base rate increase. As the Commission noted in its final order, “[t]he 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 No. 39896 ($27.7 million).” 6 Incorrect Statements. The Commission’s final order was based on a Proposal for Decision (PFD) issued by the Administrative Law Judge (ALJ) who presided over the hearing on the merits in Docket No. 40295. 7 With respect to quantification 4 AR Vol. I, Binder 2, Item 55 (Final Order) at Findings of Fact (FOF) No. 10 and 12 (Appendix B). 5 Cities of Anahuac, Beaumont, Bridge City, Cleveland, Conroe, Dayton, Groves, Houston, Huntsville, Montgomery, Navasota, Nederland, Oak Ridge North, Orange, Pine Forest, Pinehurst, Port Arthur, Port Neches, Rose City, Shenandoah, Silsbee, Sour Lake, Splendora, Vidor, and West Orange. 6 AR Vol. I, Binder 2, Item 55 (Final Order) at 5, FOF No. 17. 7 AR Vol. I, Binder 2, Item 32 (Proposal for Decision) (Appendix C). 3 of disallowance, ETI states, “The ALJ did not attempt to quantify the actual expenses ETI incurred in its effort to recover this compensation, but instead used a proxy for that amount.”8 State Agencies disagree. In fact, the ALJ was not provided with enough data to quantify actual amounts spent on the incentive compensation issue, because none of ETI’s internal costs was associated with a specific issue in the case.9 Therefore, it is incorrect to state, “the ALJ did not attempt to quantify.” SUMMARY OF THE ARGUMENT ETI is seeking to overturn the Commission’s reasoned decision to disallow ETI’s recovery of certain rate case expenses. The Commission’s disallowance of incentive compensation based on financial measures was reasonable and supported by substantial evidence. The Commission has broad discretion to disallow rate case expenses it deems were unreasonably incurred. Commission precedent that financial-based incentive compensation is not recoverable from ratepayers is unambiguous, and ETI was aware of that precedent. As such, ETI’s arguments against long-standing Commission policy were rightfully deemed unreasonable. The Commission’s disallowance of expenditures to propound ETI’s unreasonable argument was also reasonable and within its discretion. The 8 Appellant’s Br. 8. 9 AR Vol. III, Transcript at 35 and 49; AR Vol. II, Binder 3, State’s Ex. No. 4 (ETI Response to Request for Information). 4 Commission has previously disallowed rate case expenses for unreasonable rate case arguments. Previous cases in which utilities recovered rate case expenses for unsuccessfully arguing the same issue actually show the pattern that should have alerted ETI to the futility of repeatedly asserting the argument. No new standard was applied; the Commission’s conventional reasonableness standard was the basis for disallowance of the expenses. The Commission’s quantification of the disallowance for ETI’s unreasonable pursuit of a foregone issue was also well within reason. ETI failed to provide sufficient evidence documenting its expenses for the Commission to determine exact costs spent on the issue. With such evidence lacking, the Commission was forced to utilize an alternate method to determine the appropriate amount to disallow. The use of a proportional calculation to determine expenses was not unprecedented and resulted from reasoned consideration of relevant facts and factors. Use of the quantification method does not amount to imposition of a new standard, either. As such, the issue was properly addressed in the contested case setting. Lastly, the Commission’s denial of ETI’s request to recover depreciation expenses of its affiliate company was proper. ETI did not provide sufficient evidence to prove that the expenses were recoverable pursuant to Commission 5 precedent or that the expenses were reasonably incurred to participate in the ratemaking proceeding. In all respects, the Commission’s decision was within its discretion, reasoned, and supported by substantial evidence. The district court correctly affirmed the Commission’s decision and its judgment should be affirmed in its entirety. STANDARD OF REVIEW ETI challenges the district court’s decision on the basis that the Commission’s decision was arbitrary and capricious and an abuse of discretion.10 The Texas Supreme Court has articulated indicators of agency actions that are arbitrary and capricious or constitute an abuse of discretion. An administrative agency’s decision “is arbitrary or results from an abuse of discretion if the agency: (1) failed to consider a factor the legislature directs it to consider; (2) considers an irrelevant factor; or (3) weighs only relevant factors that the legislature directs it to consider but still reaches a completely unreasonable result.”11 Similarly, an abuse of discretion is characterized by unreasonable or arbitrary actions without reference to guiding rules or principles.12 10 Appellant’s Br. 10-12; Tex. Gov’t Code § 2001.174 (West 2008). 11 City of El Paso v. Pub. Util. Comm’n, 883 S.W.2d 179, 184 (Tex. 1994). 12 Butnaru v. Ford Motor Co., 84 S.W.3d 198, 211 (Tex. 2002). 6 This Court has recognized an agency’s decision will be deemed arbitrary if its “order denies parties due process of law or when it fails to follow the clear, unambiguous language of its own regulations.”13 Substantial evidence review is utilized to analyze both arbitrary and capricious and abuse of discretion challenges.14 “An administrative decision is generally not arbitrary and capricious if it is supported by substantial evidence.”15 Where some evidence supports a decision, no abuse of discretion occurred.16 Substantial evidence review “affords great deference to the Commission’s decisions on topics that the legislature has determined are within the agency’s discretion,”17 such as rate case expenses. In an appeal concerning the propriety of an order issued by the Public Utility Commission, “findings, inferences, conclusions, and decisions . . . are presumed to be supported by substantial evidence, and the burden is on the contestant to prove otherwise.” 18 13 Reliant Energy, Inc. v. Pub. Util. Comm’n, 153 S.W.3d 174, 199 (Tex. App.—Austin 2004, pet. denied) (citation omitted) (citing Pub. Util. Comm’n v. Gulf State Utils. Co., 809 S.W.2d 201, 207 (Tex. 1991)). 14 Tex. Gov’t Code § 2001.174 (West 2008). 15 Hinkley v. Tex. State Bd. of Med. Exam’rs, 140 S.W.3d 737, 743 (Tex. App.—Austin 2004, pet. denied) (citing Gerst v. Nixon, 411 S.W.2d 350, 354 (Tex. 1966)). 16 Butnaru, 84 S.W.3d at 211. 17 Nucor Steel v. Pub. Util. Comm’n, 168 S.W.3d 260, 267 (Tex. App.—Austin 2005, no pet.). 18 City of El Paso, 883 S.W.2d at 185 (citing Tex. Health Facilities Comm’n v. Charter Med.- Dall., Inc., 665 S.W.2d 446, 453 (Tex. 1984)). 7 ARGUMENT AND AUTHORITIES The district court correctly ruled that ETI’s challenges are unsubstantiated. Rather than arbitrary and capricious, the Commission’s decision is supported by substantial evidence and reasoned consideration of all relevant facts and factors. No action taken by the Commission in this matter overstepped the reasonable bounds of the discretion granted to it by the legislature. 1. The Commission’s disallowance of expenses incurred advocating for financial-based incentive compensation was reasonable and supported by substantial evidence. (Addresses ETI’s Issues 1 and 2) A. The Commission has broad discretion to disallow expenses that it determines are unreasonable. The Public Utility Regulatory Act (PURA) 19 requires that the Commission set a utility’s rates based on a reasonable return on invested capital plus “the utility’s reasonable and necessary operating expenses.”20 The Commission may include a utility’s reasonable costs of participating in a ratemaking proceeding in its recoverable operating expenses. 21 The utility bears the burden of proving that requested costs are reasonable. 22 This Court has recognized that “[t]he Commission 19 Tex. Util. Code §§ 11.001–66.016 (West 2007 & Supp. 2014). 20 PURA § 36.051. 21 PURA § 36.061(b)(2). 22 PURA § 36.006. 8 . . . has broad discretion to determine which requested expenses should be allowed.” 23 In pertinent part, the Commission is tasked with disallowing costs not proved to have been reasonably incurred within rate cases themselves. If the “Commission determines that a utility failed to prove the reasonableness of certain expenses incurred during the rate-making proceeding, the Commission may deny reimbursement of those rate case expenses.”24 This Court has agreed that even though there is no statutory or case law definition of “reasonable” as used in the rate case expenses statute, the Commission’s discretion to approve fees should be upheld when there is substantial evidence in the record to support its determination.25 This Court has also held that the manner or substance of an argument pursued in a utility rate case, if unreasonable, can render expenses arising from that dispute unrecoverable. For example, “[t]he Commission has not only the discretion, but the duty, to ensure that rates charged to public utility customers do not include expenses incurred in seeking [recovery] that the utility’s own evidence 23 City of El Paso v. Pub. Util. Comm’n, 916 S.W.2d 515, 522 (Tex. App.—Austin 1995, writ dism’d by agr.) 24 Pioneer Natural Res. USA, Inc. v. Pub. Util. Comm’n, 303 S.W. 3d 363, 376 (Tex. App.— Austin 2009, no pet.). 25 City of El Paso, 916 S.W.2d at 522-23. 9 disfavors.”26 Senseless behavior in rate cases wastes resources and is not necessary to provide service or to participate in ratemaking proceedings.27 Thus, the Commission’s decisions that: (1) ETI acted unreasonably in pursuing an argument contrary to long-standing precedent; and (2) ratepayers should not have to foot the bill for that unreasonable behavior, were entirely within the Commission’s discretion. B. The Commission’s finding that ETI was unreasonable to expend resources on the incentive compensation issue was reasonable and supported by substantial evidence. The Commission found that ETI was unreasonable to argue in Docket No. 39896 that ratepayers should pay for Entergy’s financial-based incentive compensation expenses. ETI claims that this decision is arbitrary and capricious because the Commission’s previous decisions were unclear on the differentiation between financial-based and operational-based incentive compensation.28 Commission precedent is unequivocal. The Commission has been clear and consistent with its policy that incentive compensation tied to financial measures cannot be recovered, but incentive compensation tied to operational measures 26 Indus. Utils. Serv., Inc., v. Tex. Natural Res. Conservation Comm’n, 947 S.W.2d 712, 716 (Tex. App.—Austin 1997, writ denied) (TNRCC, predecessor to the Texas Commission on Environmental Quality, is a sister agency of the PUC’s that also regulates public utilities.). 27 Id. 28 Appellant’s Br. 14. 10 can.29 Further, when deciding whether incentive compensation is recoverable through a utility’s rate base, Commission decisions consistently articulate that the “proper question to be asked is whether they provide benefits most immediately or predominantly to shareholders.”30 ETI claims it was reasonable to seek recovery of financial-based incentive compensation expenses in spite of the unequivocal Commission precedent because Entergy perceived a lack of clarity in previous PUC decisions about how to differentiate between financial- and operational-based incentive compensation. However, in Docket No. 39896, ETI did not seek to clarify this alleged mystery. Rather, Entergy requested that it be allowed to recover all of its incentive compensation costs, regardless of type. 31 Its arguments centered on the ways in which financial-based incentive compensation benefits customers. 32 ETI’s 29 AR Vol. I, Binder 2, Item 55 (Final Order) at 2. 30 Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and Obtain Deferred Accounting Treatment, Docket No. 39896, Proposal for Decision at 171 (July 6, 2012) and Final Order at 17, FOF 61 (Sept. 14, 2012). In Appellant’s Brief, page 4, footnote 10, ETI noted that the ALJ in the docket underlying this appeal took official notice of the record in Docket No. 39896. ETI then referred the court to the Commission’s interchange to access all “public filings in Docket No. 39896 and other Commission dockets.” This reference is inappropriate, as the interchange includes documents and information beyond what was ultimately entered into each docket’s administrative record. The ALJ in Docket No. 40295 took official notice of the record in Docket No. 39896, not the entire docket. See AR Vol. III, Trans. of Hearing on the Merits at 16). Proper reference should have been made only to the administrative record as finalized by SOAH in Docket No. 39896. 31 Appellant’s Br. 6 (Statement of Facts). 32 Appellant’s Br. 5 (Statement of Facts). 11 witnesses discussed incentive compensation as an undivided category; 33 they did not attempt to elucidate “the division between the two types.” 34 ETI’s arguments indicate it was not confused about the Commission’s precedent so much as it was dismissive of it. Similarly, ETI asserts that determining whether a certain program is financial- or operational-based is a fact issue. Again, ETI presented no facts regarding how its incentive compensation programs should be categorized. Instead, it presented testimony of a general nature addressing how all financial-based incentive compensation should be recoverable. In an attempt to prove Commission inconsistency, ETI points to the fact that ETI persuaded the Commission to include incentive compensation based on cost- control in Entergy’s rate base, which the PUC had previously denied another utility. 35 This example is not on point. The Commission did not have long-standing policy to disallow cost-control incentive compensation, as it does with financial- based incentive compensation. ETI refers to a single proceeding in which cost- control incentive compensation was denied, Commission Docket No. 28840.36 In 33 Docket No. 39896, ETI Ex. 36 (Gardner Direct at 31) and ETI Ex. 15 (Hartzell Direct at 3-4, 6, 9-10). 34 Appellant’s Br. 14. 35 Appellant’s Br. 14. 36 Application of AEP Texas Central Company for Authority to Change Rates, PUC Docket No. 28840 (2003). 12 that docket, the Commission denied AEP Texas Central Company recovery of its cost-control incentive compensation because the utility lumped its cost-control measures in with its financial-based measures, which were unrecoverable pursuant to long-standing PUC policy. 37 Recovering incentive compensation based on cost- control measures in Docket No. 39896 does not equate to challenging well- established Commission precedent, and it does not render reasonable a litigation practice of tilting at windmills. ETI’s argument that it was reasonable to argue the incentive compensation issue because of inconsistent Commission decisions on the issue fails. The record shows that Commission precedent on this issue is clear.38 Evidence also shows that ETI was fully aware of this precedent,39 despite its recent claims of uncertainty. This was the third rate case in a row in which ETI itself sought recovery of financial-based incentive compensation and lost the issue,40 and all parties agreed that precedent mandated that recovery be denied.41 37 Id. Final Order (Aug. 15, 2005). 38 AR Vol. I, Binder 2, Item 55 (Final Order) at 2 n.6, which cites multiple PUC proceedings denying recovery of financial-based incentive compensation expenses since 2005. 39 AR Vol. I, Binder 2, Item 32 (Proposal for Decision) at 21 (“In Docket 39896, all parties, including ETI, agreed that Commission precedent mandated that financially-based incentive compensation is not recoverable.”); Docket No. 39896, ETI Ex. 36, Gardner Direct at 29-30. 40 AR Vol. I, Binder 1, Item 23 (Initial Br. of State Agencies) at 7 (referring to Docket Nos. 34800 and 37744). 41 AR Vol. I, Binder 2, Item 32 (Proposal for Decision) at 21. 13 Based on this evidence, the ALJ stated, “ETI did not act reasonably when it incurred expenses litigating for recovery of its financially-based incentive costs in the face of clear and consistent precedent to the contrary on the issue.” 42 Affirming the ALJ, the Commission stated: “reductions should be made to Entergy’s recoverable rate-case expenses for Entergy attempting to recover financially-based incentive compensation in base rates.” 43 The Commission’s finding that ETI acted unreasonably in presenting argument about financial-based incentive compensation resulted from a thorough consideration of relevant facts and factors, was not patently unreasonable and was supported by substantial evidence. On this issue the lower court should be affirmed. C. Having properly determined ETI’s argument was unreasonable, the Commission’s disallowance of expenses arising therefrom was proper. ETI contends that the disallowance for the expenses associated with litigating the foregone financial-based incentive compensation issue was arbitrary and capricious and an abuse of discretion. 42 Id. at 24. 43 AR Vol. I, Binder 2, Item 55 (Final Order) at 2. 14 i. Disallowance of expenses unreasonably incurred is consistent with previous Commission actions Entergy’s complaint that the Commission has never before made such a disallowance is only accurate where an incredibly narrow category of “such a disallowance” is drawn. The Commission disallowed recovery of ETI’s expenses “due to an unreasonable position pursued by Entergy in the rate case.” 44 The PUC has disallowed rate case expenses for unreasonable litigation strategies before. For example, in Docket No. 31433, the Commission disallowed expenses for a utility’s use of an expert witness whose work product was “seriously flawed.” 45 This court has upheld the disallowance of such costs in a similar situation faced by a sister agency of the PUC, the Texas Natural Resources Conservation Commission (TNRCC). In Industrial Utilities Service, Inc. v. Texas Natural Resources Conservation Commission, 46 a utility challenged a TNRCC decision disallowing costs incurred when the utility took an unreasonable litigation position in a surcharge matter.47 Though the fact situations were not identical, TNRCC did, as the PUC did in Docket No. 31433 and here, assess the propriety of legal 44 AR, Vol. I, Binder 2, Item 55 (Final Order at 2). 45 Proceeding to Consider Rate Case Expenses Severed from Docket No. 28840 (Application of AEP Texas Central Company for Authority to Change Rates), Docket No. 31433, Order at 3 (March 3, 2006) (Appendix D). 46 947 S.W.2d 712 (Tex. App.—Austin 1997, pet. denied). 47 Id. at 716. 15 arguments made and determine those arguments were not reasonably propounded. In all cases, the associated costs were properly disallowed. ETI further argues that because it and other utilities have previously recovered expenses incurred advocating for financial-based incentive compensation recovery, it is arbitrary and capricious to deny ETI that same recovery. However, the premise that the Commission’s different treatment of other utilities in other cases necessarily means ETI’s treatment here has been arbitrary and capricious is inaccurate.48 “In short, regardless of the Commissions actions in other cases . . . we must assess the reasonableness of the treatment of [the utility] . . . in this case.”49 Moreover, in each case cited by ETI to show it was treated differently, the Commission disallowed recovery of financial-based incentive compensation from ratepayers. With each successive decision denying companies’ attempts to recover the requested expenses in rate bases, the relitigation of the issue with expectations of different results became less reasonable. So, the Commission’s decisions in other rate cases actually show how ETI, rather than the Commission, acted unreasonably on this issue. 48 Reliant Energy, 153 S.W.3d at 200. 49 Id. 16 ii. No new standard was applied. Entergy also claims that the disallowance was arbitrary and capricious because it imposed a new standard at the end of an administrative proceeding. No new standard was created here. The standard is and has always been that rate case expenses are only recoverable through the rate base if they were reasonably incurred to participate in the proceeding.50 The fact that no new standard was created is evident in the fact that ETI has not been able to articulate a clear and consistent statement of the “new policy.” ETI first states that the Commission declared it unreasonable to incur expenses to litigate financial-based incentive compensation. 51 Alternatively, and more generally, it defines the new policy as precluding a utility from “recovering expenses of arguing against a decision in a prior Commission proceeding.” 52 ETI also suggests that the Commission’s “new policy” addressed “rate case expenses related to advocacy of long-shot positions.” 53 However, the Commission’s declaration was in fact more specific: it reduced ETI’s recoverable expenses “due 50 PURA § 36.061(b)(2). 51 Appellant’s Br. 19. 52 Appellant’s Br. 24 53 Appellant’s Br. 18 (quoting Chairman Nelson). 17 to an unreasonable position pursued by Entergy in the rate case.”54 The Commission’s findings of fact also specifically addressed ETI’s behavior: “unreasonable and overly aggressive arguments pursued by ETI.” 55 Thus, rather than creating a new standard, the Commission applied the facts of this case to the same standard it has been using for rate case expenses all along. ETI relies heavily on Oncor Electric Delivery Company, LLC v. Public Utility Commission 56 to establish fundamental unfairness of applying a new standard retroactively. 57 In Oncor, the Commission denied recovery of rate case expenses not because they were unreasonable, but because prior authorization had not been obtained.58 The reasonableness of the expenses was never challenged.59 Instead, the Commission attempted to retroactively require prior Commission authorization to recover certain expenses that were otherwise reasonable. This Court ruled that the Commission was arbitrary and capricious when it implemented 54 AR, Vol. I, Binder 2, Item 55 (Final Order) at 2 (emphasis added. This mirrored the ALJ’s determination that “ETI did not act reasonably….”AR, Vol. I, Binder 2, Item 32 (Proposal for Decision) at 24. 55 AR, Vol. I, Binder 2, Item 55 (Final Order) at 6, FOF 18.f and Item 32 (Proposal for Decision) at 38, FOF 18.f. (emphasis added). 56 406 S.W.3d 253 (Tex. App.—Austin 2013, no pet.) 57 Appellant’s Br. 19-21. 58 Oncor, 406 S.W.3d at 258, 264. 59 Id. at 271. 18 this “new requirement that would have required Oncor to take action years before the hearing.”60 In contrast, the Commission has not added a condition to recovery of rate case expenses in this case; rather, the Commission applied its tried and true reasonableness standard to the fact situation before it, and found the rate case expenses unreasonably incurred. Oncor actually highlights the difference between imposition of a new standard and the Commission’s action in its Docket No. 40295 Final Order. No fundamental unfairness arose from the Commission’s application of a statutory reasonableness standard. iii. The Commission properly took action in a contested case hearing. No new policy was created; no rulemaking occurred. ETI avers that the Commission’s adoption of this “new policy” constitutes the promulgation of a rule and should have been completed through a rulemaking proceeding rather than in a contested case. The PUC did not adopt a new rule in Docket No. 40295. ETI states that “it is indisputable that the Commission adopted a rule of general applicability in this case.”61 State Agencies disagree. “Rule” is defined in the Administrative Procedure Act (APA) as “a state agency statement of general applicability that: (i) implements, interprets, or prescribes law or policy; or (ii) describes the procedure 60 Id. at 269. 61 Appellant’s Br. 21. 19 or practice requirements of a state agency.” 62 “General applicability” is paramount: it “references ‘statements that affect the interest of the public at large such that they cannot be given the effect of law without public input.’” 63 The Commission’s order in Docket No. 40295 constituted a fact-based decision, rather than a generally applicable rule. Entergy claims that no facts cited in the decision suggest this “new policy” applies only to this case.64 However, the PFD, as adopted by the Commission, discusses exactly the facts that make this application of the reasonableness standard particular to this case.65 For example, the ALJ explained, “all parties, including ETI, agreed that Commission precedent mandated that financially-based incentive compensation is not recoverable. Nevertheless, in its application, ETI asked the Commission to reconsider its precedents on the issue.” 66 Additionally, “[i]t was obvious throughout the hearing in Docket No. 39896 that ETI was taking an aggressive position and making a ‘long-shot’ argument in seeking recovery for its financially-based incentive compensation.” 67 The PFD also recounts the 62 Tex. Gov’t Code. § 2001.003(6)(A) (West 2008). 63 El Paso Hosp. Dist. v. Tex. Health & Human Servs. Comm’n, 247 S.W.3d 709, 714 (Tex. 2008) (citing R.R. Comm’n v. WBD Oil & Gas Co., 104 S.W.3d 69, 79 (Tex. 2003)). 64 Appellant’s Br. 21. 65 AR Vol. I, Binder 2, Item 32 (Proposal for Decision) at 21-24. 66 Id. at 21. 67 Id. at 23. 20 insufficiency of ETI’s evidence and argument on the issue.68 It was these elements that made ETI’s actions unreasonable and associated expenses unrecoverable. It is the same facts that point to the case-specific nature of the Commission’s decision. Witcher does not support ETI’s case. ETI relies heavily on Texas State Board of Pharmacy v. Witcher 69 to bolster its improper rulemaking arguments. In Witcher, this court addressed the issue of whether a certain statement of agency policy that formed the basis of a contested case decision was a rule or not.70 In that case, the Pharmacy Board imposed a disciplinary action that was impossible for the plaintiff pharmacist, Witcher, to fulfill. The Board based the sanction on what it called a “‘non-binding’ policy, practice, or precedent,” 71 but claimed it could not discipline Witcher in a manner inconsistent with the policy. Witcher challenged the disciplinary action, claiming that in deciding her case, the Board relied on the policy as it would rely on a rule, despite the fact situation presented.72 If the policy were so immutable, irrespective of case-specific facts, the plaintiff argued, the policy was actually a rule that should have been promulgated through 68 Id. at 23-24 (“ETI cites to a number of cases…[that] hurt ETI’s cause more than they help….” ETI selectively quoted Commissioner statements that appeared to support its argument, which the ALJ pointed out “overstates and distorts the facts.”). 69 447 S.W.3d 520 (Tex. App.—Austin 2014, pet. filed). 70 Id. at 527. 71 Id. 72 Id. at 525. 21 formal rulemaking.73 This Court agreed, based on a finding that the agency’s policy was being applied generally, without consideration of the circumstances in an individual case.74 The agency action alleged to be a rule here is a fact-specific decision in a contested case hearing, whereas in Witcher, it was an agency policy on which the Board based a contested case decision. The agency in Witcher created the policy underlying its disciplinary decision without a proper rulemaking process; here, in contrast, the “policy” on which the Commission’s decision is based is the reasonableness standard found in PURA. 75 The PUC’s decision in Docket No. 40295 is not ad hoc rulemaking, but an application of the statute to specific facts. This threshold distinction precludes inquiry into exceptions allowing ad hoc rulemaking. Therefore, Witcher supports the fact that the Commission did not create a rule when it issued its Final Order in Docket No. 40295. Subsequent rulemaking is neither probative nor persuasive. Entergy asserts that the fact that a rulemaking project on rate case expenses was initiated soon after issuance of the decision in this matter 76 proves that the subject was appropriate for 73 Id. 74 Id. at 529-30. 75 PURA §§ 36.051, .061(b)(2). 76 Project No. 41622 was initiated by the Commission to address rate case expenses on June 27, 2013. This project resulted in a new substantive rule: 16 Tex. Admin. Code § 25.245, effective August 26, 2014. 22 rulemaking, and so the Docket No. 40295 final order promulgated a new rule. In fact, the opposite is true: the fact that a rulemaking occurred after the decision in this case means that the decision in this case did not constitute the creation of a new rule at all. The fact that a rulemaking is initiated following a contested case also does not mean the question should not have been addressed in the contested case. ETI should know this well. Entergy Gulf States, Inc. v. Public Utility Commission77 concerned section 36.203 of the Utility Code, addressing Fuel Cost Recovery (“the fuel rule”). In that case, the Commission applied the fuel rule in a manner that Entergy Gulf States claimed departed from its previous decisions. 78 Thereafter, the Commission initiated a rulemaking and solicited comments from the public on the application of the fuel rule. Entergy Gulf States argued that the subsequent request for public comment was “tantamount to the Commission admitting that it must engage the formal rulemaking process to modify the fuel rule” as it did. 79 This Court disagreed, stating, “the Commission may consider a matter in a contested case before adopting a rule later.”80 This Court has further affirmed such agency 77 173 S.W.3d 199 (Tex. App.—Austin 2005, pet. denied). 78 Id. at 211. 79 Entergy Gulf States, 173 S.W.3d at 212. 23 discretion: “[u]nless mandated by statute, the choice by an agency to proceed by general rule or by ad hoc adjudication is one that lies primarily in the informed discretion of the agency.” 81 The Commission’s decision in Docket No. 40295 did not promulgate a new standard. Instead, it was a fact-specific application of the law in effect at that time. It was within the Commission’s discretion and supported by substantial evidence. The disallowance based on ETI’s pursuit of an unreasonable argument was appropriately addressed in a contested case hearing, and it was supported by substantial evidence. Therefore, the district court judgment on this issue should be affirmed. 2. The Issue-Specific Method of determining disallowance amounts is reasonable and did not require a rulemaking proceeding. (Addresses ETI’s Issue 3) ETI challenges the Commission’s quantification of the expenses disallowed as a result of Entergy’s unreasonable rate case actions as arbitrary and capricious and an abuse of discretion. Entergy claims that the Commission has never before used issue-specific measures to quantify a disallowance, and that the Commission 80 Id. at 212; see also City of El Paso, 883 S.W.2d at 189 (“ad hoc adjudication may be preferable to a formal rulemaking proceeding where ‘the agency may not have had sufficient experience with a particular problem to warrant rigidifying its tentative judgment into a hard and fast rule.”). 81 State Bd. of Ins. v. Deffebach, 631 S.W.2d 794, 799 (Tex. App.—Austin 1982, writ ref’d n.r.e.) (citing Sec. & Exch. Comm’n v. Chenery Corp., 332 U.S. 194 (1947)). 24 engaged in improper ad hoc rulemaking when it imposed a new standard at the end of a contested case. A. ETI’s evidence did not allow for an exact accounting of actual costs. While some of ETI’s expenses specific to the financial-based incentive compensation issue were documented, ETI did not provide adequate evidence to determine the exact total cost of litigating that topic.82 It is ETI’s burden to prove its rate case expenses were reasonable.83 ETI’s failure to adequately quantify its exact expenses does not lead to a partial disallowance consisting of only the calculable amounts, as ETI would suggest. Instead, the ALJ and the Commission were forced to find an alternative way of calculating the appropriate disallowance. A commission’s “function as the ultimate arbiter of ‘reasonableness’ would be nugatory if it were unable to exact a satisfactory accounting from those seeking reimbursement for rate case expenses.”84 In the absence of satisfactory accounting, quantification by an alternate method was well within the Commission’s discretion as the ultimate arbiter. 82 AR Vol. I, Binder 2, Item 32 (Proposal for Decision) at 24. 83 PURA § 36.006. 84 City of Amarillo v. R.R. Comm’n, 894 S.W.2d 491, 497 (Tex. App.—Austin 1995, writ denied). 25 B. Quantification by proportion is neither novel nor outside Commission discretion. In testimony, parties offered and provided recommendations on three methods for calculating the amount that should be disallowed on the financial- based incentive compensation issue.85 After consideration of all three methods, the ALJ chose,86 and the Commission adopted, 87 what is referred to as the “Issue- Specific” Method of quantifying disallowance.88 Under this approach, requested rate case expenses were reduced by the ratio of the amounts unsuccessfully sought by ETI for financially-based incentive payments to the entire rate increase sought by ETI. 89 The resulting disallowance of rate case expenses on this issue was $522,244.66. 90 This utilization of a proportion calculation was also well within the Commission’s discretion. The Commission has previously used similar methods for calculating amounts that are not explicitly addressed in a statute.91 “[E]ven 85 AR, Vol. II, Binder 3 OPUC Ex. 1 (Direct Testimony of Nathan Benedict) at 10-11; Vol. I, Binder 1, Item 23 (Init. Br. of State Agencies) at 3, 22; Vol. I, Binder 1, Item 22 (OPUC Init. Br.) at 11; Vol. I, Binder 2, Item 24 (Comm’n Staff Init. Br.) at 12. 86 AR Vol. I, Binder 2, Item 32 (Proposal for Decision) at 29-30. 87 AR Vol. I, Binder 2, Item 55 (Final Order) at 3. 88 ETI refers to this as the “proxy method.” 89 AR Vol. I, Binder 2, Item 32 (Proposal for Decision) at 29. 90 AR Vol. I, Binder 2, Item 55 (Final Order) at 3 and 6 (FOF 18.f.). 91 Docket No. 31433, Order (March 3, 2006). 26 when no evidence suggests a specific figure explicitly, the Commission may infer the figure if it is supported by the body of evidence as to that issue.”92 Expert testimony provided a range of disallowance amounts that were reasonably calculated.93 Where, as here, the record contains substantial evidence to support such a range and valuation of a disallowance is inherently complex, “there is a reasonable basis for the Commission to, in its discretion, select an amount within the range of figures provided by the expert testimony of the parties.” 94 Thus, the chosen method of disallowance calculation was well within the Commission’s discretion and reasonably decided. In addition, quantification of the disallowance through the issue-specific method was anything but arbitrary and capricious. “The findings, inferences, conclusions, and decisions of an administrative agency are presumed to be supported by substantial evidence, and the burden is on the contestant to prove otherwise.”95 ETI has not carried this burden. The record shows that the Commission engaged in a “process of discussion, careful consideration, and 92 Pioneer Natural Res., 303 S.W. 3d at 369. 93 AR Vol. II, Binder 3, OPUC Ex. 1 (Direct Testimony and Workpapers of Nathan Benedict) at 10-11. 94 City of El Paso, 883 S.W.2d at 186. 95 Id. 27 compromise,” 96 when it chose this method, which was supported by expert testimony. 97 ETI claims the method is arbitrary because there is no relationship between the issue-specific method and the rate case expenses associated with the issue.98 However, in its next sentence, Entergy explains that the relationship lies in the issues’ values rather than their costs. This is a reasonable and logical relationship. It is sensible to assume that ETI would manage its expenditures, at least in part, based on the potential value that the outcome of each argument holds for it. Certainly, good business practices would not prescribe payment of exorbitant legal fees to defend a position that would result in a minimal amount of recovery. A disallowance calculation method that employs similar logic is reasonable. Entergy claims that the Commission illogically applied the PURA provision that authorizes the Commission to entitle a utility to recover reasonably incurred rate case expenses.99 However, “[t]he Commission is not required to grant recovery of every reasonable expense.”100 And, ETI has not proffered an explanation as to 96 Nucor Steel v. Pub. Util. Comm'n, 168 S.W.3d 260, 269 (Tex.App.—Austin 2005, no pet.) (referencing earlier cite to Pedernales Elec. Coop. v. Pub. Util. Comm'n, 809 S.W.2d 332, 341 (Tex.App.—Austin 1991, no writ).). 97 AR Vol. I, Binder 2, Item 32 (Proposal for Decision) at 21-24. 98 Appellant’s Br. 28. 99 Appellant’s Br. 29 (citing PURA § 36.061(b)). 100 AR Vol. II, Binder 3, OPUC Ex. 1 at 4. 28 why any one amount within the suggested range is more reasonable or better supported than the amount chosen by the Commission. 101 Thus, ETI has failed to meet its burden showing that the issue-specific quantification method is arbitrary and capricious or an abuse of the Commission’s discretion. C. No new standard was imposed; no rulemaking was required. Lastly, ETI claims that imposing this “new standard” at the end of an administrative proceeding constitutes ad hoc rulemaking, and thus was arbitrary and capricious and an abuse of discretion. Again, no new standard was imposed. There is no indication that the ALJ or the Commission intended for this decision to become generally applicable law. “The ALJ recommends adoption of the Issue-Specific Reduction Approach in this case.” 102 In its order, the Commission affirmed “the use of the ‘issue-specific reduction approach’ to determine how to calculate an appropriate reduction,” in this case. 103 The Commission did not adopt this approach as the only way to calculate appropriate reduction for all subsequent cases. The Commission only decided the particular issue at hand supported by the facts in this case. The initiation of a rate case expenses rulemaking proceeding does not discredit the contested case decision. As explained above, the fact that a subject is 101 See City of El Paso, 883 S.W.2d at 186. 102 AR Vol. I, Binder 2, Item 32 (Proposal for Decision) at 32 (emphasis added). 103 AR Vol. I, Binder 2, Item 55 (Final Order) at 2. 29 appropriate for rulemaking does not prohibit an agency from taking it up in the context of a contested case. It is within an agency’s discretion to decide whether to take action through a rulemaking or directly in a contested case.104 The district court judgment affirming the Commission’s decision on this issue should be affirmed. 3. The Commission properly disallowed depreciation expenses of an ETI affiliate company. (Addresses ETI’s Issue 4) PURA allows a utility to recover depreciation of its capital investment property, if used to provide service, as an expense in calculating the utility’s revenue requirement. In a curious and atypical application of this allowance, ETI seeks to include depreciation of assets (capital investments) belonging to its affiliate, Entergy Services, Inc. (ESI), in ETI’s rate base as a rate case expense. The Commission disallowed $207,683 in these affiliate depreciation expenses, which ETI presented as “Depreciation & Amort” costs. The Commission’s disallowance was based on the fact that ETI failed to: (1) cite to any precedent that would justify the recovery; (2) prove the reasonableness of the expenses under the more stringent affiliate standards; and (3) establish that it would similarly recover such an expense in an arms-length transaction with a non-affiliate. 105 104 Entergy Gulf States, 173 S.W.3d at 211-12; Deffebach, 631 S.W.2d at 799 (citing Sec. & Exch. Comm’n v. Chenery Corp., 332 U.S. 194 (1947)). 105 AR Vol. I, Binder 2, Item 32 (Proposal for Decision) at 12 and Item 55 (Final Order) at 2. 30 The Commission’s disallowance of ESI’s depreciation expenses was supported by substantial evidence and was not arbitrary and capricious. Contrary to ETI’s assertions, the record shows both rational, consistent reasoning and evidentiary support for this disallowance. ETI first argues the disallowance was unreasonable because similar expenses were deemed reasonable and necessary for inclusion in the rate base in the underlying rate case. The statutory standard for reasonable and necessary expenses is different in rate cases than it is in rate case expense cases.106 Depreciation expense was included in ETI’s revenue requirement only to the extent that it was based upon the “cost of rendering service to the public during a historical test year.” 107 That is a different standard than what may be allowed as a rate case expense, which is tied by statute to what is reasonable to participate in a proceeding. 108 ETI also asserts that the ALJ’s statement that ETI “would not similarly recover such an expense in an arms-length transaction with an affiliated company,” 109 is completely unsupported by evidence in the record. However, 106 PURA 36.051, compare with 36.061(b)(2). 107 16 Tex. Admin. Code § 25.231(a). 108 PURA § 36.061(b)(2). 109 AR Vol. I, Binder 2, Item 32 (Proposal for Decision) at 12. 31 ETI’s omission of the first part of the referenced sentence is informative. The entire sentence reads: Simply put, ETI has failed to establish that it is entitled to recover a depreciation expense related to an affiliate transaction because it would not similarly recover such an expense in an arms-length transaction with an affiliated company. 110 The burden of proof, again, was ETI’s. As this court has previously recognized, “because of the possibility for self-dealing between affiliated companies, PURA regards affiliate transactions with some skepticism and requires the utility to meet a high burden of proof before costs paid to affiliated companies may be allowed as an expense.”111 Under the affiliate transaction standard, payments to affiliated companies are presumptively excluded from a utility’s rate base or operating expenses unless the utility presents evidence supporting Commission findings that (1) each item or class of items is reasonable and necessary, and (2) the price charged is no higher than that charged to other affiliates, divisions, or unaffiliated entities.112 Under this protective heightened scrutiny, ETI’s evidence falls short of 110 Id. (emphasis added). 111 Cent. Power & Light Co. v. Pub. Util. Comm’n, 36 S.W.3d 547, 568-69 (Tex. App.—Austin 2000, pet. denied). 112 PURA § 36.058; see also City of Amarillo, 894 S.W.2d at 498 (“Affiliate transactions are subject to this heightened scrutiny because when a utility and its suppliers are both owned and controlled by the same holding company, the safeguards provided by arm’s-length bargaining are absent, and ever present is the danger that the utility will be charged exorbitant prices which will, by inclusion in its operating costs, become the predicate for excessive rates.”) (citing PURA § 36.058 and R.R. Comm’n v. Rio Grande Valley Gas Co., 683 S.W.2d 783, 786 (Tex. App.—Austin 1984, no writ). 32 meeting its burden of proof. This disallowance was not based on an unsupported assumption made by the ALJ, but instead on a reasoned analysis of ETI’s evidence. The evidence ETI offered on this issue is attached hereto as Appendix E. It consists of pages 1, 7, and 8 of ETI’s Exhibit MPC-R-1 from Docket No. 40295. Pages 7 and 8 contain the sum total of documentation supporting the $207,863 in internal “Depreciation & Amort Expenses” summarized on page 1. The “detail” does not identify what assets depreciated, those assets’ original cost, or how depreciation was calculated. No employees or assets were identified in ETI’s exhibits or testimony, and underlying journal entries were not supplied. The “amortization” portion of the expense was never explained in either testimony or exhibits. Whether the claimed expense relates to assets used by ETI, ESI, or both is not detailed. A description of the assets’ use with respect to the rate case is also lacking. In short, ETI simply failed to provide evidence to support its expenses, much less to determine if those expenses were reasonable. Although ETI argues that this generalized cost relates in some fashion to ESI labor charges, there is no supporting calculation in this record that makes that connection. ETI presented no evidence that any outside contractors included depreciation in the rates billed to ETI. Actually, a standard outside vendor contract used by ETI’s outside law firm indicates that the contrary is true. 113 It expressly 113 AR Vol. III, Transcript at 55-56, concerning AR Vol. II, Binder 3, State’s Ex. No. 15. 33 provides that charges related to computers, office facilities, word processing, which charges analogous to “desks, computers, copiers, office buildings, etc.” are considered “unreimbursable overhead.”114 The contract also states that copies are reimbursed at a set copy charge, and fees for word or document processing are not reimbursable. 115 The ALJ determined that ETI did not present sufficient evidence of precedent or reasonableness to justify the recovery. 116 This determination is supported by substantial evidence in the record. As such, the district court’s judgment affirming the Commission on this issue should be affirmed. PRAYER The Commission’s decisions to disallow expenses for financial-based incentive compensation, to quantify that disallowance using an issue-specific proportion method, and to disallow an affiliate’s depreciation expenses were: • within Commission discretion; • reasonable results of logical consideration of all relevant facts and factors; • supported by substantial evidence in the record; and • properly addressed in a contested case rather than a rulemaking. 114 AR Vol. II, Binder 3, State’s Ex. No. 15 at 3. 115 Id. at 4-5. 116 AR Vol. I, Binder 2, Item 32 (Proposal for Decision) at 12. 34 For these reasons and others set out above, the district court’s final judgment was correct in affirming the Commission’s decision. State Agencies pray that the judgment be in all respects AFFIRMED. Dated: March 6, 2015 Respectfully submitted, KEN PAXTON Attorney General of Texas CHARLES E. ROY First Assistant Attorney General JAMES E. DAVIS Deputy Attorney General for Civil Litigation DAVID A. TALBOT, JR. Chief, Administrative Law Division /s/ Sara R. Hammond Katherine H. Farrell State Bar No. 24032396 Sara R. Hammond State Bar No. 24081003 Assistant Attorneys General OFFICE OF THE TEXAS ATTORNEY GENERAL Administrative Law Division P.O. Box 12548 Austin, Texas 78711 Telephone: (512) 475-4173 Facsimile: (512) 320-0167 E-mail: katherine.farrell@texasattorneygeneral.gov sara.hammond@texasattorneygeneral.gov Counsel for Appellee State Agencies 35 CERTIFICATE OF COMPLIANCE I certify that this document contains 7,572 words in the portions of the documents that are subject to the word limits of Texas Rules of Appellate Procedure 9.4(i), as measured by the undersigned’s word processing software. /s/ Sara R. Hammond Sara R. Hammond Assistant Attorney General CERTIFICATE OF SERVICE I certify that a true and correct copy of the Brief of Appellee State Agencies was transmitted by electronic filing on the 6th day of March, to the parties of record as listed below: ENTERGY TEXAS, INC., John F. Williams Marnie A. McCormick Appellant DUGGINS WREN MANN & ROMERO, LLP One American Center 600 Congress Suite 1900 Austin, Texas 78767 Telephone: (512) 744-9300 Facsimile: (512) 744-9399 jwilliams@dwmrlaw.com mmccormick@dwmrlaw.com 36 OFFICE OF PUBLIC UTILITY Ross Henderson COUNSEL, Assistant Public Counsel OFFICE OF PUBLIC UTILITY COUNSEL Appellee 1701 N. Congress Avenue Suite 9-180 P.O. Box 12397 Austin, Texas 78711-2397 Telephone: (512) 936-7500 Facsimile: (512) 936-7525 or 936-7520 ross.henderson@opuc.texas.gov PUBLIC UTILITY Elizabeth Sterling COMMISSION Assistant Attorney General OF TEXAS, OFFICE OF THE ATTORNEY GENERAL Environmental Protection Division Appellee P.O. Box 12548, Capitol Station Austin, Texas 78711-2548 Telephone: (512) 475-4152 Facsimile: (512) 320-0911 Elizabeth.Sterling@texasattorneygeneral.gov TEXAS INDUSTRIAL ENERGY Rex D. Van Middlesworth CONSUMERS, Benjamin Hallmark THOMPSON KNIGHT, LLP Appellee 98 San Jacinto Blvd, Ste. 1900 Austin, Texas 78701 Telephone: (512) 469.6100 Facsimile: (512) 469.6180 rex.vanm@tklaw.com benjamin.hallmark@tklaw.com /s/ Sara R. Hammond Sara R. Hammond Assistant Attorney General 37 APPENDICES A District Court’s Final Judgment and Letter from Judge Meachum B Commission’s Final Order, PUC Docket No. 40295 C ALJ’s Proposal for Decision, PUC Docket No. 40295 D Commission’s Final Order, PUC Docket No. 31433 E Excerpts of Entergy’s Exhibit MPC-R-1, PUC Docket No. 40295 38 APPENDIX A APPENDIX B Control Number : 40295 Item Number: 90 Addendum StartPage : 0 ^ 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 C Control Number : 40295 Item N umber: 67 Addendum StartPage : 0 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 $104.8 million, proposed tariff schedules including new riders to recover costs related to purchased-power capacity and renewable-energy credit requirements, and final reconciliation of its fuel costs. Prior to the hearing, the Commission effectively denied ETI's request for a purchased-power capacity rider by removing it as an issue to be addressed in the hearing on the ETI Application. In their PFD, the ALJs recommended an overall rate increase for ETI of $28.3 million, did not recommend approving the renewable-energy credit rider sought by ETI, and recommended approving ETI's request to reconcile fuel and purchased power costs during the Reconciliation Period.3 Ultimately, the Commission largely followed the recommendations contained in the PFD, but reduced the overall rate increase to $27.7 million.4 In this docket, Michael P. Considine, a Manager in the Regulatory Accounting Department of Entergy Services, Inc. (ESI), ETI's service company affiliate, testified in support of the company's claim for recovery of rate case expenses. He explained that ETI is seeking authority to recover its 3 Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and Obtain Deferred Accounting Treatment, Docket 39896, Proposal for Decision (July 6, 2012). 4 Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and Obtain Deferred Accounting Treatment, Docket 39896, Order on Rehearing (November 1, 2012). SOAH DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGE 4 PUC DOCKET NO. 40295 rate case expenses over a three-year period, while earning a return on the unamortized balance.' ETI seeks to recover $8,752,5456 in rate case expenses associated with Docket 39896 that were incurred and paid as of September 30, 2012.7 Of that total, $7,635,236 was incurred by ETI and $1,117,309 was incurred by Cities. Of the total amount, ETI classifies $3,908,214 as "external" rate case expenses (i.e., those expenses paid to outside accounting services, outside counsel, and outside consultants), and $4,844,362 as "internal" rate case expenses (i.e., those expenses related to direct expenses, payroll, benefits, and taxes of ETI and Entergy Services, Inc. (ESI), an affiliated company of ETI).8 Mr. Considine offered the opinion that all of ETI's internal rate case expenses were reasonable and necessary.9 Another ETI witness, Stephen F. Morris, offered his opinion that all of ETI's external rate case expenses were reasonable and necessary.10 Mr. Morris is an attorney and certified public accountant who was retained by ETI to review the company's external rate case expenses.' l ETI also seeks authority to defer until its next rate case all rate case expenses incurred in Docket 39896 after September 30, 2012.12 B. Cities' Rate Case Expenses Pursuant to PURA § 33.023, any municipality participating in a ratemaking proceeding may engage attorneys, consultants, and others to assist it, and the electric utility "shall" reimburse the municipality for its "reasonable cost" of participating in the ratemaking proceeding "to the extent the [Commission] determines is reasonable." 5 ETI Ex. 1 (Considine Direct) at 62. 6 Initially, ETI sought recovery of $8,752,576. In its briefing, however, ETI explains that it is reducing the amount it seeks to $8,752,545 (a reduction of $31) to account for two excessive charges for meals. ETI Init. Br. at 1 n. 1. 7 ETI Ex. 6 (Considine Supp.) at 1. 8 ETI Ex. 6 (Considine Supp.) at 3, 5, and attachment MPC-SD-5. The $1,117,309 in expenses incurred by Cities is included as part of ETI's "internal" expenses. 9 ETI Ex. 6 (Considine Supp.) at 7. 10 ETI Ex. 8 (Morris Direct) at 18. 11 ETI Ex. 8 (Morris Direct) at 1-2. 12 Transcript from Hearing on the Merits (Tr.) at 17. SOAH DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGE 5 PUC DOCKET NO. 40295 In this case, Cities seek reimbursement for rate case expenses totaling $1,201,568.61. Cities identify this amount as the "total actual and estimated rate case expenses" incurred by Cities in four forums: (1) ETI's base rate cases before the municipalities; (2) participation in Docket 39896; (3) participation in any appeals of Docket 39896; and (4) participation in the present case, Docket 40295.13 Of the $1,201,568.61 total, $1,125,768.61 represents actual expenses incurred by Cities through August 31, 2012, while $75,800 represents Cities' estimated expenses through completion of Dockets 39896 and 40295, and any appeal. 14 Cities offered the expert testimony of Amalija "Amy" Hodgins, a former ALJ, who opined that these expenses were reasonable and should be reimbursed. 15 No party challenged the reasonableness of Cities' expenditures through August 31, 2012 (i.e., $1,125,768.61), and the AU can find no reason to do so either. Staff challenges, however, Cities' attempt to recover their estimated expenses after that date (i.e., $75,800). Cities seek to be reimbursed for these estimated expenses only "if and when they occur," up to the maximum of $75,800.16 Ms. Hodgins offered her opinion that the amount of the estimated expenses is reasonable. 17 In reliance upon Commission precedent from 2005, Ms. Hodgins argued that estimated rate case expenses are reimbursable. Ms. Hodgins testified as follows: Projected rate case expenses can be, and routinely have been, found reasonable and reimbursable by this Commission. The fact that a municipality's rate case expenses have not all been incurred, as of the date of the determination of the reasonableness of rate case expenses, does not render them unreasonable. Expenses need only be reasonable and incurred to be recoverable. 13 Cities Init. Br. at 2. 14 Cities Init. Br. at 5. 15 See Cities Ex. No. 1(Hodgins Direct) and Ex. No. 2 (Hodgins Supp.). 16 Cities Ex. 2 (Hodgins Supp.) at n. 6. 17 Cities Ex. 2 (Hodgins Supp.) at 13-14. SOAH DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGE 6 PUC DOCKET NO. 40295 The future activities and corresponding costs, that are the subject of estimation, are necessary to complete a proceeding before the Commission. The Commission in CenterPoint's CTC case found estimated costs to complete a case were recoverable once the estimated expenses were incurred and known and measurable. ... Accordingly, it is reasonable for the Commission, in this proceeding, to consider and allow the Cities to recover the estimated costs to complete this proceeding, including possible judicial appeals, if and when those expenses are incurred.18 Staff argues, based upon Commission precedent, that Cities are not entitled to reimbursement for estimated future rate case expenses.19 Staff does not challenge the reasonableness of the amount of estimated expenses, nor does any other party. Rather, Staff asserts that the Commission precedent relied upon by Ms. Hodgins has been superseded by more recent precedent. Specifically, in 2010, the Commission decided a case in which it disallowed estimated rate case expenses. In Docket 37772, the Commission disallowed recovery of estimated expenses, holding that "approving estimated rate-case expenses is not in the public interest," but allowed the cities involved in that case to seek "recovery of actual rate-case expenses included in the estimates in [the utility's] next rate case."20 Thus, Staff argues that Cities' attempt to obtain its estimated expenses should be disallowed. Staff further argues that Cities should not be entitled to recover the expenses associated with the preparation of the portion of Ms. Hodgins' testimony in which she advocates in support of the recovery of Cities' estimated expenses. By Staffs calculation, this reduction amounts to $1,208.42 (representing Cities' actual costs for Ms. Hodgins' testimony related to the recovery of estimated expenses).21 No other party joins Staff in its opposition to Cities' estimated expenses. The ALJ recommends that Cities' request with regard to its estimated expenses be granted. Pursuant to Section 33.023 of PURA, Cities are entitled to reimbursement for their expenses 18 Cities Ex. 1(Hodgins Direct) at 6-7; citing Application of CenterPoint Energy Houston Electric, LLCfor Competition Transition Charge, Docket No. 30706, Order at 31 and FOFs 72-74 (Jul. 14, 2005)(Docket 30706). 19 Staff Init. Br. at 6. 20 Application of Southwestern Electric Power Company for Rate Case Expenses Pertaining to Docket No. 37364, Docket 37772, Order at 1-2 (Oct. 21, 2010)(emphasis in original)(Docket 37772). 21 Staff Init. Br. at 7. SOAH DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGE 7 PUC DOCKET NO. 40295 reasonably incurred in this case. As noted above, no party challenged the reasonableness of Cities' estimation that its expenses after August 2012 would total $75,800. The ALJ concludes that the estimate is reasonable.22 Most importantly, the ALJ notes that Cities are not actually seeking reimbursement of estimated rate case expenses. Rather, Cities asks for: (1) approval now of the reasonableness of its estimated expenses; but (2) reimbursement of those expenses only after they are incurred, and only up to the estimated amount of $75,800. Cities argue that, from a policy standpoint, it is more economical and efficient for Cities to request reimbursement of reasonable estimated rate case expenses to the extent they are incurred in this case, rather than requiring Cities to wait and ask for reimbursement of those expenses when ETI files a new rate case at some point in the future, a contingency which might not occur for many years. The ALJ agrees. The ALJ further believes that it would be unfair if Cities were obligated to wait until ETI files a new rate case in order to recover its estimated expenses from the present case. Any such arrangement would delay, potentially for years, Cities' recovery of its actual expenses in the present rate case, a result which seems contrary to the clear intent expressed in PURA § 33.023 that municipalities are entitled to reimbursement for their reasonable rate cases expenses. Moreover, such an arrangement would obligate Cities to participate in a future ETI rate case that they might otherwise have no interest in becoming a party to. For these reasons, the ALJ recommends: (1) that Cities' rate case expenses be found to be reasonable in the amount of $1,201,568.61 (consisting of $1,125,768.61 in actual expenses incurred by Cities through August 31, 2012, and $75,800 in estimated expenses to be incurred by Cities after August 31, 2012 through completion of Dockets 39896 and 40295, and any appeal); (2) that ETI be ordered to reimburse Cities for $1,125,768.61 in actual expenses incurred by Cities through August 31, 2012; and 22 Indeed, the ALJ notes that Cities attached to their Reply Brief an affidavit from Ms. Hodgins attesting to the fact that, from September through November 2012, Cities actually incurred expenses of $43,525.45 (or 57% of the estimated $75,800). Cities Reply Br. at 4-5, and attached affidavit. SOAH DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGE 8 PUC DOCKET NO. 40295 (3) that ETI be ordered to reimburse Cities for actual expenses incurred by Cities after August 31, 2012, through completion of Dockets 39896 and 40295 and any appeal up to a maximum possible amount of $75,800. C. ETI's Rate Case Expenses Pursuant to PURA Section 36.061(b), the Commission "may" allow a utility to recover its "reasonable costs of participating in a [ratemaking proceeding] not to exceed that amount approved" by the Commission. ETI seeks recovery of $8,752,545 in rate case expenses associated with Docket 39896 that were incurred and paid as of September 30, 2012. However, that total includes only the $1,125,768.61 in expenses incurred by Cities through August 31, 2012, but does not also include the $75,800 in expenses estimated for Cities as discussed above. Because the ALJ is recommending that Cities' estimated expenses be approved as outlined above, the ALJ deems ETI's overall request to have been increased by $75,800 to a total amount of $8,828,345. The parties other than ETI challenged various components of ETI's rate case expenses. Those challenges are discussed as follows. 1. Challenges to Specific ETI Rate Case Expenses That are Relatively Quantifiable a. Costs Associated with Gerald Tucker, ETI's Consulting Expert In Docket 39896, ETI retained Gerald Tucker as a consulting expert to assist in the preparation of the utility's case dealing with affiliate transactions. Mr. Tucker is an accountant who has experience regarding affiliate costs in Commission rate cases and who has commonly assisted ETI in its rate cases.23 23 ETI Ex. 8 (Morris Direct) at 29-30. SOAH DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGE 9 PUC DOCKET NO. 40295 State Agencies contend that Mr. Tucker's fees should be disallowed. No party other than State Agencies challenged Mr. Tucker's expenses. State Agencies complain that Mr. Tucker: (1) did not testify; (2) provided services that were described by ETI in only "the most general terms;" and (3) provided services (such as reviewing witness testimony, reviewing discovery responses, benchmarking, and assisting in preparing witnesses for deposition) that were duplicative of services provided by ETI's legal counsel or other consultants. Accordingly, State Agencies argue that the $116,119 representing Mr. Tucker's fees should be excluded from rate case expenses.24 ETI responds by contending that, over the last 20 years or so, the Commission has, at times, disallowed large percentages of utility companies' affiliate expenses, based upon the fact that ALJs and the Commissioners have had difficulty understanding the complex information supplied by utilities concerning affiliate transactions. In light of that history, ETI contends that it reasonably relied upon the expertise and accounting experience of Mr. Tucker to assist it in preparing and presenting information about the company's affiliate transactions in order to assure that it was understandable. According to ETI, Mr. Tucker has been involved in all rate cases of ETI and its predecessor since in 1997. ETI contends that Mr. Tucker's participation in Docket 39896 enabled the company to present clearer and more accurate information about its affiliate transactions. Moreover, ETI disputes that Mr. Tucker's work was duplicative of the work performed by the company's attorneys, pointing out that Mr. Tucker provided expertise from the accounting perspective, rather than from the legal perspective.25 The AU recommends that Mr. Tucker's fees be included in the rate case expenses. State Agencies are essentially arguing that it was solely the job of ETI's attorneys and its testifying experts to prepare the case regarding affiliate transactions and, therefore, any work performed by Mr. Tucker with regard to affiliate transactions was purely duplicative. The AU disagrees. As pointed out by ETI, the notion that multiple people with varied expertise cannot provide valuable input on a complex issue like affiliate transactions is overly simplistic. ETI demonstrated that Mr. Tucker 24 State Agencies Init. Br. at 18-19. 25 ETI Init. Br. at 10-11; ETI Ex. 7 (Considine Supp.) at 9-10. SOAH DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGE 10 PUC DOCKET NO. 40295 provided real expertise that benefited the company in the presentation of its case. In other words, ETI proved the reasonableness of Mr. Tucker's expenses. b. Costs Associated with "Lessons Learned" In Docket 39896, ETI included several charges from its law firm, Duggins, Wren, Mann & Romero (Duggins Wren), for "lessons learned," as shown in a July 26, 2011 invoice from the law firm. The charges total $5,743.50.26 According to ETI, the charges relate to a memo provided to ETI by the firm which contained a "detailed analysis of developments in ETI's last rate case as well as developments in four recent pertinent cases at the PUCT that had taken place since the last ETI rate case."27 The memo identified procedural and substantive issues for ETI to consider while preparing its rate case in Docket 39896.28 State Agencies contend that any "lessons learned" should have already been learned in the prior rate case and, therefore, any "refreshing [ofJ the learning curve ... should be a shareholder, not ratepayer, expense. Bringing one's attorneys `up to speed' for the third rate case filed in five years ought to be regarded as the legal equivalent of a`luxury item. `29 No party other than State Agencies challenged the "lessons learned" expenses. ETI responds by contending that State Agencies are essentially seeking to punish the company for its efforts to learn from the past. ETI also contends that State Agencies' argument would have the perverse effect of increasing, rather than decreasing rate case expenses. According to ETI: 26 ETI Ex. 8 (Morris Direct) at 29-30. 27 ETI Ex. 12 (Morris Rebuttal) at 28-29 (Attachment SFM-R-3). 28 ETI Ex. 12 (Morris Rebuttal) at 28-29 (Attachment SFM-R-3). 29 State Agencies Init. Br. at 19. SOAH DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGE 11 PUC DOCKET NO. 40295 Incurring these costs to analyze lessons learned from litigating prior rate cases and important aspects of non-ETI Commission rate cases, if anything, reduces overall rate case expenses by supporting a more efficient case presentation and avoiding prior issues that lead to contention among the parties.30 The ALJ agrees and recommends that the "lessons learned" expenses be included in the rate case expenses. ETI demonstrated that the expenses were reasonable because they benefited the company in the presentation of its case. c. ESI Depreciation Costs ETI identified, as part of its "internal" rate case expenses, $207,683 in "Depreciation & Amort" expenses. 31 As explained by ETI witness Considine, the expenses are for the depreciation of assets (apparently office equipment) used by ESI employees who participated in the rate case.32 Mr. Considine further testified that the costs were a reasonable and necessary part of ESI providing services for the rate case.33 State Agencies contend that recovery of such depreciation expenses should be denied because: (1) such a recovery is unprecedented; (2) ETI has failed to prove that the expenses were reasonable and necessary; and (3) the expenses were not "incurred" for the rate case. As to the last point, State Agencies explains: "ESI's depreciable property exists, and is presumably depreciated, whether or not proceedings in Texas take place. As such, this `cost' was not necessary for ETI's participation in the rate case and should be disallowed."34 No party other than State Agencies challenged the depreciation expenses. 30 ETI Init. Br. at 13. 31 ETI Ex. 7(Considine Rebuttal) at 9-11 and Attachment MPC-R-1. 32 ETI Ex. 7 (Considine Rebuttal) at 11. 33 ETI Ex. 7 (Considine Rebuttal) at 11. 34 State Agencies Init. Br. at 20. SOAH DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGE 12 PUC DOCKET NO. 40295 ETI responds by explaining that the costs at issue are "a loader to ESI labor costs covering depreciation on office expenses and capital." Notably, however, ETI also concedes that such costs would "typically [be] embedded in a vendor's labor costs billed to the Company. ,35 The AU recommends that the depreciation expenses be disallowed. ETI has not cited to any precedent which would justify the recovery of these apparently unusual rate case expenses. Moreover, ETI has failed to prove the reasonableness of the expenses under the more stringent standards that are applicable to affiliate expenses. As explained in Railroad Comm 'n v. Rio Grande Valley Gas Company, unlike arms-length transactions, affiliate transactions "are clearly tainted with the possibility of self-dealing."36 The Commission and the courts have consistently placed a greater burden of proof upon a utility company to prove the reasonableness of transactions with its affiliated companies because of the potential for self-dealing. In this case, ETI is seeking reimbursement of $2.9 million for payments it made to its affiliate, ESI, for work done by ESI employees relevant to Docket 39896, plus $207,683 for depreciation of the assets used by the ESI employees in their work. 37 This is in stark contrast to its arms-length dealings with outside consultants. For example, ETI is seeking reimbursement for $2.4 million in expenses from Duggins Wren, but it is not also seeking to recover depreciation expenses for Duggins Wren's equipment. If the work done by ESI employees had, instead, been done by outside consultants, it is very doubtful that the outside consultants would also have expected an ETI payment for the depreciation of their equipment. Thus, the very nature of ETI's depreciation request calls its validity into question. Simply put, ETI has failed to establish that it is entitled to recover a depreciation expense related to an affiliate transaction because it would not similarly recover such an expense in an arms-length transaction with an unaffiliated company. 3s ETI Init. Br. at 12. 36 683 S.W.2d 783, 786 (Tex. App.-Austin 1985, no pet.). 37 ETI Ex. 7 (Considine Rebuttal) at Attachment MPC-R-1. SOAH DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGE 13 PUC DOCKET NO. 40295 d. Miscellaneous Internal Rate Case Expenses Under the heading of "Internal Rate Case Expenses (Non-Payroll)," ETI seeks recovery of a number of categories of expenses. State Agencies challenge the following four categories: • "business meals/entertainment" in the amount of $3,852; • "other employee expenses" in the amount of $3,423; • "employee mtgs/functions" in the amount of $7,762; and • "utility bills" in the amount of $2,518.38 According to State Agencies, the justification for these charges has not been explained, nor are they reasonable and necessary. No other party challenged these expenses. ETI responds by explaining, in great detail, where the supporting documentation can be found, within the company's exhibits, to justify each of the expenses.39 Without repeating that discussion here, the ALJ is convinced that the evidence in the record supports the conclusion that the expenses are reasonable and should be recovered by ETI. e. Costs Associated with the Calpine-Carville PPA In a "Recommendation" filed prior to the hearing in this matter, OPUC argued that the Commission should disallow the recovery of any rate case expenses associated with the regulatory approval of the Calpine-Carville Purchased Power Agreement (the Calpine-Carville PPA). In Docket 39896, ETI sought, and obtained, regulatory approval of the Calpine-Carville PPA. The affiliate expenses related to the contract were assigned to Project F3PPWET308. The Project F3PPWET308 costs were approved for recovery in Docket 39896.40 As a result, OPUC 38 ETI Ex. 7 (Considine Rebuttal) at Attachment MPC-R-1; see also State Agencies Init. Br. at 21. 39 ETI Reply Br. at 23-24. 40 Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and Obtain Deferred Accounting Treatment, Docket 39896, Proposal for Decision at 236 (July 6, 2012). SOAH DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGE 14 PUC DOCKET NO. 40295 contends that ETI has already recovered its expenses associated with the Calpine-Carville PPA and, if it were allowed to recovery those expenses again, it would be receiving a double recovery.a' OPUC did not identify a specific dollar amount that it believes should be disallowed. Moreover, OPUC did not discuss this issue in any of its post-hearing briefing. In their post-hearing briefing, State Agencies "concurred" with OPUC's recommendation, but provided no discussion of the issue.42 ETI did discuss this issue in its post-hearing briefing. The company points out, correctly, that the Commission has already specifically rejected OPUC's double recovery argument. In Docket 39896, OPUC argued that the costs ETI sought related to the Calpine-Carville PPA should have been denied in that docket because they were, among other things, rate case expenses. The Commission specifically disagreed and allowed recovery of the costs in that docket.43 In other words, because the Commission has already concluded that ETI did not recover any rate case expenses associated with the Calpine-Carville PPA in Docket 39896, the company will not be receiving a double recovery if it recovers such expenses in this docket. Further, as explained by ETI witness Considine, costs were charged to Project F3PPWET308 (the internal project code for the Calpine-Carville PPA development costs) as the contract was being developed. Those costs were recovered in Docket 39896. On the other hand, costs were charged to Project F5PPETX011 (the internal project code for the rate case in Docket 39896) as testimony or other hearing-related work was performed for pocket 39896. According to ETI, it is only the latter costs, associated with Project F5PPETX011, that are being sought here. As a result, no double recovery will occur.44 The ALJ concludes that ETI has the better argument on this issue, and 41 Application of Entergy Texas, Inc. for Rate Case Expenses Pertaining to PUC Docket No. 39896, Docket 40295, OPUC's Recommendation and Request for Hearing at 2-3 (November 6, 2012). 42 State Agencies Reply Br. at 20. 43 Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and Obtain Deferred Accounting Treatment, Docket 39896, Proposal for Decision at 236 (July 6, 2012). 44 ETI Ex. 7 (Considine Rebuttal) at 7-9. SOAH DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGE 15 PUC DOCKET NO. 40295 recommends that ETI be allowed to recover its rate case expenses associated with the Calpine-Carville PPA. f. Specific Items That State Agencies Contend Cast Doubt on ETI's Overall Scrutiny of Its Expenses State Agencies performed what they described as a number of "spot check" reviews of ETI's costs and identified several errors or items that they contend should be disallowed. Moreover, State Agencies contend that it is not only these specific items which should be disallowed. Rather, they argue that the flaws they have identified should cast doubt on the overall adequacy of the internal review process utilized by ETI in quantifying its rate case expenses. According to State Agencies, "[i]dentification of these questionable costs underscores the need for conservative, rather than liberal, standards for allowing rate case expenses.s45 Similarly, State Agencies argue that these items demonstrate ETI's "lack of diligence in exercising basic economic restraint. ,46 Staff agrees that State Agencies' examination of these issues "call[s] into question the thoroughness of ETI's review of its rate case expenses."47 Staff further points out that, because the testimony of ETI witness Considine (who was the company's prime witness supporting the reasonableness of its internal rate case expenses) contained "mistakes that he was engaged to identify," his testimony "is of limited value."48 In its Reply Brief, Staff reiterates: "Staff shares the concerns raised by State Agencies regarding the adequacy of ETI's review of its rate case expenses."49 Similarly, OPUC agrees that State Agencies' examples illustrate that, as to rate case expenses, ETI did not act as a prudent gatekeeper.so 45 State Agencies Init. Br. at 7. 46 State Agencies Reply Br. at 9. 47 Staff Init. Br. at 12. 48 Staff Init. Br. at 12. 49 Staff Reply Br. at 9. so OPUC Init. Br. at 1. SOAH DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGE 16 PUC DOCKET NO. 40295 (1) External Legal Fees ETI seeks to recover roughly $2.4 million in legal fees paid to the Duggins Wren law firm.s 1 State Agencies argue that this amount should be reduced. ETI witness Stephen Morris was hired to review ETI's external legal expenses and testify about the reasonableness of those expenses.52 State Agencies question the objectivity, quality, and extent of Mr. Morris' review. For example, State Agencies point out that, rather than being retained by ETI, he was retained by Duggins Wren, the firm whose fees he was to review.53 Staff agrees that this arrangement "likely undermined Mr. Morri s' objectivity. ,54 State Agencies also contend that, based upon his invoices, Mr. Morris spent only a "minimal" amount of time reviewing Duggins Wren's bills.55 Yet, by State Agencies' own reckoning, Mr. Morris and his associate spent roughly 21 hours reviewing Duggins Wren bills.56 Mr. Morris testified as to the reasonableness of the hourly rates charged by Duggins Wren. State Agencies argue, however, that Mr. Morris' focus was too narrow and he should have, instead, been critical of the fact that too many Duggins Wren attorneys, twelve, were involved in the case.57 State Agencies are also critical of the fact that Mr. Morris apparently did not scrutinize Duggins Wren's bills for duplicative legal work. For example, State Agencies point out that on April 25, 2012, a day from the hearing in Docket 39896, five Duggins Wren attorneys billed a total of 26.3 hours for a hearing day that lasted less than seven hours and in which in-house ETI lawyers defended many of the witnesses. On the next day, April 26, six Duggins Wren attorneys billed a total of 24.4 hours for a hearing day that lasted less than eight hours and in which only three Duggins Wren attorneys participated .51 State 51 ETI Ex. 7 (Considine Rebuttal) at Attachment MPC-R-1. 52 ETI Ex. 8 (Morris Direct) at 2. 53 State Agencies Init. Br. at 10. 54 Staff Reply Br. at 9. 55 State Agencies Init. Br. at 10. 56 State Agencies Init. Br. at 12. 57 State Agencies Init. Br. at 9. 58 State Agencies Init. Br. at 13. SOAH DOCKET NO. XXX-XX-XXXX PROPOSAL FOR DECISION PAGE 17 PUC DOCKET NO. 40295 Agencies contend that "a reduction is in order" for the Duggins Wren costs, but do not suggest what size the reduction should be. ETI responds by defending the reasonableness of the Duggins Wren costs. For one thing, ETI points out that the $2.4 million in legal fees paid to Duggins Wren includes fees and expenses for five consultants billed through Duggins Wren without mark-up.59 Additionally, ETI explains that the huge scope of the hearing necessitated substantial legal work. ETI presented 39 witnesses who discussed hundreds of categories of costs. ETI points out that while it used the services of 12 attorneys, they were opposed by 15 attorneys: four for Staff; three fo [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/4052563. Public record. Not legal advice.