# Entergy Texas, Inc.// Office of Public Utility Counsel and Public Utility Commission of Texas v. Public Utility Commission of Texas and Texas Industrial Energy Consumers// Office of Public Utility Counsel and Entergy Texas, Inc. > Texas Court of Appeals, 3rd District (Austin) · March 31, 2015 URL: https://www.frixlaw.com/law-library/cases/4062157 ## Case - **Court:** Texas Court of Appeals, 3rd District (Austin) - **Decided:** March 31, 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/4062157 ## How later opinions describe it (automated extraction) - holding that Fact 215 (“Staff's recommended 15–basis–point upward a return on equity falling within the range presented by adjustment to recognize the Company's exceptional expert testimony meets the substantial evidence test ## Opinion text ACCEPTED 03-14-00735-CV 4704785 THIRD COURT OF APPEALS AUSTIN, TEXAS 3/31/2015 9:56:35 AM JEFFREY D. KYLE CLERK NO. 03-14-00735-CV IN THE FILED IN 3rd COURT OF APPEALS TEXAS COURT OF APPEALS AUSTIN, TEXAS THIRD COURT OF APPEALS DISTRICT3/31/2015 9:56:35 AM AT AUSTIN JEFFREY D. KYLE Clerk ENTERGY TEXAS, INC., ET AL., APPELLANTS, V. PUBLIC UTILITY COMMISSION OF TEXAS, ET AL., APPELLEES ON APPEAL FROM THE FINAL JUDGMENT IN CAUSE NO. D-1-GN-13-000121 (CONSOLIDATED), 353RD JUDICIAL DISTRICT COURT, TRAVIS COUNTY, TEXAS, HONORABLE JOHN K. DIETZ, JUDGE PRESIDING APPELLANT’S BRIEF AND APPENDIX OF THE OFFICE OF PUBLIC UTILITY COUNSEL OFFICE OF PUBLIC UTILITY COUNSEL Tonya Baer Public Counsel State Bar No. 24026771 Sara J. Ferris Senior Assistant Public Counsel State Bar No. 50511915 P.O. Box 12397 Austin, Texas 78711-2397 512/936-7500 (Telephone) 512/936-7525 (Facsimile) Sara.Ferris@opuc.texas.gov ORAL ARGUMENT REQUESTED March 31, 2015 IDENTITY OF PARTIES AND COUNSEL PARTIES ATTORNEYS OFFICE OF PUBLIC Sara J. Ferris UTILITY COUNSEL Senior Assistant Public Counsel Office of Public Utility Counsel P.O. Box 12397 Austin, Texas 78711-2397 sara.ferris@opuc.texas.gov ENTERGY TEXAS, INC. Marnie A. McCormick John F. Williams Duggins, Wren, Mann & Romero, LLP P.O. Box 1149 Austin, Texas 78767-1149 mmcormick@dwmrlaw.com jwilliams@dwmrlaw.com CITIES OF ANAHUAC, Daniel J. Lawton BEAUMONT, ET. AL. Lawton Law Firm PC 12600 Hill Country Boulevard, Suite R275 Austin, Texas 78738 dlawton@ecpi.com STATE AGENCIES OF Katherine H. Farrell TEXAS Assistant Attorney General Administrative Law Division – Energy Rates Section Office of the Attorney General P. O. Box 12548 Austin, Texas 78711-2548 katherine.farrell@texasattorneygeneral.gov i TEXAS INDUSTRIAL Rex VanMiddlesworth ENERGY CONSUMERS Benjamin Hallmark Thompson & Knight, LLP 98 San Jacinto Blvd, Suite 1900 Austin, Texas 78701 rex.vanm@tklaw.com benjamin.hallmark@tklaw.com PUBLIC UTILITY Elizabeth R. B. Sterling COMMISSION OF TEXAS Assistant Attorney General Environmental Protection Division Office of the Attorney General P. O. Box 12548, Capitol Station Austin, Texas 78711-2548 elizabeth.sterling@texasattorneygeneral.gov ii TABLE OF CONTENTS IDENTITY OF PARTIES AND COUNSEL........................................................................ i TABLE OF CONTENTS......................................................................................................... iii INDEX OF AUTHORITIES .................................................................................................. v GLOSSARY OF ABBREVIATIONS & TECHNICAL TERMS .................................... ix STATEMENT OF THE CASE ............................................................................................... 1 STATEMENT REGARDING ORAL ARGUMENT........................................................ 2 ISSUE PRESENTED ............................................................................................................... 2 Did the Commission err by allowing the inclusion of $13,014,379 in 1997 ice storm restoration costs that were directly related to the Company’s imprudence and reasonably anticipated? Did the Commission act arbitrarily in allowing the inclusion of these costs in the Company’s storm reserve balance, and violate PURA and the Commission’s own rules? ................................................................................... 2 STATEMENT OF FACTS ..................................................................................................... 3 BACKGROUND ........................................................................................................................... 3 THE RATE CASE, DOCKET NO. 39896 ................................................................................... 7 SUMMARY OF THE ARGUMENT ................................................................................... 8 ARGUMENT ............................................................................................................................ 13 A. Standard of Review ........................................................................................................ 13 B. The Commission Erred as a Matter of Law in Allowing the Inclusion of $13,014,379 in 1997 Ice Storm Restoration Costs That Were Directly Related to the Company’s Imprudence and Which Were Reasonably Anticipated. The Commission Acted Arbitrarily in Allowing the Inclusion of These Costs in the Company’s Storm Reserve Accrual and Storm Reserve Balance, and Violated PURA and the Commission’s Own Rules. .............................................................................. 15 iii 1. The Commission erred in approving the recovery of imprudent costs. .................... 16 2. The Commission erred by failing to hold ETI to its burden of showing that the expenses it sought to include in the storm reserve were not reasonably anticipated. .............................................................................................................. 20 3. Prior remedies assessed for poor quality of service, including imprudent vegetation management do not address the subsequent imprudence of excessive ice damage expenses. ............................................................................................... 22 4. The statutory burden of proof rests upon ETI to affirmatively prove each element of its case. The Commission erred in excusing ETI from its burden of proof merely because years had passed between the incurrence of the 1997 ice storm restoration costs and Docket No. 39896. . .................................................. 25 a. ETI has the burden of persuasion on the entire case failed to prove each required element to meet this burden. ............................................................ 27 b. The Commission erred in finding that ETI had established a prima facie case sufficient to shift the burden of proof. .................................................... 28 c. The overall burden of proof remained on ETI to affirmatively prove each element of its case by a preponderance of the evidence. The Commission erred in failing to hold ETI to this burden. ................................................... 29 d. ETI’s statutory responsibilities do not expire or shift due to the passage of time. .................................................................................................................. 31 e. The PFD adopted by the Commission improperly shifted the burden to OPUC and intervening parties. ..................................................................... 32 f. Under Texas and Commission standards, ETI failed to meet its burden of proof required for the inclusion of the $13,014,379 in 1997 ice storm costs. ................................................................................................................. 36 5. The Commission’s decision to approve the inclusion of $13,014,379 in 1997 ice storm costs is arbitrary and capricious and constitutes an abuse of discretion. ............................................................................................................. 37 PRAYER .................................................................................................................................... 40 CERTIFICATE OF COMPLIANCE .................................................................................. 41 iv CERTIFICATE OF SERVICE ............................................................................................. 41 APPENDIX A: District Court Judgement, Cause No. D-1-GN-13-000121 (Consolidated) B: PUC Docket No. 39896, Order on Rehearing C: PURA, Chapter 36, Subchapters A and B, and Chapter 37, Subchapter D D: Entergy Gulf States, Inc. v. Public Utility Commission, 112 S.W.3d 208 (Tex. App. – Austin 2003, pet. denied) E: Texas Utilities Electric Company v. Public Utility Commission, 881 S.W.2d 387 (Tex. App. – Austin 1994) aff’d in part, rev’d in part on other grounds, 935 S.W.2d 109 (Tex. 1997) F: PUC Docket No. 18249, Order on Rehearing G: Excerpt from: PUC Docket No. 16705, Proposal for Decision H: Excerpts from: PUC Docket No. 16705, Second Order on Rehearing I: 16 Tex. Admin. Code § 25.231 v INDEX OF AUTHORITIES CASES Apresa v. Montfort Insurance Co., 932 S.W.2d 246 (Tex. App.—El Paso 1996, no writ) ......................................... 34 Boaz v. Harris, 30 S.W.2d 810 (Tex. Civ. App.—Fort Worth 1930, no writ) .....................27, 28 Cameron Compress Co. v. Kubecka, 283 S.W. 285 (Tex. Civ. App.—Austin 1926, writ ref’d) ................................... 27 City of El Paso v. Public Util. Commission, 883 S.W.2d 179 (Tex. 1994) ................................................................................. 14, 38 Clark v. Hiles, 67 Tex. 141, 2 S.W. 356 (1886) ................................................................................... 33 Coalition for Long Point Preservation v. Texas Commission on Environmental Quality, 106 S.W.3d 363 (Tex. App – Austin 2003, pet. denied) .................................... 14 Dodson v. Watson, 110 Tex. 355, 220 S.W. 771 (1920)............................................................................. 28 Entergy Gulf States, Inc. v. Public Utility Commission, 112 S.W.3d 208 (Tex. App.—Austin 2003, pet. denied) ................. 16, 23, 27, 29 Fritsche v. Niechoy, 197 S.W. 1017 (Tex. App. – Galveston 1917, writ dism’d w.o.j.)........................ 28 Hernandez v. State, 161 S.W.3d 491 (Tex. Crim. App. 2005) ................................................................. 28 In re E.I. DuPont de Nemours & Co., 136 S.W.3d 218 (Tex. 2004) (orig. proceeding) .................................................... 28 vi Koppe v. Koppe, 57 Tex. Civ. App. 204, 122 S.W. 68 (1909)............................................................. 33 Lykes Bros.-Ripley S. S. Co. v. Pluto, 146 S.W.2d 414 (Tex. Civ. App.—Galveston 1940, writ dism’d judgm’t cor.) .................................................................................................................. 29 Public Utility Commission v. Gulf States Utilities, 809 S.W.2d 201 (Tex. 1991) ................................................................................ 12, 39 Public Utility Commission v. Houston Lighting & Power Co., 778 S.W.2d 195 (Tex. App.—Austin 1989, no writ) ..................................... 27, 29 Reliant Energy, Inc. v. Public Util. Commission, 62 S.W.3d 833 (Tex. App. – Austin 2001, no pet.)............................................... 38 Texas Parks & Wildlife Department v. Dearing, 240 S.W.3d 330 (Tex. App.—Austin 2007, pet. denied) ................................... 28 Texas Utilities Electric Company v. Public Utility Commission, 881 S.W.2d 387 (Tex. App.—Austin 1994) aff’d in part, rev’d in part on other grounds, 935 S.W.2d 109 (Tex. 1997) .................................................... 16, 18 Vance v. My Apartment Steak House, 677 S.W.2d 480 (Tex. 1984) ..................................................................................... 37 Wyeth v. Hall, 118 S.W.3d 487 (Tex. App. – Beaumont 2003, no pet.)....................................... 28 TEXAS STATUTES TEX. GOV’T CODE § 2001.174 .................................................................................. 13-14, 15, 27 Public Utility Regulatory Act (PURA), TEX. UTIL. CODE §§ 11.001-66.017 .................. 2 PURA § 15.001 ........................................................................................................................... 13 PURA § 31.002(19) ..................................................................................................................... 3 PURA § 36.003(a) .................................................................................................................... 23 PURA § 36.006 ............................................................................................................ 23, 25, 27 vii PURA § 36.051.................................................................................................................... 23, 25 PURA § 36.062 ....................................................................................................................23, 39 PURA § 36.064................................................................................................................... 20, 25 PURA § 36.064(a) .............................................................................................................. 15, 22 PURA § 36.101 – 36.111 ............................................................................................................... 3 PURA § 37.151.............................................................................................................................. 5 PURA § 38.001 ............................................................................................................................ 5 PURA § 39.452(e) ...................................................................................................................... 3 PUBLIC UTILITY COMMISSION OF TEXAS RULES 16 Tex. Admin. Code § 25.231 .......................................................................................... 12, 20 16 Tex. Admin. Code § 25.231(b) ........................................................................15, 16, 20, 25 16 Tex. Admin. Code § 25.231(b)(1)(G)................................... 12, 15-16, 20-21, 22, 25, 39 16 Tex. Admin. Code § 25.231(b)(2)(J)......................................................................... 12, 39 ADMINISTRATIVE PROCEEDINGS Application of Entergy Texas for Approval of its Transition to Competition Plan and the Tariffs Implementing the Plan, and for the Authority to Reconcile Fuel Costs, Docket No. 16705, Proposal For Decision (Mar. 25, 1998). ......... 30, 34-35, 36 Application of Entergy Texas for Approval of its Transition to Competition Plan and the Tariffs Implementing the Plan, and for the Authority to Reconcile Fuel Costs, Docket No. 16705, Second Order on Rehearing (Oct. 14, 1998). ........... 4, 9, 26 Entergy Gulf States, Inc. Service Quality Issues (Severed from Docket No. 16705), Docket No. 18249, Order on Rehearing (Apr. 22, 1998). .......................................... 3, 4, 5, 6, 7, 8, 9, 12-13, 17, 18, 21, 22, 39 LEARNED TREATISE 35 Tex Jur 3d, Evidence § 103 (Gene A. Noland, ed., 1984) .............................................. 27 viii GLOSSARY OF ABBREVIATIONS & TECHNICAL TERMS AR – Administrative Record Cities – 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 Texas, Plaintiffs in this appeal Commission or PUC– Public Utility Commission of Texas Company – Entergy Texas, Inc. Docket No. 16705 – The Company’s last fully litigated rate case Docket No. 18249 – The Company’s Quality of Service Issues docket Docket No. 39896 – The PUC docket underlying this appeal EGS or EGSI – Entergy Gulf States, Inc., predecessor to ETI Entergy – Entergy Corporation, ETI’s parent company ETI – Entergy Texas, Inc. Order – The Commission’s “Order on Rehearing” signed on November 1, 2012, the final and appealable order of the Commission in Docket No. 39896, from which OPUC appeals in this suit for judicial review OPUC – Office of Public Utility Counsel PFD – Proposal for Decision PURA – Public Utility Regulatory Act, Tex. Util. Code §§ 11.001-66.017 ROE – Return on Equity ix ROW – Right of Way SAIDI – System Average Interruption Duration Index SAIFI – System Average Interruption Frequency Index Self-Insurance Storm Reserve – Account designed to provide for storm-related property losses exceeding $50,000 that are not covered by commercial insurance or eligible for securitization. SOAH – State Office of Administrative Hearings Test Year – July 1, 2010, through June 30, 2011 x BRIEF OF APPELLANT, OFFICE OF PUBLIC UTILITY COUNSEL TO THE HONORABLE COURT OF APPEALS: The Office of Public Utility Counsel (OPUC), Appellant, submits this brief in support of its appeal from a portion of the final judgment of the District Court on judicial review of the final Order on Rehearing (Order) of the Public Utility Commission of Texas (Commission or PUC) in Docket No. 39896. 1 Appellant respectfully presents the following: STATEMENT OF THE CASE The case is an appeal from the final judgment of the 353rd Judicial District Court of Travis County, Texas, the Honorable John K. Dietz, Judge Presiding, in Entergy Texas, Inc., et al. v. Public Utility Commission of Texas, Cause No. D-1-GN-13- 000121 (Consolidated). The case involves the judicial review of the final Order of the Commission in Docket No. 39896, styled Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and Obtain Deferred Accounting Treatment, a contested rate case. The final judgment of the District Court affirmed in part, and reversed and remanded in part the final order of the Commission. OPUC appeals the part of the District Court judgment affirming the Commission’s decision to 1 The final judgment of the District Court and the Commission’s Order on Rehearing are submitted as Appendix A and Appendix B. 1 include in the Company’s storm reserve $13,014,379 in 1997 ice storm restoration costs that were directly related to the Company’s imprudence. STATEMENT REGARDING ORAL ARGUMENT The Court should permit oral argument. Like most cases involving public utility regulation, this case is complex; oral argument will assist the Court in clarifying the law and facts of the case. ISSUE PRESENTED Did the Commission err by allowing the inclusion of $13,014,379 in 1997 ice storm restoration costs that were directly related to the Company’s imprudence and reasonably anticipated? Did the Commission act arbitrarily in allowing the inclusion of these costs in the Company’s storm reserve balance, and violate PURA and the Commission’s own rules? 2 2 Public Utility Regulatory Act, PURA, Tex. Util. Code §§ 11.001-66.017. 2 STATEMENT OF FACTS BACKGROUND Entergy Texas, Inc. (ETI or the Company), an investor-owned electric utility with a retail service area in southeastern Texas, filed an application with the Commission on November 28, 2011 for authority to increase its rates. ETI’s application was designated as Commission Docket No. 39896. See generally, PURA §§ 31.002(19), 36.101–36.111; Administrative Record (AR), Binder 7, Item 244, Order on Rehearing. 3 Previously, the Company had been known as Entergy Gulf States, Inc. (EGS) but on December 31, 2007, EGS jurisdictionally separated pursuant to PURA § 39.452(e).4 ETI succeeded to EGS’s certificate of convenience and necessity (CCN) for its Texas retail jurisdiction. 5 Prior to 1993 and Entergy Corporation’s merger with Gulf States Utilities, Inc., the company serving this territory and holding the CCN was Gulf States Utilities. 6 On November 27, 1996, EGS filed its transition to competition plan and rate case in PUC Docket No. 16705. In this docket, the Commission issued two preliminary orders related to EGS’s service quality. The second or supplemental 3 In this brief, citations to the Administrative Record will be in the following format: AR, Binder X, Item X, Item name. 4 Docket No. 34800, Application of Entergy Gulf States, Inc. for Authority to Change Rates and to Reconcile Fuel Costs, Order at 1-2 n.1 (Mar. 16, 2009). 5 Id. 6 See Docket No. 18249, Entergy Gulf States, Inc. Service Quality Issues (Severed from Docket No. 16705), Order on Rehearing at 1 (Apr. 22, 1998). This Order is submitted as Appendix F. 3 preliminary order addressed whether EGS’s management policy devoted adequate resources to ensure adequate and reliable service to its ratepayers, whether there were patterns of variable service quality in the service territory, what were the cause and resolution of the variations, and what procedures should the Commission implement to monitor EGS’s service quality and to respond when its service quality falls below benchmark levels. 7 On November 4, 1997, the Commission severed the quality of service issues from Docket No. 16705 into Docket No. 18249.8 One of the issues which remained in Docket No. 16705 was the amount of the Company’s storm reserve funding includable in rates. The Commission considered the Company’s proposal to include a post-test-year adjustment for the January 1997 ice storm expenses. In Finding of Fact Number 147, the Commission found: Any reduction to the reserve fund occurring after the test year should not be considered in this case because EGS did not prove a reasonable post-test year level for its existing reserve fund or that the amount expended in 1997 to reduce the fund was prudent or appropriate. Reserve fund levels following the test year in this case can be addressed in EGS’ November 1998 rate filing when all parties will have the opportunity to evaluate the reasonableness of changes to the insurance reserve fund. (emphasis added) 9 7 Id. at 2. 8 Id. at 3. 9 Application of Entergy Texas for Approval of its Transition to Competition Plan and the Tariffs Implementing the Plan, and for the Authority to Reconcile Fuel Costs, Docket No. 16705, Second Order on Rehearing (Oct. 14, 1998). Excerpts from this Order are submitted with this brief as Appendix H. 4 In the severed Service Quality Issues proceeding (Docket No. 18249), after a hearing on the merits presided over by two Commissioners and briefing by the parties, the Commission issued its Order on Rehearing on April 22, 1998. 10 The Order on Rehearing discussed the importance of reliability and the vital role electricity plays in our lives. Under Texas law, an electric utility is required by PURA § 37.151 to provide “continuous and adequate service” in its service area, and is further obligated by PURA § 38.001 to furnish service, instrumentalities and facilities that are safe, adequate, efficient and reasonable. In Docket No. 18249, the Commission concluded that the quality of the Company’s electric service to its customers in Texas had been less than adequate, specifically since Entergy Corporation acquired Gulf States Utilities, Inc., in 1993. 11 The Commission also discussed numerous deficiencies in the Company’s service quality, including inadequate distribution maintenance policies, inadequate vegetation management practices, distribution poles in poor condition or in need of comprehensive vegetation clearing, and inadequate pole inspection and repair work cycles. 12 The culmination of these inadequacies led the Commission to make findings regarding 10 Docket No. 18249, Entergy Gulf States, Inc. Service Quality Issues (Severed from Docket No. 16705), Order on Rehearing at 4 (Apr. 22, 1998). 11 Id. at 1. 12 Id. at 8-19. 5 the state of the Company’s distribution maintenance, including its vegetation management practices. 13 The Commission also considered the damage caused in the EGS (now ETI) service territory due to a severe ice storm which occurred in January 1997. After finding that EGS should have been better prepared to deal with the January 1997 ice storm, the Commission found that up to 120,000 of the Company’s approximately 318,000 customers were without power and that the restoration of service took seven days to complete. 14 The Commission then found in Finding of Fact 102 that EGS’s restoration efforts would have been more effective if the Company had been more diligent in its preventative vegetation management practices and if it had a better communication and management program in place to deal with emergency situations. The Commission also stated the following: A major cause of the outages during the storm were broken or bowed ice-laden tree limbs overhanging the wires. Tree limbs in ROW overhanging distribution lines pose a threat to system reliability, and are largely within EGS’ control. The Company’s failure to clear the limbs before the storm was a major factor in the number and duration of outages experienced by customers. While Company’s initial efforts to mobilize and deploy additional non-EGS personnel were slow and cause concern, vegetation management failures greatly aggravated the situation. 15 13 Id. at 42-49, Findings of Fact Nos. 45, 46, 67, 79-83, 91-92, 94-96, 97-99, 102, 123-124, and 127; See Id. at 50, Conclusions of Law Nos. 5-7. 14 Id. at 46, Findings of Fact Nos. 91 and 92. 15 Id. at 18-19. 6 The Order on Rehearing in Docket No. 18249 also contained the following findings of fact: 82. Neglect and backlog of vegetation management projects has posed unacceptable risks of increasing and recurrent service outages, especially during major ice storms. 83. The Commission finds that the Company’s vegetation management efforts have not been adequate, have led to a backlog in vegetation clearing, and have resulted in an unacceptably high risk to the system. (emphasis added) 97. The impact of the January 1997 ice storm was greatly exacerbated by the Company’s failure to maintain its ROW clear of excessive vegetation. THE RATE CASE, DOCKET NO. 39896 In the underlying rate case now on appeal, ETI included in the storm reserve $13,014,379 in 1997 ice storm expenses but did not provide an affirmative case supporting the prudence of the 1997 ice storm costs. Instead, the Company’s testimony focused on future quality of service practices and anticipated future storm costs. The Commission’s Order failed to make required findings as to the prudence of these costs or whether the costs ETI sought to include “were not reasonably anticipated” as required by PURA and the Commission’s rules. OPUC appeals the Commission’s consequent inclusion of the 1997 ice storm costs as legal error. 7 SUMMARY OF THE ARGUMENT The Commission’s Order contains legal error that prejudices the rights of residential and small commercial customers. The Commission’s inclusion of the 1997 ice storm restoration expenses in the Company’s self-insurance storm reserve violates PURA and the Commission’s own rules, was arbitrary, and capricious, and made through unlawful procedure. For these reasons, the District Court’s judgment upholding the Commission’s Order on this issue should be reversed and the case remanded to the Commission for further proceedings based upon the existing evidentiary record and consistent with this Court’s decision. It is a violation of PURA to include imprudent costs in rates. When there is imprudence within a utility’s request for recovery, any imprudent costs must be removed either by separating them out from the prudent costs, or disallowing the entire amount of the intermingled requested costs. Despite the Commission’s finding in Docket No. 18249 that the 1997 ice storm damage was greatly exacerbated by the Company’s imprudence, particularly with regard to its vegetation management, ETI made no showing or even an attempt at showing that the costs of cleaning up the damage caused by its imprudent actions had been excluded from its storm balance request. Nor did the Commission hold ETI to this required showing. ETI also bore the burden of showing that any cost it sought to include in the 8 storm reserve was “not reasonably anticipated.” Both PURA and the Commission’s rules require that costs included in the storm reserve be “not reasonably anticipated.” Vegetation management is required in order to prevent foreseeable damage due to tree limbs or other vegetation coming into contact with conductors or power lines. The damage resulting from imprudent vegetation management is by its very nature, “reasonably anticipated.” Thus, the inclusion of the $13,014,379 in 1997 ice storm restoration costs was improper and in violation of the applicable law. The Commission committed legal error in failing to hold ETI to its burden of proving that the $13,014,379 in costs the Company was seeking to include in the storm reserve, the cost of service and ultimately reflected in rates, were not reasonably anticipated. The Commission, through the adopted PFD, erroneously relied on a 60 basis point reduction to the return on equity (ROE) from Docket No. 18249 that was imposed to compensate ratepayers for poor quality of service. The ROE reduction did not address or remedy the imprudent restoration costs that were caused by the original imprudent acts. In fact, the Commission’s Order in Docket No. 16705, which was issued after the Docket No. 18249 Order, expressly contemplated that the reasonableness of including the 1997 ice storm costs in the Company’s storm reserve would be addressed in the next rate case because the Company had not proven the prudence of those costs in its request to 9 include them in that docket as a post-test year adjustment. The underlying docket to this appeal, Docket No. 39896 is the first fully-litigated rate case for the Company since Docket No. 16705. The Commission erred in failing to give effect to this prior order and further erred by failing to require ETI to address the imprudence findings from Docket No. 18249 before having 1997 ice storm costs included in the storm reserve. The Commission violated PURA by approving the recovery of the entire $13,014,379 in ice storm restoration expenses without requiring ETI to show that no costs caused by imprudent vegetation management were included in the Company’s request. Under PURA, the burden of proof rests upon ETI to affirmatively prove each element of its case. The Commission erred in lifting that burden from ETI because fifteen years had passed between the incurrence of the 1997 ice storm restoration costs and Docket No. 39896. The Company’s burden to prove that the requested costs were reasonable, prudent, and not reasonably anticipated under PURA does not expire. The burden of proof in an electric rate proceeding is on the utility and it is ETI’s burden to prove that each dollar included in rates was reasonable and prudent. ETI failed to provide evidence that the $13,014,379 in 1997 ice storm costs were “not reasonably anticipated.” With regard to prudence, ETI only provided 10 evidence as to the reasonableness of how the clean-up was carried out; ETI wholly failed to address the prudence of these costs with regard to what portion was or was not related to the exacerbated damage caused by the imprudent vegetation management, or what amount would have been incurred even if no imprudent conditions had existed at the time of the storm. Further, ETI made no attempt to separate out imprudent costs from prudent costs, and the Commission erred in adopting the portion of the PFD that excused this lack of evidence due to the passage of time. Further, the Commission erroneously shifted the burden of proof to OPUC and intervening parties and compounded this error by applying an improper standard of proof. Requiring OPUC and intervening parties to challenge specific expense items is contrary to what is required when rebutting a prima facie case under Texas law and Commission precedent. Under those standards, ETI failed to meet its burden of proof for the inclusion of $13,014,379 in the storm reserve, the cost of service, and ultimately reflected in rates. ETI failed to prove the existence of each element of its claim and consequently, the Commission erred in approving the inclusion of the $13,014,379 in 1997 ice storm restoration costs in the storm reserve. Moreover, the Commission’s decision approving the $13,014,379 in 1997 ice storm restoration costs was arbitrary and capricious. The Commission failed to consider factors the legislature directs it to consider, including whether the costs 11 were “not reasonably anticipated” and prudently incurred. Tellingly, there were no findings of fact or conclusions of law with regard to whether the costs were not reasonably anticipated. The Commission also considered irrelevant factors, including the passage of time between the rate case and the incurrence of the storm expenses, and the 60 basis-point reduction to the Company’s ROE imposed for poor quality of service. Additionally, the Commission acted arbitrarily and capriciously by failing to “follow the clear, unambiguous language of its own regulation.” 16 The Commission failed to follow the clear, unambiguous language of Rule 25.231, which clearly states that “any expenditure found by the Commission to be unreasonable, unnecessary or not in the public interest” “shall never be a component of the cost of service.” 16 Tex. Admin. Code § 25.231(b)(2)(J). The Commission also acted arbitrarily and capriciously by failing to follow its own rule which only allows storm costs to be included in the storm reserve to the extent they are reasonable and necessary, and are not reasonably anticipated. 16 Tex. Admin. Code § 25.231(b)(1)(G). In allowing the 1997 ice storm restoration costs to be included without addressing what portion was due to damage related to poor vegetation management, the Commission disregarded its prior finding from the final order of the Commission in Docket No. 18249 that storm damage was “greatly exacerbated 16 Public Util. Comm’n v. Gulf States Utilities, 809 S.W.2d 201, 207 (Tex. 1991). 12 by the state of the Company’s vegetation management.” As discussed in the sections below, the Commission committed reversible error in approving the inclusion of $13,014,379 in the storm reserve balance ultimately reflected in rates. The Commission’s decision violates PURA and the Commission’s own rules, is arbitrary, and capricious, affected by other error of law and made through unlawful procedure. For these reasons, the District Court’s judgment upholding the Commission’s Order on this issue should be reversed and the case and remanded to the Commission for further proceedings based upon the existing evidentiary record and consistent with this Court’s decision. ARGUMENT A. Standard of Review Any party to a proceeding before the Commission is entitled to judicial review under the substantial evidence rule. PURA § 15.001. The statutory standard of review is as follows: If the law authorizes review of a decision in a contested case under the substantial evidence rule or if the law does not define the scope of judicial review, a court may not substitute its judgment for the judgment of the state agency on the weight of the evidence on questions committed to agency discretion but: (1) may affirm the agency decision in whole or in part; and (2) shall reverse or remand the case for further proceedings if substantial rights of the appellant have been prejudiced 13 because the administrative findings, inferences, conclusions, or decisions are: (A) in violation of a constitutional or statutory provision; (B) in excess of the agency’s statutory authority; (C) made through unlawful procedure; (D) affected by other error of law; (E) not reasonably supported by substantial evidence considering the reliable and probative evidence in the record as a whole; or (F) arbitrary or capricious or characterized by abuse of discretion or clearly unwarranted exercise of discretion. Tex. Gov’t Code § 2001.174. In conducting a substantial evidence review, the court must determine whether the evidence as a whole is such that reasonable minds could have reached the same conclusion as the agency in the disputed action. 17 The court may not substitute its judgment for that of the agency and may consider only the record on which the agency based its decision. 18 The issue for the reviewing court is not whether the agency reached the correct conclusion, but rather, whether there is some reasonable basis in the record for its action. 19 The Commission’s Order prejudices the substantial rights of residential and small commercial customers by the excessive rates established in the Order, and because the Order’s findings, inferences, conclusions and decisions with regard to 17 Coalition for Long Point Preservation v. Texas Commission on Environmental Quality, 106 S.W.3d 363, 366 (Tex. App – Austin 2003, pet. denied). 18 Id. 19 City of El Paso v. Public Util. Comm’n, 883 S.W.2d 179, 185 (Tex. 1994). 14 the 1997 ice storm restoration expenses included in the Company’s self-insurance storm reserve and reflected in the Company’s cost of service were in violation of PURA, affected by other error of law, and were arbitrary, and capricious. Under the standard articulated in Tex. Gov’t Code § 2001.174, the Commission’s Order should be reversed and the case remanded for determination based upon the existing evidentiary record to determine rates consistent with the Court’s decision. B. The Commission Erred as a Matter of Law in Allowing the Inclusion of $13,014,379 in 1997 Ice Storm Restoration Costs That Were Directly Related to the Company’s Imprudence and Which Were Reasonably Anticipated. The Commission Acted Arbitrarily in Allowing the Inclusion of These Costs in the Company’s Storm Reserve Accrual and Storm Reserve Balance, and Violated PURA and the Commission’s Own Rules. The PFD adopted by the Commission erroneously found the entirety of ETI’s $13,014,379 in storm expenses related to the 1997 ice storm to be reasonable and necessary and properly included in the self-insurance storm reserve.20 By adopting the PFD on these points, the Commission erred as a matter of law by violating PURA’s and PUC Substantive Rule 25.231(b)’s requirement that expenses included in rates be reasonable and necessary, and further erred by violating the requirement of both PURA § 36.064(a) and PUC Substantive Rule 25.231(b)(1)(G) that only those property and liability losses which “could not have 20 AR, Binder 5, Item No. 185, PFD at 56 and 57. 15 been reasonably anticipated” may be included in a self-insurance plan.21 The Commission’s failure to either disallow the entire $13,014,379 in ice storm costs or determine what portion of those costs was incurred imprudently as a result of the Company’s poor vegetation management results in the inclusion of imprudent costs in the Company’s rates. 1. The Commission erred in approving the recovery of imprudent costs. Imprudently incurred costs may not be recovered in the utility’s base rates. 22 The utility bears the burden of proving the prudence of each cost for which recovery is sought, and if some but not all of the requested costs are imprudent, the imprudent costs must be removed either by separating them out or disallowing the intermingled requested costs. In Texas Utilities Electric Company v. Public Utility Commission, the Texas Third Court of Appeals found that, where a portion of the utility’s $537.90 million in costs for the Comanche Peak nuclear project were imprudently incurred, the Commission acted properly in disallowing some but not all of the costs due to imprudence. 23 In the originating docket, the 21 16 Tex. Admin. Code § 25.231(b). The PUC’s Cost of Service Rule, 16 Tex. Admin. Code § 25.231, is submitted as Appendix I. 22 See Entergy Gulf States, Inc. v. Public Utility Commission, 112 S.W.3d 208, 214 (Tex. App.—Austin 2003, pet. denied) (“[I]n order to raise the price of its product, the utility must participate in a rate case and bear the burden of proving that each dollar of cost incurred was reasonably and prudently invested.”) (Appendix D). 23 Texas Utilities Electric Company v. Public Utility Commission, 881 S.W.2d 387, 405-406 (Tex. App.— 16 utility had argued that all of its Comanche Peak costs were prudently incurred, while intervening parties had argued that the costs should be disallowed entirely. 24 The Commission had then brought in a third party to evaluate the prudence of the costs. Based upon the third party recommendation, the Commission disallowed part of the costs because they were imprudent but allowed other costs. 25 The Austin court, reviewing the Commission’s decision to reject an all-or-nothing approach and disallow a portion of the expenses, stated that “it is the Commission that is charged with sifting through the evidence and deciding whether imprudent conduct caused certain expenditures.” 26 The instant case is distinguishable from Texas Utilities Electric Company in that the decision as to whether imprudent conduct caused certain expenditures has already been made. “The impact of the January 1997 ice storm was greatly exacerbated by the Company’s failure to maintain its ROW clear of excessive vegetation.” 27 Finding of Fact 97 from PUC Docket No. 18249 provided the Commission with the starting point in its decision-making process, and it was the Commission’s job at that point to either deny ETI’s requested 1997 storm expenses Austin 1994) aff’d in part, rev’d in part on other grounds, 935 S.W.2d 109 (Tex. 1997). Texas Utilities Electric Company is submitted as Appendix E. 24 Id. at 404. 25 Id. at 403-405. 26 Id. at 404. 27 Appendix F, Entergy Gulf States, Inc. Service Quality Issues (Severed from Docket No. 16705), Docket No. 18249 at 47, FoF No. 97 (Apr. 22, 1998). 17 in their entirety or determine what portion was imprudently incurred and deny the portion of expenses that were caused by ETI’s imprudence in managing its system. The Commission erroneously failed to take either approach, and the imprudent costs became part of the approved rates through their inclusion in the storm reserve. Additionally, the Commission’s discussion of the 1997 ice storm in its Order on Rehearing in Docket No. 18249, the Company’s Service Quality Issues docket, included the following statement: The January 1997 ice storm was certainly a severe storm that would have adversely affected even the best-maintained distribution system. EGS’ distribution system, however, is not the best-maintained. A major cause of the outages during the storm were broken or bowed ice-laden tree limbs overhanging the wires. Tree limbs in ROW overhanging distribution lines pose a threat to system reliability, and are largely within EGS’ control. The Company’s failure to clear the limbs before the storm was a major factor in the number and duration of outages experienced by customers. 28 Unlike in the Texas Utilities Electric Company case, in the absence of evidence from ETI in the underlying docket (Docket No. 39896) on what portion of the costs were attributable to the Company’s imprudence, the Commission did not have a third party recommend what portion was due to imprudence. Nor did the Commission consider alternative recommendations for partial disallowance in the evidentiary record. OPUC provided evidence the Commission could have relied 28 Id. at 18 (Emphasis added). 18 upon to disallow a portion of the expenses if the Commission wished to avoid making a total disallowance. In addition to recommending total disallowance of the 1997 ice storm expenses, OPUC offered a reasonable, alternative recommendation which would have disallowed a portion of the 1997 ice storm expenses to account for the Company’s imprudence that heavily contributed to the expenses, but the Commission did not adopt either of OPUC’s recommendations. 29 Despite the Commission’s finding in Docket No. 18249 that the ice storm damage was greatly exacerbated by the Company’s failings, ETI made no showing or even an attempt at showing that the fruit of their imprudent actions has been excluded from their storm balance request. As OPUC Witness Nathan Benedict testified, “the Company has provided no analysis regarding the incremental damage caused by its imprudent vegetation management practices.” 30 Despite this, the Commission failed to hold ETI to its burden of proof and ignored the fact that imprudence had already been established as the cause of at least some of the storm damage that is the subject of the restoration costs in question. The Commission committed reversible error in failing completely to take into account the expenses 29 AR Binder 39, OPUC Exhibit No. 6 (Benedict Direct) at 16. 30 AR, Binder 39, OPUC Exhibit No. 6, Benedict Direct at 13. 19 that resulted from the Company’s imprudence established in a prior Commission final order to have, in fact, been a major cause of the ice storm damage. 2. The Commission erred by failing to hold ETI to its burden of showing that the expenses it sought to include in the storm reserve were not reasonably anticipated. In addition to the burden of proving that the costs the Company incurred were reasonable and necessary or “reasonably and prudently invested” and in the public interest, ETI also bore the burden of showing that any cost it sought to include in the storm reserve was “not reasonably anticipated.” The purpose of the storm reserve is set forth in PURA § 36.064. PURA Section 36.064 authorizes an electric utility to “self-insure all or part of the utility’s potential liability or catastrophic property loss . . . that could not have been reasonably anticipated and included under operating and maintenance expenses.” The Commission’s cost of service rule, 16 Tex. Admin. Code § 25.231, further explains what the Company must show in order to include storm damage expenses in the storm reserve. One component of the cost of service is allowable expenses. Subsection 25.231(b), entitled “allowable expenses” states that “only those expenses which are reasonable and necessary to provide service to the public shall be included in allowable expenses.” Rule 25.231(b)(1) sets out the components of allowable expenses and states that “allowable expenses, to the 20 extent they are reasonable and necessary, and subject to this section, may include . . .(G) Accruals credited to reserve accounts for self-insurance under a plan requested by the Commission.” Rule 25.231(b)(1)(G) also states that the reserve accounts are to be charged with “property and liability losses which occur, and which could not be reasonably anticipated and included in operating and maintenance expenses and are not paid or reimbursed by commercial insurance.” Expenses incurred due to the Company’s “neglect of regular vegetation clearing” 31 are not unanticipated. The very purpose of vegetation management is to anticipate and prevent future damage. As stated in the PFD adopted by the Commission in the Company’s Service Quality Issues docket, vegetation management is employed to ensure, to the greatest extent possible, that vegetation in or near the utility’s right-of-way does not come into contact with the conductors and cause wire breakage or ground faults. 32 The existence of a storm reserve account, combined with the fact that expenses were incurred in the cleanup efforts related to the 1997 storm, in no way speaks to whether these past storm expenses were reasonably anticipated, prudently incurred and properly 31 Entergy Gulf States, Inc. Service Quality Issues (Severed from Docket No. 16705), Docket No. 18249, Order on Rehearing at 16 and 19, Finding of Fact No. 97 (April 21, 1998) (submitted with this brief as Appendix F). This cited portion of the order is also found at AR, Binder 39, OPC Exhibit No. 6, Benedict Direct at Exhibit NAB-2. 32 See Appendix F, Docket No. 18249, Entergy Gulf States, Inc. Service Quality Issues (Severed from Docket No. 16705), Order on Rehearing at 14 (Apr. 22, 1998). 21 includable in the storm damage accrual. ETI failed to demonstrate that the 1997 ice storm costs were “not reasonably anticipated.” By failing to hold ETI to this required showing, the Commission’s Order results in violations of the requirements in both PURA § 36.064(a) and PUC Substantive Rule 25.231(b)(1)(G) that only those property and liability losses which “could not have been reasonably anticipated” may be included in a self- insurance plan. See Appendix C and Appendix I. Expenses that directly result from the Company’s “neglect of regular vegetation clearing” 33 are not unanticipated. The purpose of vegetation management is to prevent damage caused by vegetation in or near the utility’s right-of-way coming into contact with the conductors and causing wire breakage or ground faults. 34 The Commission’s failure to disallow the inclusion of $13,014,379 in storm restoration costs or determine what portion of those costs were incurred imprudently as a result of the Company’s imprudent vegetation management violates PURA and results in a storm reserve that impermissibly includes costs that were reasonably anticipated. 3. Prior remedies assessed for poor quality of service, including imprudent vegetation management do not address the subsequent imprudence of excessive ice damage expenses. 33 Appendix F, Docket No. 18249, Order on Rehearing at 16 and 19, Finding of Fact No. 97. 34 See Appendix F, Docket No. 18249, Order on Rehearing at 14. 22 The PFD adopted by the Commission states on page 57 that “the Commission’s retroactive reduction of ETI’s ROE in Docket No. 18249 in part compensated ratepayers for the poor service issues that exacerbated the storm damage.”35 This statement misses the point. The 60 basis point reduction to the ROE was the ratepayers’ remedy for poor quality of service, including for such things as billing rate error and call center response time, and should not be presumed to inoculate the Company from facing the costs caused as a result of its poor performance with regard to vegetation management. Reducing the ROE was consistent with PURA § 36.062’s requirement that the utility’s quality of service and efficiency of operations be considered when establishing a return on invested capital. The PFD adopted by the Commission in Docket No. 39896 confuses one set of imprudence (poor quality of service) and its remedy (60 basis-point reduction), with a second, separate imprudence (costs associated with excessive ice damage caused by imprudence). This second imprudent condition requires a separate remedy; that is, the costs associated with the damage caused by imprudence should be disallowed. Moreover, PURA requires that imprudent costs not be included in rates.36 The Commission’s decision to allow all of the 1997 ice storm costs is an error of law. 35 AR, Binder 5, Item No. 185, PFD at 57. 36 Tex. Util. Code §§ 36.003(a), 36.006(1) and 36.051; See Entergy Gulf States, Inc. v. Public Utility 23 The PFD adopted by the Commission stated that ETI had to take appropriate action to repair the damage and restore service and that ETI had established that the expenses incurred in those efforts were reasonable and necessary. However, costs can be imprudent in two different ways. First, costs can be imprudent because of their source, the fruit of a bad act. Second, costs can be imprudent due to how they are carried out, such as the amount spent or activities performed. The evidence provided by ETI went to this second type of prudence question (i.e., the prudence of costs incurred to restore exacerbated levels of storm damage), but ETI wholly failed to show which or how much of the $13,014,379 of expenses was caused or not caused by the poor vegetation management. The Commission erred in allowing the entirety of ETI’s $13,014,379 in 1997 ice storm costs and ignoring the established fact that imprudence was a major factor in the extent of damage. The Commission’s failure to take into account or determine what portion of the requested 1997 ice storm costs were imprudent due to the exacerbated damage and what portion could reasonably have been anticipated violated PURA and the Commission’s own rules and consequently, the District Court’s Judgment and the Commission’s Order should Commission, 112 S.W.3d 208, 214 (Tex. App.—Austin 2003, pet. denied) (“[I]n order to raise the price of its product, the utility must participate in a rate case and bear the burden of proving that each dollar of cost incurred was reasonably and prudently invested.”) (Appendix D). 24 be reversed and remanded to correct this error of law based upon the existing record. 4. The statutory burden of proof rests upon ETI to affirmatively prove each element of its case. The Commission erred in excusing ETI from its burden of proof merely because years had passed between the incurrence of the 1997 ice storm restoration costs and Docket No. 39896. The PFD adopted by the Commission erroneously absolves ETI of its burden of proof on the 1997 ice storm restoration costs due to the passage of time and merely states that it is “not feasible to accurately determine now what portion of ice storm damage that occurred 15 years ago was caused by preventative maintenance issues.”37 This attempt at justification is in error; the Company is charged with the affirmative burden of proof under PURA § 36.006, and must show not only that its expenses included in rates are reasonable and necessary, but that expenses included in the storm reserve were not reasonably anticipated. 38 PURA § 36.006 unequivocally establishes that the utility has the burden of proof on the case. If too much time had passed to prove what portion of the storm costs was not related to the imprudence, then the Commission should have found that ETI failed to meet its burden of proof and disallowed the entire amount. 37 AR, Binder 5, Item No. 185, PFD at 56. 38 PURA §§ 36.051 and 36.064; 16 Tex. Admin. Code § 25.231(b) and (b)(1)(G). 25 More directly, the Commission failed to give effect to the Order in Docket No. 16705 with regard to the storm costs. In that docket, the Company had proposed recovery of the 1997 costs as a post-test year adjustment. The Commission rejected ETI’s request and expressly found: 147. Any reduction to the reserve fund occurring after the test year should not be considered in this case because EGS did not prove a reasonable post-test-year level for its existing reserve fund or that the amount expended in 1997 to reduce the fund was prudent or appropriate. Reserve fund levels following the test year in this case can be addressed in EGS’ November 1998 rate filing when all parties will have the opportunity to evaluate the reasonableness of changes to the insurance reserve fund. 39 The underlying docket to this appeal, Docket No. 39896, is the first fully litigated rate case for the Company since Docket No. 16705 due to a rate freeze imposed on the Company and settlement of all subsequent rate cases for the Company after the freeze was lifted. As such, Docket No. 39896 represented the first opportunity to address the inclusion of 1997 storm costs. The parties effectively stood in the same position as if it was November 1998, and it was error for the Commission to treat the issue and the parties as if it were otherwise. Altering the burden of proof, ignoring the imprudence finding related to the cause of the storm damage and failing to require the company to show the 39 Docket No. 16705, Application of Entergy Texas for Approval of its Transition to Competition Plan and the Tariffs Implementing the Plan, and for the Authority to Reconcile Fuel Costs, Second Order on Rehearing at 84 (Finding of Fact No. 147) (Oct. 14, 1998). 26 reasonableness of including these costs in the reserve fund constitutes reversible error under APA § 2001.174(2)(A),(D),(E) and (F). a. ETI has the burden of persuasion on the entire case failed to prove each required element to meet this burden. The burden of proof for a contested electric utility rate proceeding is on the electric utility. PURA Section 36.006(1) states that the electric utility has the burden of proving that the rate change is just and reasonable, if the utility proposes the change. 40 Courts have interpreted this statutory burden of proof to mean that, “in order to raise the price of its product, the utility must participate in a rate case and bear the burden of proving that each dollar of cost incurred was reasonably and prudently invested.” 41 PURA Section 36.006 serves to place the burden of persuasion on the electric utility in that if no evidence at all were offered, the electric utility would not prevail. 42 The burden of persuasion does not shift but remains with the same party for the entire case.43 40 PURA Chapter 36, subchapters A and B and Chapter 37, subchapter D is submitted as Appendix C. 41 Entergy Gulf States, Inc. v. Public Utility Commission, 112 S.W.3d 208, 214 (Tex. App.—Austin 2003, pet. denied) citing Public Utility Commission v. Houston Lighting & Power Co., 778 S.W.2d 195, 198 (Tex. App.—Austin 1989, no writ)); See Boaz v. Harris, 30 S.W.2d 810, 811 (Tex. Civ. App.—Fort Worth 1930, no writ). Entergy Gulf States, Inc. v. Public Utility Commission is submitted as Appendix D. 42 See Cameron Compress Co. v. Kubecka, 283 S.W. 285, 286 (Tex. Civ. App.—Austin 1926, writ ref’d) (“[T]he burden of proof rests upon the party who holds the affirmative of an issue or proposition of fact.” . . . The general test in determining who has the affirmative of an issue is “which party would be successful if no evidence at all were given.”). 43 Boaz v. Harris, 30 S.W. 2d 810, 811; 35 Tex Jur 3d, Evidence § 103 at 190 (Gene A. Noland, ed., 27 b. The Commission erred in finding that ETI had established a prima facie case sufficient to shift the burden of proof. Another subset of the burden of proof is the burden of production. This burden may shift from party to party during the case and is the burden of producing or going forward with the evidence in order to make or meet a prima facie case. Boaz v. Harris, 30 S.W.2d 810, 811 (quoting Fritsche v. Niechoy, 197 S.W. 1017, 1018 (Tex. App. – Galveston 1917, writ dism’d w.o.j.) (“The burden of proof does not shift at any time in the trial of a cause, though the weight of the evidence does.”)). 44 The establishment of a prima facie case plays a role in determining which party has the burden of production. Prima facie evidence is evidence that suffices for proof of a particular fact until it is contradicted and overcome by other evidence. 45 The prima facie standard requires the production of sufficient evidence with which to support a rational inference that the allegation of fact is true. 46 A prima facie case must be established for each and every element of proof. 47 If a prima facie case is fully established, the burden of production shifts to the opponent. 1984). 44 See Texas Parks & Wildlife Department v. Dearing, 240 S.W.3d 330, 355-56 (Tex. App.—Austin 2007, pet. denied). 45 Dodson v. Watson, 110 Tex. 355, 358, 220, S.W. 771, 772 (1920). 46 See In re E.I. DuPont de Nemours & Co., 136 S.W.3d 218, 223 (Tex. 2004) (orig. proceeding). 47 See Hernandez v. State 161 S.W.3d 491, 497-98 (Tex. Crim. App. 2005); Wyeth v. Hall, 118 S.W.3d 487, 491 (Tex. App. – Beaumont 2003, no pet.). 28 However, if the plaintiff fails to establish a prima facie case, the defendant is under no obligation or duty to produce any evidence. 48 In Docket No. 39896, ETI failed to prove that the requested $13,014,379 in 1997 ice storm costs were “not reasonably anticipated” and further failed to affirmatively prove that the costs were prudently incurred with regard to the reason why the costs had to be expended, not merely how the clean-up was carried out. The Commission erred in failing to hold ETI to its burden of proof on these elements. c. The overall burden of proof remained on ETI to affirmatively prove each element of its case by a preponderance of the evidence. The Commission erred in failing to hold ETI to this burden. In the electric rate case context, Texas courts have stated that once the utility has presented a prima facie case in support of its application, the burden of going forward or burden of production shifts to the intervening parties, and that in turn, once the utility’s prima facie case is rebutted, the burden falls back onto the utility to prove its case by a preponderance of the evidence. 49 Texas courts have held that “a utility enjoys no presumption that the expenditures reflected therein have been prudently incurred by simply opening its books to inspection.” 50 Past 48 Lykes Bros.-Ripley S. S. Co. v. Pluto, 146 S.W.2d 414, 416 (Tex. Civ. App.—Galveston 1941, writ dism’d judgm’t cor.). 49 Entergy Gulf States, Inc. v. Public Utility Commission, 112 S.W.3d 208, 215 (Tex. App.—Austin 2003, pet. denied). 50 Id. citing Public Utility Commission v. Houston Lighting & Power Co., 778 S.W.2d 195, 198 (Tex. App.— Austin 1989, no writ). 29 Commission orders provide further guidance as to the burden of proof in the context of a prima facie case. The PFD adopted by the Commission in the Company’s last litigated rate case, PUC Docket No. 16705, discussed the burden of proof in the context of a prima facie case, stating: The utility's task is not finished when it makes a prima facie case, by a preponderance of the evidence that its expenditures were in fact reasonably incurred. That case may be challenged, and the challenger can make a reasonable challenge without introducing evidence which directly establishes imprudence. A challenger need not establish that a particular decision proximately caused unnecessary or [avoidable] costs. The challenging evidence need only tend to disprove prudence by making a prima facie case. Once such evidence has been produced by the challenger, the burden returns to the utility to produce evidence to show, by a preponderance of the evidence, that the challenged decisions were prudent. When what is at issue is not simple facts, such as the price actually paid, but why certain things were done, … [and when] one party is far better able to know what the relevant facts were and how they fit together, it is manifestly reasonable to require only that a challenge be plausible, and that rebuttal be substantial. . . . A utility which does not present all the evidence relevant to its claim to have acted prudently cannot succeed by pointing to mere evidentiary gaps in challengers' cases. “Only upon presentation of the affirmative evidence supporting all of the utility's actions during the reconciliation period can interested or affected persons know exactly what actions were taken.” 51 51 Application of Entergy Texas for Approval of its Transition to Competition Plan and the Tariffs Implementing 30 This discussion from the Company’s last fully-litigated rate case details the burden-shifting process that applies in electric utility rate cases and makes clear that despite the potential shifting of the burden of production, the overall burden of proof remains on the utility to show by a preponderance of the evidence that the expenditures it seeks to recover in rates were reasonably and prudently incurred. The Commission erred in failing to hold ETI to its burden of proof in violation of PURA. d. ETI’s statutory responsibilities do not expire or shift due to the passage of time. Merely because many years have elapsed from the time the costs were incurred to the time the costs were presented as part of ETI’s Docket No. 39896 rate increase request, does not mean that the Company is somehow absolved of its burden to affirmatively prove each element required for those costs to be included in the storm reserve and reflected in rates. A reasonable company, after experiencing a 60 basis-point reduction in its authorized rate of return due to quality of service inadequacies and having it expressly stated in the same Commission Order that the amount of storm damage was greatly exacerbated due to the Company’s inadequate vegetation management, would make some attempt the Plan, and for Authority to Reconcile Fuel Costs, to Set Revised Fuel Factors, and to Recover a Surcharge for Under-Recovered Fuel Costs, PUC Docket No. 16705, Proposal For Decision at 7-9 (Mar. 25, 1998) (Citations omitted) (Emphasis in bold added). An excerpt from the Docket No. 16705 PFD is submitted as Appendix G. 31 to quantify or carve out what portion of the storm restoration costs were due to the exacerbated damage. This could have been done by the Company in 1998, very close in time to the actual restoration effort, or anytime in the years thereafter prior to filing its rate case in Docket No. 39896. There are other ways beyond tracking expenses the Company could have attempted in order to show what ice storm costs a prudent company would have incurred, but the passage of time does not excuse the Company from carrying its burden. The distance in time is not a valid basis on which to decide not to require proof of prudence from the Company, and the Commission erred in adopting this faulty justification. e. The PFD adopted by the Commission improperly shifted the burden to OPUC and intervening parties. The PFD adopted by the Commission erroneously found that ETI had established a prima facie case that shifted the burden of proof to OPUC and the intervening parties. As discussed in the above sections, ETI failed to establish a prima facie case on each required element of proof. However, even if ETI had established a prima facie case sufficient to prevail if unrebutted, the standard of proof imposed on OPUC and other parties by the PFD adopted by the Commission was far beyond what is required under Texas law and established Commission precedent. Texas law makes clear that, in order to defeat a prima facie case, the opponent 32 must meet the weight of the evidence provided and, once met, the party with the burden of proof must prove its case by a preponderance of the evidence. The Texas Court of Civil Appeals articulated the rule to be followed: The rule that, when the defendant seeks to defeat the prima facie case made by the plaintiff by evidence tending to show that some fact necessary to establish such prima facie case is not true, the burden does not rest upon him to establish the nonexistence of such fact by a preponderance of the evidence, but in such case, unless the jury find from a preponderance of all the evidence that the facts necessary to establish plaintiff’s right to recover are true, they should find for the defendant, is firmly fixed by the decisions of our Supreme Court. Koppe v. Koppe, 57 Tex. Civ. App. 204, 210, 122 S.W. 68, 71-72 (1909). One of the Supreme Court decisions Koppe referred to is Clark v. Hiles, 67 Tex. 141, 2 S.W. 356 (1886). Clark was an appeal of a boundary dispute in which the question presented to the Court dealt with the burden of proof and what shifts when a plaintiff has made out a prima facie case. Id. at 360, 148. The Court stated that the general rule is that “the burden of proof ‘remains on a party affirming a fact in support of his case, and does not change in any aspect of the cause, though the weight of the evidence may shift from side to side, according to the nature and strength of proof offered in support or denial of the main fact to be established.’” Id. at 360, 148 (citations omitted) (emphasis added). 33 Going beyond the required standard for sufficiently rebutting a prima facie case, The PFD adopted by the Commission placed upon OPUC the burden to produce evidence to challenge “specific expense items included in the storm damage reserve.” AR, Binder 5, Item No. 185, PFD at 56. This standard for production required OPUC to go beyond rebutting prima facie evidence; it required OPUC to rebut data on a level of specificity the Company did not present in evidence. Rebuttal evidence is “evidence given to disprove facts given in evidence by an adverse party.” 52 In the electric rate case context, the Commission in the past has articulated what is required when rebutting a prima facie case. In the Company’s last litigated rate case, PUC Docket No. 16705, the Commission adopted the majority of the March 25, 1998 Proposal for Decision, including an analysis of the burden of proof in the context of a prima facie case and, citing past PUC precedent, stated: The utility's task is not finished when it makes a prima facie case, by a preponderance of the evidence that its expenditures were in fact reasonably incurred. That case may be challenged, and the challenger can make a reasonable challenge without introducing evidence which directly establishes imprudence. A challenger need not establish that a particular decision proximately caused unnecessary or [avoidable] costs. The challenging evidence need only tend to disprove prudence by making a prima facie case. 52 Apresa v. Montfort Ins. Co., 932 S.W.2d 246, 251 (Tex. App.—El Paso 1996, no writ). 34 Once such evidence has been produced by the challenger, the burden returns to the utility to produce evidence to show, by a preponderance of the evidence, that the challenged decisions were prudent. 53 The PFD further stated: A utility which does not present all the evidence relevant to its claim to have acted prudently cannot succeed by pointing to mere evidentiary gaps in challengers' cases. “Only upon presentation of the affirmative evidence supporting all of the utility's actions during the reconciliation period can interested or affected persons know exactly what actions were taken.” 54 As noted above, the standard for rebutting a prima facie case is not as high as that which the Commission imposed on OPUC in Docket No. 39896. The Commission’s error in finding that ETI had established a prima facie case was compounded by shifting the burden and improperly requiring OPUC to produce evidence on specific expense items in order to rebut ETI’s prima facie case. 53 Application of Entergy Texas for Approval of its Transition to Competition Plan and the Tariffs Implementing the Plan, and for Authority to Reconcile Fuel Costs, to Set Revised Fuel Factors, and to Recover a Surcharge for Under-Recovered Fuel Costs, PUC Docket No. 16705, Proposal For Decision at 7-9 (Mar. 25, 1998) (citations omitted) (emphasis in bold added). 54 Id. (citations omitted) (emphasis in bold added). 35 f. Under Texas and Commission standards, ETI failed to meet its burden of proof required for the inclusion of the $13,014,379 in 1997 ice storm costs. To summarize, under the burden of proof standards articulated by the Commission, ETI failed to make a prima facie case.55 And, even assuming for the sake of argument that ETI had made a prima facie showing, the Commission erred in imposing an improper standard of proof for rebutting any such prima facie showing. OPUC and Cities provided evidence that “tends to disprove” prudence and supports the conclusion that the expenses were in fact reasonably anticipated. 56 The burden then returned to the Company to produce evidence that affirmatively showed by a preponderance of the evidence that either the entirety of the approx. $13 million in restoration costs were unrelated to the imprudent action, or to show what portion thereof was and was not related to the imprudent action and was not reasonably anticipated. ETI failed to establish a prima facie case for each element of proof required in order to include its requested $13,014,379 of 1997 ice storm restoration costs in the storm reserve balance. By allowing ETI to include its requested 1997 ice storm restoration costs in the storm reserve balance without actually establishing a prima 55 Id. 56 AR, Binder 39, OPUC Exhibit No. 6, Benedict Direct at 6-12, 78-87 and 88; AR Binder 8, Cities Exhibit No. 5, Pous Direct at 46-59. 36 facie case for each element of proof, the Commission violated PURA’s requirement that the burden of proof be placed on the utility. For this reason, the Commission’s Order should be reversed on the issue of the storm reserve balance and remanded to the Commission based upon the existing evidentiary record. ETI’s task was to show “the existence of each element of [its claim],” i.e., “to prove every fact essential to their case.” 57 ETI failed to show that the expenses the Company requested to include in its storm reserve balances are reasonable and prudent and not reasonably anticipated. Consequently, the Commission erred as a matter of law in failing to hold ETI to its burden of proof with regard to storm damage expenses. 5. The Commission’s decision to approve the inclusion of $13 ,014,379 in 1997 ice storm costs is arbitrary and capricious and constitutes an abuse of discretion. The Commission committed legal error by abusing its discretion and acting in an arbitrary and capricious manner when approving the inclusion of the 1997 ice storm costs in ETI’s storm reserve, cost of service, and rates. 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 57 Vance v. My Apartment Steak House, 677 S.W.2d 480, 482 (Tex. 1984). 37 to consider but still reaches a completely unreasonable result. 58 In allowing the inclusion of all $13,014,379 of ice storm expenses in ETI’s cost of service, the Commission failed to consider factors the legislature directs it to consider, including whether the costs were “not reasonably anticipated” and prudently incurred. Tellingly, there were no findings of fact or conclusions of law with regard to whether the costs were not reasonably anticipated. The Commission also acted in an arbitrary and capricious manner by considering irrelevant factors. The Commission, through the adopted PFD, erroneously considered the passage of time between the rate case and the incurrence of the storm expenses, and absolved the Company of its burden to prove what portion of the approximately $13 million was due to the exacerbated damages caused by the imprudent vegetation management and what portion would have been incurred even with prudent management. 59 The Commission, through the adopted PFD, also erroneously considered the 60 basis-point reduction to the Company’s ROE imposed for poor quality of service including poor call center response time. 60 58 City of El Paso v. Public Util. Comm’n, 883 S.W.2d 179, 184 (Tex. 1994). See also, Reliant Energy, Inc. v. Public Util. Comm’n, 62 S.W.3d 833, 841 (Tex. App. – Austin 2001, no pet.). 59 AR, Binder 5, Item No. 185, PFD at 56; see supra pp. 16-19, 25-26 and 31-32. 60 Id.; see supra pp. 22-24. 38 Additionally, when an agency fails to “follow the clear, unambiguous language of its own regulation,” it acts arbitrarily and capriciously. 61 The Commission failed to follow the clear, unambiguous language of its own substantive rule which states unequivocally that “any expenditure found by the Commission to be unreasonable, unnecessary or not in the public interest” “shall never be a component of the cost of service.” 16 Tex. Admin. Code § 25.231(b)(2)(J).62 The Commission also failed to follow its own substantive rule which allows storm costs to be included in the storm reserve, to the extent they are reasonable and necessary, and are not reasonably anticipated. 16 Tex. Admin. Code § 25.231(b)(1)(G). Moreover, as stated above, the Commission made no findings of fact or conclusions of law as to whether the ice storm expenses were not reasonably anticipated. Further, the Commission disregarded the prior- established finding from the final order of the Commission in Docket No. 18249 which found that storm damage was greatly exacerbated by the state of the Company’s vegetation management. For these reasons, it was arbitrary and capricious to include all of the Company’s requested ice storm expenses in SPS’s storm reserve and allow these costs to be reflected in SPS’s cost of service and rates. 61 Public Util. Comm’n v. Gulf States Utilities, 809 S.W.2d 201, 207 (Tex. 1991). 62 See also PURA § 36.062(4). 39 PRAYER For the reasons stated in this brief, the Office of Public Utility Counsel respectfully prays that the Court reverse the district court’s judgment insofar as it upholds the Commission’s decision in the respects discussed above. OPUC further prays that the Court remand the case to the Commission for further proceedings, based upon the existing evidentiary Record, to determine rates consistent with the Court’s decision. Finally, OPUC respectfully prays that this Court grant the OPUC such other and further relief to which it may be justly entitled. Respectfully submitted, Tonya Baer Public Counsel State Bar No. 24026771 /s/ Sara J. Ferris___________________________ Sara J. Ferris Senior Assistant Public Counsel State Bar No. 50511915 OFFICE OF PUBLIC UTILITY COUNSEL 1701 N. Congress Avenue, Suite 9-180 P.O. Box 12397, Capitol Station Austin, Texas 78711-2397 512/936-7500 (Telephone) 512/936-7525 (Facsimile) 40 CERTIFICATE OF COMPLIANCE I certify that the Appellant’s Brief and Appendix of the Office of Public Utility Counsel contains 8,113 words, as measured by the undersigned counsel’s word-processing software, and therefore complies with the word limit found in Tex. R. App. P. 9.4(i)(2)(B). __ /s/ Sara J. Ferris_________________ Sara J. Ferris CERTIFICATE OF SERVICE I certify that the Appellant’s Brief and Appendix of the Office of Public Utility Counsel was electronically filed with the Clerk of the Court using the electronic case filing system of the Court, and that a true and correct copy of the Appellant’s Brief and Appendix of the Office of Public Utility Counsel was served upon counsel for each party of record, listed below, by electronic service or 1st Class U.S. Mail, on this 31st day of March, 2015. ENTERGY TEXAS, INC. CITIES OF ANAHUAC, Marnie A. McCormick BEAUMONT, ET. AL John F. Williams Daniel J. Lawton Duggins, Wren, Mann & Romero, LLP Lawton Law Firm PC P.O. Box 1149 12600 Hill Country Blvd, Suite R275 Austin, Texas 78767-1149 Austin, Texas 78738 (512) 744-9300 (512) 322-0019 mmcormick@dwmrlaw.com dlawton@ecpi.com jwilliams@dwmrlaw.com 41 PUBLIC UTILITY COMMISSION TEXAS INDUSTRIAL ENERGY OF TEXAS CONSUMERS Elizabeth R. B. Sterling Rex VanMiddlesworth Assistant Attorney General Benjamin Hallmark Environmental Protection Division Thompson Knight LLP Office of the Attorney General 98 San Jacinto Blvd, Suite 1900 P. O. Box 12548, Capitol Station Austin, Texas 78701 Austin, Texas 78711-2548 (512) 320-9200 (512) 475-4152 rex.vanm@tklaw.com elizabeth.sterling@texasattorneygeneral.gov benjamin.hallmark@tklaw.com STATE AGENCIES OF TEXAS Katherine H. Farrell Assistant Attorney General Admin Law Div. – Energy Rates Section Office of the Attorney General P. O. Box 12548 Austin, Texas 78711-2548 (512) 475-4173 katherine.farrell@texasattorneygeneral.gov _ /s/ Sara J. Ferris_________________ Sara J. Ferris 42 Appendix to the Appellant’s Brief of the Office of Public Utility Counsel A: District Court Judgement, Cause No. D-1-GN-13-000121 (Consolidated) B: PUC Docket No. 39896, Order on Rehearing C: PURA, Chapter 36, Subchapters A and B, and Chapter 37, Subchapter D D: Entergy Gulf States, Inc. v. Public Utility Commission, 112 S.W.3d 208 (Tex. App. – Austin 2003, pet. denied) E: Texas Utilities Electric Company v. Public Utility Commission, 881 S.W.2d 387 (Tex. App. – Austin 1994) aff’d in part, rev’d in part on other grounds, 935 S.W.2d 109 (Tex. 1997) F: PUC Docket No. 18249, Order on Rehearing G: Excerpt from: PUC Docket No. 16705, Proposal for Decision H: Excerpts from: PUC Docket No. 16705, Second Order on Rehearing I: 16 Tex. Admin. Code § 25.231 Appendix A District Court Judgement, Cause No. D-1-GN-13-000121 (Consolidated) DC BK14295 PG132 Filed In 1°h o· of Travis ~ •strict Cour:· ounty, Texas EM OCT 1~ tUl'I CAUSE NO. D-l-GN-13-000121 At (/ ·d-t..f. A Amalia Rodriguez.Mendoza, c;e~· ENTERGY TEXAS, INC., § IN THE DISTRICT COURT OF Plaintiff § § v. § TRAVIS COUNTY, TEXAS § PUBLIC UTILITY COMMISSION, § Defendant § 353RD JUDICIAL DISTRICT ORDER ON ADMINISTRATIVE APPEAL On July 22, 2014, the Court heard Plaintifrs appeal from Defendant' s Order in PUC Docket No. 39896, SOAH Docket No. XXX-XX-XXXX. The administrative record was admitted into evidence, and the Court heard oral argument. Entergy, the Cities, and OPUC each asserted points of error challenging the Commission's order. Having considered the pleadings, the evidence and the arguments of counsel, the Court makes the following rulings: 1. Entergy' s Point of Error No. 1 addressing the use of a current line loss study rather that a prior-approved line loss study in allocating line loss costs among classes of customers establishes that the Commission erred in applying the current study in violation of Commission rules found at 16 TAC §25.236(e)(3) and 16 TAC 25.237(a) and (c)(2)(B). Accordingly, the Court FINDS that the PUC's ruling was arbitrary and capricious and constitutes an error of Jaw. The Court REVERSES such ruling and REMANDS this matter to the Commission for further proceedings consistent with this Court's Order. 2. All other points of error are DENIED, and the Commission's Order is in all other respects AFFIRMED. All relief not granted, herein, is DENIEDL l / # rl.. llc114t. Signed this J day of ~telli~r, 20 14. J Appendix B PUC Docket No. 39896, Order on Rehearing f ` , ^,n 7^^^ a a *^, PUC DOCKET NO. 39896 201"`` Noy -2 V 9: 24 SOAH DOCKET NO. XXX-XX-XXXX APPLICATION OF ENTERGY TEXAS, § PUBLIC UTILITY COMMISSION INC. FOR AUTHORITY TO CHANGE § RATES, RECONCILE FUEL COSTS, § OF TEXAS AND OBTAIN DEFERRED § ACCOUNTING TREATMENT § ORDER ON REHEARING This Order addresses the application of Entergy Texas, Inc. for authority to change rates, reconcile fuel costs, and defer costs for the transition to the Midwest Independent System Operator (MISO). In its application, Entergy requested approval of an increase in annual base- rate revenues of approximately $111.8 million (later lowered to $104.8 million), proposed tariff schedules, including new riders to recover costs related to purchased-power capacity and renewable-energy credit requirements, requested final reconciliation of its fuel costs, and requested waivers to the rate-filing package requirements. On July 6, 2012, the State Office of Administrative Hearings (SOAH) administrative law judges (ALJs) issued a proposal for decision in which they recommended an overall rate increase for Entergy of $28.3 million resulting in a total revenue requirement of approximately $781 million. The ALJs also recommended approving total fuel costs of approximately $1.3 billion. The ALJs did not recommend approving the renewable-energy credit rider and the Commission earlier removed the purchased-power capacity rider as an issue to be addressed in this docket.' On August 8, 2012, the ALJs filed corrections to the proposal for decision based on the exceptions and replies of the parties.2 Except as discussed in this Order, the Commission adopts the proposal for decision, as corrected, including findings of fact and conclusions of law. Parties filed motions for rehearing on September 25 and October 4, 2012 and filed replies to the motions for rehearing on October 15, 2012. The Commission considered the motions for ' Supplemental Preliminary Order at 2, 3 (Jan. 19, 2012). 2 Letter from SOAH judges to PUC (Aug. 8, 2012). PUC Docket No. 39896 Order on Rehearing Page 2 of 44 SOAH Docket No. XXX-XX-XXXX rehearing at the October 25, 2012 open meeting. The Commission granted Commission Staff's motion for rehearing that requested technical corrections to reflect the rates that resulted from the Commission Staff number-running memo that was filed on August 28, 2012. The Commission modifies findings of fact 205, 206, 208, and 210 as requested by Commission Staff and attaches Commission schedules I through V to reflects its decisions. The Commission granted the Department of Energy's motion for rehearing requesting that finding of fact 198 be modified to reflect the applicable off-season for the schedulable intermittent pumping service. Finding of fact 198 is modified to reflect that the off-season is October through May. In its motion for rehearing, Entergy noted that findings of fact 17B and 17D should be modified to more accurately reflect the procedural history. The Commission modifies findings of fact 17B and 17D to state that Entergy agreed to extend time to provide the Commission sufficient time to consider the issues in this proceeding on two occasions-at the July 27 and August 30, 2012 open meetings. 1. Discussion A. Prepaid Pension Asset Balance Entergy included in rate base an approximately $56 million item named Unfunded Pension.3 This amount represents the accumulated difference between the annual pension costs calculated in accordance with the Statement of Financial Accounting Standards (SFAS) No. 87 and the actual contributions made by Entergy to the pension fund-Entergy contributed nearly $56 million more to its pension fund than the minimum required by SFAS No. 87.4 In Docket No. 33309, the Commission allowed a pension prepayment asset, excluding the portion of the asset that is capitalized to construction work in progress (CWIP), less accrued deferred federal income taxes (ADFIT) to be included in rate base.5 For the excluded portion, the Commission allowed the accrual of an allowance for funds used during construction 3 Proposal for Decision at 23 (July 6, 2012) (PFD). '` PFD at 23-24. 5 Application of AEP Texas Central Company for Authority to Change Rates, Docket No. 33309, Order on Rehearing (March 4, 2008). PUC Docket No. 39896 Order on Rehearing SOAH Docket No. XXX-XX-XXXX Page 3 of 44 (AFUDC).6 The ALJs concluded that this approach was sound and should be followed in this case.7 Thus, the ALJs recommended that the CWIP-related portion of Entergy's prepaid pension asset ($25,311,236) should be excluded from the asset and should accrue AFUDC.8 However, the ALJs did not address ADFIT. The Commission agrees that the CWIP-related portion of Entergy's pension asset should be excluded from the asset and that this excluded portion should accrue AFUDC. However, the Commission also finds that the impact of this exclusion on Entergy's ADFIT should be reflected. When items are excluded from rate base, the related ADFIT should also be excluded. The adjusted ADFIT for the prepaid pension asset remaining in Entergy's rate base should be reduced by $8,858,933, the deferred taxes related to the excluded $25 million. The Commission adds new finding of fact 28A to reflect this modification to Entergy's ADFIT. B. FIN 48 The Financial Accounting Standards Board's Interpretation No. 48 (FIN 48) prescribes the way in which a company must analyze, quantify, and disclose the potential consequences of tax positions that the company has taken that are legally uncertain. Entergy reported that its uncertain tax positions totaled $5,916,461. FIN 48 requires that this amount be recorded on Entergy's balance sheet as a tax liability. Entergy also reported that it made a cash deposit with the IRS in the amount of $1,294,683 associated with its FIN 48 liability.9 The ALJs concluded that Entergy's FIN 48 liability should be included in its ADFIT balance, but the amount of the cash deposit made by Entergy to the IRS attributable to Entergy's FIN 48 liability should not be included in Entergy's ADFIT balance. Accordingly, the ALJs recommended that $4,621,778 (Entergy's FIN 48 liability of $5,916,461 less the $1,294,683 cash deposit Entergy has already made with the IRS) be added to Entergy's ADFIT balance and thus 6 Remand of Docket No. 33309 (Application of AEP Texas Central Company for Authority to Change Rates), Docket No. 38772, Order on Remand (Jan. 20, 2011). ' PFD at 26. 8 Id at 24-26. 9 PFD at 26-27 (citing Rebuttal Testimony of Roberts, Entergy Ex. 64 at 6), 29 (citing Rebuttal Testimony of Roberts, Entergy Ex. 64 at 8). PUC Docket No. 39896 Order on Rehearing Page 4 of 44 SOAH Docket No. XXX-XX-XXXX be used to offset Entergy's rate base.10 The ALJs did not recommend the addition of a deferred- tax-account rider because no party expressly advocated the addition of such a rider. II The Commission adopts the proposal for decision regarding the adjustment to Entergy's ADFIT for the amount attributable to Entergy's FIN 48 liability. However, the Commission also follows its precedent regarding the creation of a deferred-tax-account tracker and modifies the proposal for decision on this point. In CenterPoint's Electric Delivery Company's last rate case, Docket No. 38339,12 the Commission found that tax schedule UTP-on which companies must describe, list, and rank each uncertain tax position-would provide the IRS auditors sufficient information to quickly determine which uncertain tax positions are of a magnitude worth investigating and that an IRS audit would be more likely to occur on some uncertain tax positions. If an IRS audit of a FIN 48 uncertain tax position results in an unfavorable outcome, the utility would not be able to earn a return on the amount paid to the IRS until the next rate case. Accordingly, the Commission authorizes Entergy to establish a rider to track unfavorable FIN-48 rulings by the IRS. The rider will also allow Entergy to recover on a prospective basis an after-tax return of 8.27% on the amounts paid to the IRS that result from an unfavorable FIN- 48 unfavorable-tax-position audit. The return will be applied prospectively to FIN-48 amounts disallowed by an IRS audit after such amounts are actually paid to the federal government. If Entergy subsequently prevails in an appeal of an unfavorable FIN-48 unfavorable-tax-position decision by the IRS, then any amounts collected under rider related to that overturned decision shall be credited back to ratepayers. The Commission adds new finding of fact 40A and deletes finding of fact 41 consistent with its decision to authorize the deferred-tax-account tracker. ^o PFD at 29. Id. at 29. 12 Application of CenterPoint Electric Delivery Company, LLC for Authority to Change Rates, Docket No. 38339, Order on Rehearing at 3-4 ( June 23, 2011). PUC Docket No. 39896 Order on Rehearing Page 5 of 44 SOAH Docket No. XXX-XX-XXXX C. Capitalized Incentive Compensation Entergy capitalized into plant-in-service accounts some of the incentive payments made to employees and sought to include those amounts in rate base. The ALJs determined that Entergy should not be able to recover its financially based incentive-compensation costs.13 Therefore, the portion of Entergy's incentive-compensation costs capitalized during the period July 1, 2009 through June 30, 2010 that were financially based was excluded from Entergy's rate base. The ALJs also determined that the actual percentages should be used to determine the amount that is financially based. 14 In discussing Entergy's incentive compensation as a component of operating expenses, the ALJs adopted the method advocated by Texas Industrial Energy Consumers (TIEC) for calculating the amount of the financially based incentive costs. This method uses the actual percentage reductions applicable to each of the annual incentive programs that included a component of financially-based costs. 15 In its exceptions regarding capitalized incentive compensation, Entergy advocated for the use of TIEC's methodology to also calculate the amount of capitalized incentive compensation that is financially based. Entergy also noted that the amount of the disallowance reflected in the schedules, $1,333,352, was calculated using a disallowance factor that included incentive compensation tied to cost-control measures, which the ALJs found to be recoverable in the operating-cost incentive-compensation calculation.16 When the TIEC methodology is applied to the capitalized incentive-compensation costs in rate base, the net result under TIEC's methodology is that only $335,752.96 should be disallowed from capital Costs. 17 The Commission agrees that capitalized incentive compensation that is financially based should be excluded from rate base and that the exclusion only applies to incentive costs that Entergy capitalized during the period from July 1, 2009 through June 30, 2010. However, the Commission finds that a consistent methodology should be used to calculate the amount to be "PFDat 171. 1aki. at 72. 15 Id. at 174; see also Entergy's Exceptions to the Proposal for Decision at 25-26 (July 23, 2012). 16 Entergy's Exceptions to the Proposal for Decision at 25-26. " !d. at 25-26. PUC Docket No. 39896 Order on Rehearing Page 6 of 44 SOAH Docket No. XXX-XX-XXXX excluded and therefore that TIEC's methodology should also be used for calculating the amount of capitalized financially based incentive-compensation costs that should be excluded from rate base. Accordingly, the total amount of capitalized incentive-compensation costs that should be disallowed from rate base is $335,752.96. Finding of fact 61 is modified to reflect this determination. As noted by Commission Staff, this disallowance to plant-in-service alters the expense for ad valorem taxes. Accounting for this disallowance, the appropriate expense amount for ad valorem taxes is $24,921,022," an adjustment of $1,222,106 to Entergy's test year amount. Finding of fact 151 is modified to reflect this adjustment to property taxes. D. Rate of Return and Cost of Capital The ALJs found the proper range of an acceptable return on equity for Entergy would be from 9.3 percent to 10.0 percent.19 The mid-point of the range is 9.65 percent. The ALJs found that the effect of unsettled economic conditions facing utilities on the appropriate return on equity should be taken into account and that the effect would be to move the ultimate return on equity towards the upper limits of the range that was determined to be reasonable.20 The ALJs found that the reasonable adjustment would be 15 basis points, moving the reasonable return on equity to 9.80 percent.21 The Commission must establish a reasonable return for a utility and must consider applicable factors.22 The Commission disagrees with the ALJs that a utility's return on equity should be determined using an adder to reflect unsettled economic conditions facing utilities. The Commission agrees with the ALJs, however, that a return on equity of 9.80 percent will allow Entergy a reasonable opportunity to earn a reasonable return on its invested capital, but finds this rate appropriate independent of the 15-point adder recommended by the ALJs. A return on equity of 9.80 percent is within the range of an acceptable return on equity found by 18 Commission Number-Run Memorandum at 2 (Aug. 28, 2012). 19 PFD at 94. 20 id 21 Id. at 94. 22 PURA §§ 36.051,.052. PUC Docket No. 39896 Order on Rehearing Page 7 of 44 SOAH Docket No. XXX-XX-XXXX the ALJs. Accordingly, the Commission adds new finding of fact 65A to reflect the Commission's decision on this point. E. Purchased-Power Capacity Expense The ALJs rejected Entergy's request to recover $31 million more in purchased-power capacity costs than its actual test-year expenses because Entergy had failed to prove that the adjustment was known and measurable,23 and because the request violated the matching principle.24 Consequently, the ALJs recommended that Entergy's test-year expenses of $245,432,884 be used to set rates in this docket.25 Entergy pointed to an additional $533,002 of purchased-power capacity expenses that were properly included in Entergy's rate-filing package, but not provided for in the proposal for decision.26 The Commission finds that an additional $533,002 ($6,132 for test-year expenses for Southwest Power Pool fees, $654,082 for Toledo Bend hydro fixed-charges, and -$127,212 for an Entergy intra-system billing adjustment that were all recorded in FERC account 555) of purchased-power capacity costs were incurred during the test-year and should be added to the purchased-power capacity costs in Entergy's revenue requirement. The Commission modifies findings of fact 72 and 86 to reflect the inclusion of the additional $533,002 of test-year purchased-power capacity costs, increasing the total amount to $245,965,886. F. Labor Costs - Incentive Compensation The ALJs found that $6,196,037, representing Entergy's financially-based incentives paid in the test-year, should be removed from Entergy's O&M expenses.27 The ALJs agreed with Commission Staff and Cities that an additional reduction should be made to account for the FICA taxes that Entergy would have paid for those costs,28 but did not include this reduction in a finding of fact. 23 PFD at 108-09. 24 Id. at 109. • s id 26 Entergy's Exceptions to the Proposal for Decision at 51. ''' PFD at 175. 21 1a! at 175-76. PUC Docket No. 39896 Order on Rehearing Page 8 of 44 SOAH Docket No. XXX-XX-XXXX The Commission agrees with the ALJs, but modifies finding of fact 133 to specifically include the decision that an additional reduction should be made to account for the FICA taxes Entergy would have paid on the disallowed financially-based incentive compensation. The Commission notes that this reduction for FICA taxes is reflected in the schedules attached to this Order.29 G. Affiliate Transactions OPUC argued that Entergy's sales and marketing expenses exclusively benefit the larger commercial and industrial customers, but the majority of the sales, marketing, and customer service expenses are allocated to the operating companies based on customer counts. Therefore, the majority of these expenses are allocated to residential and small business customers. OPUC argued that it is inappropriate for residential and small business customers to pay for these expenses.30 The ALJs did not adopt OPUC's position on this issue. The Commission agrees with OPUC and reverses the proposal for decision regarding allocation of Entergy's sales and marketing expense and finds that $2.086 million of sales and marketing expense should be reallocated using direct assignment. The Commission has previously expressed its preference for direct assignment of affiliate expenses.31 The Commission finds that the following amounts should be allocated based on a total-number-of- customers basis: (1) $46,490 for Project E 10PCR56224 - Sales and Marketing - EGSI Texas; (2) $17,013 for Project F3PCD10049 - Regulated Retail Systems O&M; and (3) $30,167 for Project F3PPMMALI2 - Middle Market Mkt. Development. The remainder, $1,992,475, should be assigned to (1) General Service, (2) Large General Service and (3) Large Industrial Power Service.32 The reallocation has the effect of increasing the revenue requirement allocated to the large business class customers and reduces the revenue requirement for small business and residential customers. New finding of fact 164A is added to reflect the proper allocation of these affiliate transactions. 29 See Commission Number Run-Memorandum at 3 (Aug. 28, 2012). 30 Direct Testimony of Carol Szerszen, OPUC Ex. I at 44-45. 31 Application of Central Power and Light Company for Authority to Change Rates, Docket No. 14965, Second Order on Rehearing at 87, COL 29 (Oct. 16, 1997). 'Z Direct Testimony of Carol Szerszen, OPUC Ex. 1 at Schedule CAS-7. PUC Docket No. 39896 Order on Rehearing Page 9 of 44 SOAH Docket No. XXX-XX-XXXX H. Fuel Reconciliation Entergy proposed to allocate costs for the fuel reconciliation to customers using a line- loss study performed in 1997. Entergy conducted a line-loss study for the year ending December 31, 2010, which falls in the middle of the two year fuel reconciliation period-July 2009 through June 2011-and therefore reflects the actual line losses experienced by the customer classes during the reconciliation period. Cities argued that the allocation of fuel costs incurred over the reconciliation period should reflect the current line-loss study performed by Entergy for this case and recommended approval on a going-forward basis. Fuel factors under P.U.C. SUBST. R. 25.237(a)(3) are temporary rates subject to revision in a reconciliation proceeding described in P.U.C. SUBST. R. 25.236. P.U.C. SUSST. R. 25.236(d)(2) defines the scope of a fuel reconciliation proceeding to include any issue related to the reasonableness of a utility's fuel expenses and whether the utility has over- or under-recovered its reasonable fuel expenses.33 Cities calculated a $3,981,271 reduction to the Texas retail fuel expenses incurred over the reconciliation period using the current line-losses. The ALJs rejected Cities' proposed adjustment finding that the P.U.C. SUBST. R. 25.237(c)(2)(B) requires the use of Commission- approved line losses that were in effect at the time fuel costs were billed to customers in a fuel reconciliation. 34 The Commission agrees with Cities and reverses the proposal for decision regarding which line-loss factors should be used in Entergy's fuel reconciliation. Entergy used the 2010 study line-loss calculations to calculate the demand- and energy-related allocations in its cost of service analysis supporting its requested base rates. These same currently available line-loss factors should have been utilized in Entergy's fuel reconciliation. The Commission finds that Entergy's 2010 line-loss factors should be used to calculate Entergy's fuel reconciliation over-recovery. As a result, Entergy's fuel reconciliation over-recovery should be reduced by $3,981,271. Finding of fact 246A and conclusions of law 19A and 19B are added to reflect the Commission's finding that the 2010 line-loss factors be used to reconcile Entergy's fuel costs. '3 Cities' Exceptions to the Proposal for Decision at 20-21 (July 23, 2012). 31 PFD at 327-328. PUC Docket No. 39896 Order on Rehearing Page 10 of 44 SOAH Docket No. XXX-XX-XXXX 1. MISO Transition Expenses During the Commission's consideration of the proposal for decision, the parties that contested the amount of Entergy's MISO transition expenses and how the transition expenses should be accounted for reached announced on the record that they had reached an agreement on these issues.35 Those parties agreed that the MISO transition expenses would not be deferred and that Entergy's base rates should include $1.6 million for MISO transition expense.36 The Commission adopts the agreement of the parties and accordingly modifies finding of fact 251 and deletes finding of fact 252. J. Purchased-Power Capacity Cost Baseline The Commission modified the amount of purchased-power capacity expense in the test-year to be $245,965,886 (see section E above). Finding of fact 255 is modified to reflect the change to the proper test-year purchased-power capacity expense. K. Other Issues New findings of fact 17A, 17B, 17C, 17D, and 17 E are added to reflect procedural aspects of the case after issuance of the proposal for decision. In addition, to reflect corrections recommended by the ALJs, findings of fact 116, 123, 192, 194, and 202 are modified; and new finding of fact 182A is added. The Commission adopts the following findings of fact and conclusions of law: II. Findings of Fact Procedural History l. Entergy Texas, Inc. (ETI or the company) is an investor-owned electric utility with a retail service area located in southeastern Texas. 35 Open Meeting Tr. at 138 (Aug. 17, 2012). 36 /d PUC Docket No. 39896 Order on Rehearing Page I I of 44 SOAH Docket No. XXX-XX-XXXX 2. ETI serves retail and wholesale electric customers in Texas. As of June 30, 2011, ETI served approximately 412,000 Texas retail customers. The Federal Energy Regulatory Commission (FERC) regulates ETI's wholesale electric operations. 3. On November 28, 2011, ETI filed an application requesting approval of. (1) a proposed increase in annual base rate revenues of approximately $111.8 million over adjusted test- year revenues; (2) a set of proposed tariff schedules presented in the Electric Utility Rate Filing Package for Generating Utilities (RFP) accompanying ETI's application and including new riders for recovery of costs related to purchased-power capacity and renewable energy credit requirements; (3) a request for final reconciliation of ETI's fuel and purchased-power costs for the reconciliation period from July 1, 2009 to June 30, 2011; and (4) certain waivers to the instructions in RFP Schedule V accompanying ETI's application. 4. The 12-month test-year employed in ETI's filing ended on June 30, 2011 (test-year). 5. ETI provided notice by publication for four consecutive weeks before the effective date of the proposed rate change in newspapers having general circulation in each county of ETI's Texas service territory. ETI also mailed notice of its proposed rate change to all of its customers. Additionally, ETI timely served notice of its statement of intent to change rates on all municipalities retaining original jurisdiction over its rates and services. 6. The following parties were granted intervenor status in this docket: Office of Public Utility Counsel; 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), the Kroger Co. (Kroger); State Agencies; Texas Industrial Energy Consumers; East Texas Electric Cooperative, Inc.; the United States Department of Energy (DOE); and Wal-Mart Stores Texas, LLC, and Sam's East, Inc. (Wal-Mart). The Staff (Staff) of the Public Utility Commission of Texas (Commission or PUC) was also a participant in this docket. 7. On November 29, 2011, the Commission referred this case to the State Office of Administrative Hearings (SOAH). PUC Docket No. 39896 Order on Rehearing Page 12 of 44 SOAH Docket No. XXX-XX-XXXX 8. On December 7, 2011, the Commission issued its order requesting briefing on threshold legal/policy issues. 9. On December 19, 2011, the Commission issued its Preliminary Order, identifying 31 issues to be addressed in this proceeding. 10. On December 20, 2011, the Administrative Law Judges (ALJs) issued SOAH Order No. 2, which approved an agreement among the parties to establish a June 30, 2012 effective date for the company's new rates resulting from this case pursuant to certain agreed language and consolidate Application of Entergy Texas, Inc. for Authority to Defer Expenses Related to its Proposed Transition to Membership in the Midwest Independent System Operator, Docket No. 39741 ( pending) into this proceeding. Although it did not agree, Staff did not oppose the consolidation. 11. On January 13, 2012, the ALJs issued SOAH Order No. 4 granting the motions for admission pro hac vice filed by Kurt J. Boehm and Jody M. Kyler to appear and participate as counsel for Kroger and the motion for admission pro hac vice filed by Rick D. Chamberlain to appear and participate as counsel for Wal-Mart. 12. On January 19, 2012, the Commission issued a supplemental preliminary order identifying two additional issues to be addressed in this case and concluding that the company's proposed purchased-power capacity rider should not be addressed in this case and that such costs should be recovered through base rates. 13. ETI timely filed with the Commission petitions for review of the rate ordinances of the municipalities exercising original jurisdiction within its service territory. All such appeals were consolidated for determination in this proceeding. 14. On April 4, 2012, the ALJs issued SOAH Order No. 13 severing rate case expense issues into Application of Entergy Texas, Inc. for Rate Case Expenses Severed from PUC Docket No. 39896, Docket No. 40295 (pending). 15. On April 13, 2012, ETI adjusted its request for a proposed increase in annual base rate revenues to approximately $104.8 million over adjusted test-year revenues. 16. The hearing on the merits commenced on April 24 and concluded on May 4, 2012. PUC Docket No. 39896 Order on Rehearing Page 13 of 44 SOAH Docket No. XXX-XX-XXXX 17. Initial post-hearing briefs were filed on May 18 and reply briefs were tiled on May 30, 2012. 17A. On August 7, 2012, the SOAH ALJs filed a letter with the Commission recommending changes to the PFD. 17B At the July 27, 2012 open meeting, ETI agreed to extend time to August 31, 2012 to provide the Commission sufficient time to consider the issues in this proceeding. 17C. The Commission considered the proposal for decision at the August 17, 2012 and August 30, 2012 open meetings. 17D. At the August 30, 2012 open meeting, ETI agreed to extend time to September 14, 2012 to provide the Commission sufficient time to consider the issues in this proceeding. 17E. At the August 17, 2012 open meeting, parties announced on the record a settlement of the amount of costs for the transition to MISO. Rate Base 18. Capital additions that were closed to ETI's plant-in-service between July 1, 2009 and June 30, 2011, are used and useful in providing service to the public and were prudently incurred. 19. ETI's proposed Hurricane Rita regulatory asset was an issue resolved by the black-box settlement in Application of Entergy Texas, Inc. for Authority to Change Rates and Reconcile Fuel Costs, Docket No. 37744 ( Dec. 13, 2010). 20. Accrual of carrying charges on the Hurricane Rita regulatory asset should have ceased when Docket No. 37744 concluded because the asset would have then begun earning a rate of return as part of rate base. 21. The appropriate calculation of the Hurricane Rita regulatory asset should begin with the amount claimed by ETI in Docket No. 37744, less amortization accruals to the end of the test-year in the present case, and less the amount of additional insurance proceeds received by ETI after the conclusion of Docket No. 37744. 22. A Test-Year-end balance of $15,175,563 for the Hurricane Rita regulatory asset should remain in rate base, applying a five-year amortization rate beginning August 15, 2010. PUC Docket No. 39896 Order on Rehearing Page 14 of 44 SOAH Docket No. XXX-XX-XXXX 23. The Hurricane Rita regulatory asset should not be moved to the storm damage insurance reserve. 24. The company requested in rate base its prepaid pension assets balance of $55,973,545, which represents the accumulated difference between the Statement of Financial Accounting Standards (SFAS) No. 87 calculated pension costs each year and the actual contributions made by the company to the pension fund. 25. The prepaid pension assets balance includes $25,311,236 capitalized to construction work in progress (CWIP). 26. It is not necessary to the financial integrity of ETI to include CWIP in rate base, and there was insufficient evidence showing that major projects under construction were efficiently and prudently managed. 27. The portion of the prepaid pension assets balance that is capitalized to CWIP should not be included in ETI's rate base. 28. The remainder of the prepaid pension assets balance should be included in ETI's rate base. 28A. When items are excluded from rate base, the related ADFIT should also be excluded. The amount of ADFIT associated with the $25 million capitalized to CWIP and excluded from rate base is $8,858,933. The adjusted ADFIT for the prepaid pension asset remaining in Entergy's rate base should be reduced by $8,858,933. 29. ETI should be permitted to accrue an allowance for funds used during construction on the portion of ETI's Prepaid Pension Assets Balance capitalized to CWIP. 30. The Financial Accounting Standard Board (FASB) Financial Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in Income Taxes," requires ETI to identify each of its uncertain tax positions by evaluating the tax position on its technical merits to determine whether the position, and the corresponding deduction, is more-likely-than-not to be sustained by the Internal Revenue Service (IRS) if audited. 31. FIN 48 requires ETI to remove the amount of its uncertain tax positions from its Accumulated Deferred Federal Income Tax (ADFIT) balance for financial reporting PUC Docket No. 39896 Order on Rehearing Page 15 of 44 SOAH Docket No. XXX-XX-XXXX purposes and record it as a potential liability with interest to better reflect the company's financial condition. 32. At test-year-end, ETI had $5,916,461 in FIN 48 liabilities, meaning ETI has, thus far, avoided paying to the IRS $5,916,461 in tax dollars (the FIN 48 liability) in reliance upon tax positions that the company believes will not prevail in the event the positions are challenged, via an audit, by the IRS. 33. ETI has deposited $1,294,683 with the IRS in connection with the FIN 48 liability. 34. The IRS may never audit ETI as to its uncertain tax positions creating the FIN 48 liability. 35. Even if ETI is audited, ETI might prevail on its uncertain tax positions. 36. ETI may never have to pay the IRS the FIN 48 liability. 37. Other than the amount of its deposit with the IRS, ETI has current use of the FIN 48 liability funds. 38. Until actually paid to the IRS, the FIN 48 liability represents cost-free capital and should be deducted from rate base. 39. The amount of $4,621,778 (representing ETI's full FIN 48 liability of $5,916,461 less the $1,294,683 cash deposit ETI has made with the IRS for the FIN 48 liability) should be added to ETI's ADFIT and thus be used to reduce ETI's rate base. 40. ETI's application and proposed tariffs do not include a request for a tracking mechanism or rider to collect a return on the FIN 48 liability. 40A. It is appropriate for ETI to create a deferred-tax-account tracker in the form of a rider to recover on a prospective basis an after-tax return of 8.27% on the amounts paid to the IRS that result from an unfavorable FIN 48 audit. The rider will track unfavorable FIN 48 rulings and the return will be applied prospectively to FIN 48 amounts disallowed by an IRS audit after such amounts are actually paid to the federal government. If ETI prevails in an appeal of a FIN 48 decision, then any amounts collected under the rider related to that decision should be credited back to ratepayers. PUC Docket No. 39896 Order on Rehearing Page 16 of 44 SOAH Docket No. XXX-XX-XXXX 41. Deleted. 42. Investor-owned electric utilities may include a reasonable allowance for cash working capital in rate base as determined by a lead-lag study conducted in accordance with the Commission's rules. 43. Cash working capital represents the amount of working capital, not specifically addressed in other rate base items, that is necessary to fund the gap between the time expenditures are made and the time corresponding revenues are received. 44. The lead-lag study conducted by ETI considered the actual operations of ETI, adjusted for known and measurable changes, and is consistent with P.U.C. SUBST. R. 25.231(c)(2)(B)(iii). 45. It is reasonable to establish ETI's cash working capital requirement based on ETI's lead- lag study as updated in Jay Joyce's rebuttal testimony and on the cost of service approved for ETI in this case. 46. As a result of the black-box settlements in Application of Entergy Gulf States, Inc. for Authority to Change Rates and to Reconcile Fuel Costs, Docket No. 34800 (Nov. 7, 2008) and Docket No. 37744, the Commission did not approve ETI's storm damage expenses since 1996 and its storm damage reserve balance. 47. ETI established a prima facie case concerning the prudence of its storm damage expenses incurred since 1996. 48. Adjustments to the storm damage reserve balance proposed by intervenors should be denied. 49. The Hurricane Rita regulatory asset should not be moved to the storm damage insurance reserve. 50. ETI's appropriate Test-Year-end storm reserve balance was negative $59,799,744. 51. The amount of $9,846,037, representing the value of the average coal inventory maintained at ETI's coal-burning facilities, is reasonable, necessary, and should be included in rate base. PUC Docket No. 39896 Order on Rehearing Page 17 of 44 SOAH Docket No. XXX-XX-XXXX 52. The Spindletop gas storage facility (Spindletop facility) is used and useful in providing reliable and flexible natural gas supplies to ETI's Sabine Station and Lewis Creek generating plants. 53. The Spindletop facility is critical to the economic, reliable operation of the Sabine Station and Lewis Creek generating plants due to their geographic location in the far western region of the Entergy system. 54. It is reasonable and appropriate to include ETI's share of the costs to operate the Spindletop facility in rate base. 55. Staff recommended updating ETI's balance amounts for short-term assets to the 13- month period ending December 2011, which was the most recent information available. Staff's proposed adjustments should be incorporated into the calculation of ETI's rate base. 56. The following short-term asset amounts should be included in rate base: prepayments at $8,134,351; materials and supplies at $29,285,421; and fuel inventory at $52,693,485. 57. The amount of $1,127,778, representing costs incurred by ETI when it acquired the Spindletop facility, represent actual costs incurred to process and close the acquisition, not mere mark-up costs. 58. ETI's $1,127,778 in capitalized acquisition costs should be included in rate base because ETI incurred these costs in conjunction with the purchase of a viable asset that benefits its retail customers. 59. In its application, ETI capitalized into plant in service accounts some of the incentive payments ETI made to its employees. ETI seeks to include those amounts in rate base. 60. A portion of those capitalized incentive accounts represent payments made by ETI for incentive compensation tied to financial goals. 61. The portion of ETI's incentive payments that are capitalized and that are financially- based should be excluded from ETI's rate base because the benefits of such payments inure most immediately and predominantly to ETI's shareholders, rather than its electric PUC Docket No. 39896 Order on Rehearing Page 18 of 44 SOAH Docket No. XXX-XX-XXXX customers. ETI's capitalized incentive compensation that is financially based is $335,752.96 and should be removed for rate base. 62. The test-year for ETI's prior ratemaking proceeding ended on June 30, 2009, and the reasonableness of ETI's capital costs (including capitalized incentive compensation) for that prior period was dealt with by the Commission in that proceeding and is not at issue in this proceeding. 63. In this proceeding, ETI's capitalized incentive compensation that is financially-based should be excluded from rate base, but only for incentive costs that ETI capitalized during the period from July 1, 2009 (the end of the prior test-year) through June 30, 2010 (the commencement of the current test-year). Rate of Return and Cost of Capital 64. A return on common equity (ROE) of 9.80 percent will allow ETI a reasonable opportunity to earn a reasonable return on its invested capital. 65. The results of the discounted cash flow model and risk premium approach support a ROE of 9.80 percent. 65A. It is not appropriate to add 15 points to the ROE due to unsettled economic conditions facing utilities. 66. A 9.80 percent ROE is consistent with ETI's business and regulatory risk. 67. ETI's proposed 6.74 percent embedded cost of debt is reasonable. 68. The appropriate capital structure for ETI is 50.08 percent long-term debt and 49.92 percent common equity. 69. A capital structure composed of 50.08 percent debt and 49.92 percent equity is reasonable in light of ETI's business and regulatory risks. 70. A capital structure composed of 50.08 percent debt and 49.92 percent equity will help ETI attract capital from investors. PUC Docket No. 39896 Order on Rehearing Page 19 of 44 SOAH D [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/4062157. Public record. Not legal advice.