# Entergy Texas, Inc. v. Public Utility Commission of Texas, Office of Public Utility Counsel, and State of Texas Agencies and Institutions of Higher Education > Texas Court of Appeals, 3rd District (Austin) · April 27, 2015 URL: https://www.frixlaw.com/law-library/cases/4064940 ## Case - **Court:** Texas Court of Appeals, 3rd District (Austin) - **Decided:** April 27, 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/4064940 ## How later opinions describe it (automated extraction) - discussing a similar tax treatment in Re Southern Union Gas Company, 36 P.U.R.3d 60 (1960), on remeand, 40 P.U.R.3d (N.M. Pub. Serv. Comm'n 1961) - holding that court of appeals must take judicial notice of agency's published order if asked to do so ## Opinion text ACCEPTED 03-14-00706-CV 5038192 THIRD COURT OF APPEALS AUSTIN, TEXAS 4/27/2015 10:27:46 AM JEFFREY D. KYLE CLERK No. 03-14-00706-CV IN THE FILED IN 3rd COURT OF APPEALS THIRD DISTRICT COURT OF APPEALS AUSTIN, TEXAS AT AUSTIN, TEXAS 4/27/2015 10:27:46 AM JEFFREY D. KYLE ENTERGY TEXAS, INC., Clerk Appellant, v. PUBLIC UTILITY COMMISSION OF TEXAS, ET AL., Appellees. Appeal from the 345th Judicial District Court, Travis County, Texas The Honorable Amy Clark Meachum, Judge Presiding ________________________________________________________________ APPELLANT’S REPLY BRIEF _________________________________________________________________ John F. Williams State Bar No. 21554100 jwilliams@dwmrlaw.com Marnie A. McCormick State Bar No. 00794264 mmccormick@dwmrlaw.com DUGGINS WREN MANN & ROMERO, LLP 600 Congress Ave., Ste. 1900 (78701) P. O. Box 1149 Austin, Texas 78767-1149 (512) 744-9300 (512) 744-9399 fax ATTORNEYS FOR APPELLANT ENTERGY TEXAS, INC. ORAL ARGUMENT REQUESTED April 2015 TABLE OF CONTENTS TABLE OF CONTENTS ........................................................................................... i INDEX OF AUTHORITIES.................................................................................... iii STATEMENT OF FACTS ........................................................................................1 SUMMARY OF ARGUMENT .................................................................................1 ARGUMENT AND AUTHORITIES ........................................................................3 I.  Discretion alone does not justify the Commission’s decision.........................3 II.  The Court may not sustain the Commission’s decision upon the theory that ETI’s total rate case expenses were “too high” or that ETI wantonly incurred expenses.............................................................................6 A.  The Commission did not find that ETI’s expenses were excessive or that ETI files rate cases too frequently. ............................6 B.  The Court cannot sustain the Commission’s decision upon an unarticulated factual theory. ................................................................10 III.  The Commission’s disallowance of ETI’s costs of litigating the incentive compensation issue is arbitrary and capricious and an abuse of discretion. ..................................................................................................12 A.  The Commission’s finding that ETI made an unreasonable argument in the underlying rate case is arbitrary and capricious........12 B.  Regardless, the Commission’s decision is reversibly wrong on procedural grounds. .............................................................................16 1.  The Commission changed its past practice without explanation or advance notice...................................................16 2.  Additionally, the Commission effectively and improperly adopted a new rule in this contested case. ................................21 IV.  The Commission further erred in quantifying its disallowance of ETI’s expenses of seeking to include financially-based incentive compensation in rates. ...................................................................................24 i V.  The Commission’s disallowance of depreciation expense associated with ESI’s efforts in the rate case is not supported by any evidence and is arbitrary and capricious. ......................................................................27 CONCLUSION AND PRAYER .............................................................................31 CERTIFICATE OF COMPLIANCE .......................................................................32 CERTIFICATE OF SERVICE ................................................................................33 APPENDICES .........................................................................................................34 ii INDEX OF AUTHORITIES Cases Bowman Transportation, Inc. v. Arkansas-Best Freight System, Inc., 419 U.S. 281, 95 S.Ct. 438, 42 L.Ed.2d 447 (1974) ............................................15 CenterPoint Energy Entex v. Railroad Comm’n of Tex., 213 S.W.3d 364 (Tex. App. – Austin 2006, no pet.)...........................................27 Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 91 S.Ct. 814, 28 L.Ed.2d 136 (1971) ............................................14 City of El Paso v. El Paso Elec. Co., 851 S.W.2d 896 (Tex. App. – Austin 1993, writ denied) ............................. 11, 28 City of El Paso v. Public Util. Comm’n of Tex., 883 S.W.2d 179 (Tex. 1994) ..................................................................................4 City of El Paso v. Public Util. Comm’n of Tex., 916 SW.2d 515 (Tex. App. – Austin 1995, writ dism’d by agr.)...........................5 City of Port Neches v. Railroad Comm’n of Tex., 212 S.W.3d 565 (Tex. App. – Austin 2006, no pet.) .............................................5 Continental Imports, Ltd. v. Brunke, No. 03-10-00719-CV, 2011 WL 6938489 *5 (Tex. App. – Austin Dec. 30, 2011, pet. denied) .......................................... 11, 28 Downer v. Aquamarine Operators, Inc., 701 S.W.2d 238 (Tex. 1985) ..................................................................................3 Entergy Gulf States, Inc. v. Public Util. Comm’n of Tex., 173 S.W.3d 199 (Tex. App. – Austin 2005, pet. denied) ............................. 23, 24 Flores v. Employees Ret. Sys., 74 S.W.3d 532 (Tex. App. – Austin 2002, pet. denied) .........................................4 Goeke v. Houston Lighting & Power Co., 797 S.W.2d 12 (Tex. 1990) ..................................................................................11 Hendee v. Dewhurst, 228 S.W.3d 354 (Tex. App. -- Austin 2007, pet. denied) ....................................17 Industrial Utils. Serv. Co. v. Texas Natural Resources Conservation Comm’n, 947 S.W.2d 712 (Tex. App. – Austin 1997, no writ) .................................... 20, 21 Lewis v. Metropolitan Savings & Loan Association, 550 S.W.2d 11 (Tex. 1977) ..................................................................................14 iii McHaney v. Texas Comm’n on Environmental Quality, No. 03-13-00280-CV, 2015 WL 869197 at *8 (Tex. App. – Austin Feb. 27, 2015, no pet. h.) ......................................................................................22 Morgan Drive Away, Inc. v. Railroad Comm'n of Tex., 498 S.W.2d 147 (Tex. 1973) ......................................................................... 11, 28 Office of Pub. Util. Counsel v. Public Util. Comm'n, 878 S.W.2d 598 (Tex. 1994) ................................................................................17 Oncor Elec. Delivery Co. v. Public Util. Comm’n of Tex., 406 S.W.3d 253 (Tex. App. – Austin 2013, no pet.)................................ 4, 17, 19 Pioneer Natural Resources USA, Inc. v. Public Util. Comm’n of Tex., 303 S.W.3d 363 (Tex. App. – Austin 2009, no pet.) ...................................... 5, 26 Professional Mobile Home Transport v. Railroad Comm’n, 733 S.W.2d 892 (Tex. App. – Austin 1987, writ ref’d n.r.e.) ....................... 12, 28 Railroad Commission of Texas v. Lone Star Gas Co., 611 S.W.2d 908 (Tex. Civ. App. – Austin 1981, writ ref’d n.r.e.) ......................15 Starr County v. Starr Indus. Services, Inc., 584 S.W.2d 352 (Tex. App. -- Austin 1979, writ ref’d n.r.e.) ...................... 14, 15 State of Texas’ Agencies & Institutions of Higher Learning v. Public Util. Comm’n of Tex., 450 S.W.3d 615 (Tex. App. – Austin 2014, pet. filed) ........................................13 Suburban Util. Corp. v. Public Util. Comm'n, 652 S.W.2d 358 (Tex.1983) ...................................................................................5 Texas Bd. of Pharmacy v. Witcher, 447 S.W.3d 520 (Tex. App. – Austin 2014, pet. requested) ..................................4 Texas Health Facilities Comm’n v. Charter Medical-Dallas, Inc., 665 S.W.2d 446 (Tex. 1984) ........................................................................... 4, 10 Texas Medical Association v. Mathews, 408 F.Supp. 303 (W.D. Tex. 1976) ......................................................................15 Vista Medical Center Hosp. v. Texas Mut. Ins. Co., 416 S.W.3d 11 (Tex. App. – Austin 2013, no pet.)....................................... 10, 27 Statutes Tex. Gov’t Code Ann. § 2001.141 .................................................................... 10, 27 Tex. Gov’t Code Ann. § 2001.174.............................................................................3 iv Tex. Util. Code Ann. § 36.051 ........................................................................ 5, 9, 27 Tex. Util. Code Ann. § 36.058 .................................................................................30 Tex. Util. Code Ann. § 36.061 .................................................................... 3, 5, 6, 27 Tex. Util. Code Ann. § 36.203 ...................................................................................9 Other Authorities 5 B. Mezines, J. Stein and J. Gruff, Administrative Law § 51.03 (1979) ...............15 Rules Tex. R. Civ. Evid. 201 .............................................................................................17 Administrative Cases Application of AEP Texas Central Co. for Authority to Change Rates, Docket No. 28840 .................................................................................... 17, 25, 26 Application of AEP Texas Central Co. for Authority to Change Rates, Docket No. 33309 .................................................................................................17 Application of CenterPoint Energy Houston Electric, LLC for Authority Change Rates, Docket No. 38339 ........................................................................18 Application of Entergy Gulf States, Inc. for Authority to Change Rates and to Reconcile Fuel Costs, Docket No. 34800 ....................................... 9, 10, 16, 18 Application of Entergy Texas, Inc. for Authority to Change Rates and Reconcile Fuel Costs, Docket No. 37744 ........................................... 9, 10, 16, 18 Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and Obtain Deferred Accounting Treatment, Docket No. 39896 ......................................................................................... passim Application of Oncor Electric Delivery Co. LLC for Authority to Change Rates, Docket No. 35717 ......................................................................................18 Application of Southwestern Electric Power Co. for Authority to Change Rates and Reconcile Fuel Costs, Docket No. 40443............................................18 Proceeding to Consider Rate Case Expenses Severed from Docket No. 28840 (Application of AEP Texas Central Company for Authority to Change Rates), Docket No. 31433 .......................................................................25 v STATEMENT OF FACTS Entergy Texas, Inc. (“ETI”) does not dispute the statements of fact submitted by the Public Utility Commission of Texas (“PUCT” or “Commission”), Office of Public Utility Counsel (“OPUC”), and State Agencies, save in a few respects. Specifically, ETI disputes the Attorney General’s argumentative characterization of ETI’s request concerning financially-based incentive compensation in the underlying rate case, and of the way financially-based incentive compensation has been treated in past PUCT dockets. ETI also disputes the suggestion of OPUC and the Attorney General that the Commission found ETI’s rate case expenses to be “excessive.” ETI discusses these factual inaccuracies more fully below. SUMMARY OF ARGUMENT The Commission’s disallowance of over $522,000 for ETI’s effort to recover incentive compensation expense is arbitrary and capricious for several reasons. The contours of the incentive compensation issue have never been defined, ETI’s argument in the rate case was not materially different from what ETI and other utilities have argued in the past, and ETI actually prevailed on the issue in part. In light of these facts, the Commission’s characterization of ETI’s advocacy as unreasonable is itself unreasonable. 1 More important, the Commission has consistently allowed utilities, including ETI, to recover the expenses of seeking incentive compensation, even when the utilities have been unsuccessful. The Commission has never before said it is unreasonable to incur expense to litigate the incentive compensation issue or any other “long shot” issue. The Commission’s abrupt policy change, without even an acknowledgement of its historical treatment of advocacy costs, at the end of this case, after ETI had already incurred its costs, is arbitrary and capricious and an abuse of discretion. This abuse is further manifest in the Commission’s quantification of the disallowance. The Commission employed a “proxy” for the amount of expense ETI incurred to litigate the incentive compensation issue, faulting ETI for failing to track all of its expenses by issue. But again, the Commission has never before disallowed the entire expense of litigating a single issue in a rate case, certainly not the incentive compensation issue. That is why utilities have not recorded their expenses by issue. If the Commission wanted to impose these new standards, it could and should have done so on a prospective basis. The Commission’s decision to impose the new standards at the end of this case, contrary to the way the agency has historically handled the issue, should be reversed. So should the Commission’s disallowance of over $207,000 in depreciation expense associated with ESI’s efforts on the rate case. The Commission said only 2 that this expense was “unreasonable,” without identifying any fact underlying that ultimate finding. Moreover, there is abundant and undisputed record evidence that ESI’s costs were reasonable, necessary, and fairly charged to ETI and its other affiliates. None of the Attorney General’s arguments presents a legitimate basis upon which to affirm the Commission’s decision, and it should be reversed. ARGUMENT AND AUTHORITIES Two themes run throughout appellees’ briefs. ETI will address those first, and then turn to specific issues. I. Discretion alone does not justify the Commission’s decision. Appellees attempt to justify the Commission’s decision principally by asserting that the Commission has discretion in awarding rate case expenses under Public Utility Regulatory Act (“PURA”) section 36.061(b)(2). See Tex. Util. Code Ann. § 36.061(b)(2). The Commission does have some measure of discretion, but that alone cannot justify its decision here. The Commission must adhere to applicable “guiding” principles in exercising its discretion. Tex. Gov’t Code Ann. § 2001.174(2)(F); Downer v. Aquamarine Operators, Inc., 701 S.W.2d 238, 241- 42 (Tex. 1985). One of the fundamental principles of administrative law is that an agency is bound to make decisions based upon a full consideration of the evidence and a serious appraisal of the facts. E.g., Texas Health Facilities Comm’n v. Charter 3 Medical-Dallas, Inc., 665 S.W.2d 446, 452 (Tex. 1984). Another is that an agency is not absolutely bound to follow its decisions in previous cases in the same way a court must follow controlling precedent. E.g., Oncor Elec. Delivery Co. v. Public Util. Comm’n of Tex., 406 S.W.3d 253, 267 (Tex. App. – Austin 2013, no pet.) (citing Flores v. Employees Ret. Sys., 74 S.W.3d 532, 544-45 (Tex. App. – Austin 2002, pet. denied)). Another guiding principle is that parties to contested cases are entitled to advance notice of what is expected of them in the administrative process. E.g., Oncor Elec. Delivery Co., 406 S.W.3d at 268-69; Flores, 74 S.W.3d at 545. A related rule is that an agency is bound to impose a new policy upon regulated entities via the formal rulemaking process unless the issue is of first impression, flows from an amended statute or rule, or cannot be adequately captured within the bounds of a general rule because the problem is so specialized in nature. E.g., City of El Paso v. Public Util. Comm’n of Tex., 883 S.W.2d 179, 188-89 (Tex. 1994); Texas Bd. of Pharmacy v. Witcher, 447 S.W.3d 520, 534 (Tex. App. – Austin 2014, pet. requested). In addition to these basic principles applicable to all administrative cases, PURA includes principles that specifically pertain to the Commission’s decisions on rate case expense recovery. Appellees cite cases that correctly observe that 4 PURA section 36.061(b)(2) affords the agency some discretion in determining what expenses should be allowed.1 However, as this Court recently noted: Although section 36.061(b)(2) gives the Commission the discretion to disallow improper expenses, this discretion is tempered by section 36.051’s mandate that the utility must be allowed to recover its operating expenses and a reasonable return on invested capital ... If the expense can be shown to be actual, necessary and reasonable it should be allowed. Oncor Elec. Delivery Co., 406 S.W.3d at 264 (citing Suburban Util. Corp. v. Public Util. Comm'n, 652 S.W.2d 358, 362–63 (Tex.1983)). In other words, the Commission does not have the discretion to disallow rate case expenses that are reasonably incurred.2 Appellees’ repeated suggestion that the Commission’s discretion effectively insulates its decision from meaningful review is flat wrong. 1 See Tex. Util. Code Ann. § 36.061(b)(2), cited in City of El Paso v. Public Util. Comm’n of Tex., 916 SW.2d 515, 522 (Tex. App. – Austin 1995, writ dism’d by agr.), Pioneer Natural Resources USA, Inc. v. Public Util. Comm’n of Tex., 303 S.W.3d 363, 377 (Tex. App. – Austin 2009, no pet.), & Oncor Elec. Delivery Co. LLC v. Public Util. Comm’n, 406 S.W.3d 253, 264 (Tex. App. – Austin 2013, no pet.). 2 The testimony of OPUC’s witness Nathan Benedict ignores the impact of PURA section 36.051 on rate case expense recovery. See AR Part II, Binder 3, OPUC Exh. 1 (Direct Testimony of N. Benedict at 4). So do appellee’s briefs. OPUC cites City of Port Neches v. Railroad Comm’n of Tex., 212 S.W.3d 565 (Tex. App. – Austin 2006, no pet.) for the proposition that the agency may disallow reasonable expenses. See OPUC’s Brief at 16. That case, discussing rate case expense recovery under the Gas Utilities Regulatory Act, does not say reasonable rate case expenses may be disallowed. It says even though a particular underlying cost of service is determined to be reasonable, the utility’s expense of seeking recovery of that cost is not “automatically” or “as a matter of law” deemed reasonable. City of Port Neches, 212 S.W.3d at 581. In other words, the reasonableness of a utility’s rate case expenses is a fact question separate from the reasonableness of a utility’s underlying cost of service. City of Port Neches undermines the Commission’s decision here, where the Commission made the “impermissible leap” that the reasonableness of an underlying cost of service automatically controls the reasonableness of related rate case expenses. 5 This case implicates all of the principles set forth above. The Commission does not avoid their application simply because it has some discretion in applying PURA section 36.061(b)(2). II. The Court may not sustain the Commission’s decision upon the theory that ETI’s total rate case expenses were “too high” or that ETI wantonly incurred expenses. Appellees also contend that the Commission’s decision was based upon a finding that ETI’s total expense for prosecuting Docket No. 39896 was “excessive” or “unusually high.” The Commission’s order, though, confirms that this was not the basis of the disallowance ETI challenges here. A. The Commission did not find that ETI’s expenses were excessive or that ETI files rate cases too frequently. The Administrative Law Judge (“ALJ”), in the proposal for decision (“PFD”) that was adopted by the Commission, recognized that Docket No. 39896 was complex and labor intensive. He noted that ETI presented 39 witnesses, who discussed hundreds of categories of costs, and that while ETI used the services of 12 attorneys, the other parties and Staff were represented by a total of 15 attorneys.3 3 AR Part I, Binder 2, Item 32 (PFD at 17); AR Part I, Binder 2, Item 55 (Final Order at 1) (adopting PFD). 6 Though the ALJ and Commission found that the expenses of the case were “high,” they did not find that the expenses were too high.4 Nor did they reduce ETI’s expense recovery based upon any finding or conclusion that the total was unreasonable. Rather, the ALJ and Commission expressly rejected OPUC’s and State Agencies’ theories that ETI’s expenses should be reduced on bases other than an “issue-specific” approach.5 In support of their arguments that ETI’s total expenses were unreasonable, State Agencies and OPUC criticized many categories of ETI’s costs. The ALJ discussed and expressly rejected most of those criticisms, finding that:  State Agencies’ challenge to ETI witness Gerald Tucker’s testimony was “overly simplistic”;6  State Agencies’ proposal to disallow the expenses of a “lessons learned” memo would encourage inefficiency;7  State Agencies’ challenge of miscellaneous internal rate case expenses should be rejected because ETI proved “in great detail” that they were reasonable;8  ETI had “the better argument” on OPUC’s challenge to expenses associated with the Calpine-Carville purchased power agreement;9 4 AR Part I, Binder 2, Item 32 (PFD at FOF 17); AR Part I, Binder 2, Item 55 (Final Order at FOF 17). 5 AR Part I, Binder 2, Item 32 (PFD at 31-32); AR Part I, Binder 2, Item 55 (Final Order at 2). 6 AR Part I, Binder 2, Item 32 (PFD at 9). 7 Id. at 10-11. 8 Id. at 13. 9 Id. at 14-15. 7  he was “unswayed” by State Agencies’ criticism of ETI’s expert’s review of outside legal fees; the external “legal costs involved do not appear to be inordinate”;10  meal, courier, and taxi expenses were a reasonable part of prosecuting the laborious rate case;11  State Agencies’ identification of “relatively few errors” in categorizing meal expenses does not lead to doubt about the overall accuracy of ETI’s accounting;12 and  State Agencies’ challenge to airfare and lodging expense was “vague” and “unproven”.13 The Commission adopted the ALJ’s resolution of all these issues.14 The Commission also refused to accept the ALJ’s recommendation that another category of expense, associated with ETI’s advocacy concerning transmission equalization costs, should be disallowed.15 The Commission ultimately disallowed only a few discrete categories of expense, for reasons specific to those categories.16 Regarding the category at issue here, the Commission gave only one reason for the disallowance: “for Entergy attempting to recover financially-based incentive compensation in base rates.”17 It 10 Id. at 17. 11 Id. at 18-19. 12 Id. at 19. 13 Id. at 21. 14 AR Part I, Binder 2, Item 55 (Final Order at 1). 15 Id. at 3. 16 Id. at 2-3 & FOF 18. 17 Id. at 2. 8 is incorrect to suggest in this appeal that the Commission disallowed any expenses on the basis that the grand total was unreasonably high. It is also incorrect to suggest that the Commission disallowed any expenses based on the purported “frequency” of ETI’s recent rate cases. There is no legal or factual support for the parties’ intimation that ETI files rate cases with unreasonable frequency. The frequency of rate cases is cost-driven.18 PURA guarantees an electric utility rates that afford it a reasonable opportunity to recover a reasonable return on its investment, and to recover its reasonable and necessary expenses. Tex. Util. Code Ann. § 36.051. Expenses, which change over time, are largely recovered through base rates.19 The only Commission-approved way for an electric utility to capture changes in its overall level of base-rate expense is to file a rate case. In the previous ETI rate cases mentioned in appellees’ briefs, the Commission granted ETI substantial base-rate increases and expressly found that the increases were just and reasonable. See Application of Entergy Gulf States, Inc. for Authority to Change Rates and to Reconcile Fuel Costs, Docket No. 34800 (Mar. 16, 2009, Order at FOFs 24 & 45 & COL 7); Application of Entergy Texas, Inc. for Authority to Change Rates and Reconcile Fuel Costs, Docket No. 37744 18 AR Part II, Binder 3, ETI Exh. 7 (Considine Rebuttal at 5). 19 Some categories of expense, like fuel expenses, are recovered through other methods. Tex. Util. Code Ann. § 36.203. Those categories of expense are not at issue in this case. 9 (Dec. 13, 2010, Order at FOFs 16 & 35 & COL 7). Any suggestion that ETI was unjustified in pursuing those increases is, therefore, unfounded. So is any suggestion that it was unfair for ratepayers to pay the expenses of pursuing those cost increases. The Commission expressly found that the expenses of pursuing those rate cases were just and reasonable. See Docket No. 34800, supra (Feb. 5, 2009, Order at FOF 27 & 45 & COL 7); Docket No. 37744, supra (Dec. 13, 2010, Order at FOFs 18 & 43 & COL 7). In any event, ETI’s pursuit of its statutorily- guaranteed opportunity to recover its costs in the past has no bearing on this case. The Commission did not make any finding that it does. Simply put, the parties invite the Court to affirm the Commission’s disallowance of expenses by relying on contested factual theories that the Commission did not accept or rely on. The Court should not accept the invitation. B. The Court cannot sustain the Commission’s decision upon an unarticulated factual theory. An agency is required to make findings on any factual theory underlying its decision. Tex. Gov’t Code Ann. § 2001.141(b) & (d). Those findings must provide a logical link between the facts and the agency’s application of a statutory standard. E.g., Vista Medical Center Hosp. v. Texas Mut. Ins. Co., 416 S.W.3d 11, 26 (Tex. App. – Austin 2013, no pet.) (citing Texas Health Facilities Comm'n v. Charter Med.-Dallas, Inc., 665 S.W.2d 446, 453 (Tex.1984)). The purpose of this requirement is to inform the parties and the courts of the basis for the agency's 10 decision so that the parties may intelligently prepare an appeal and so that the courts may properly exercise their function of review. E.g., Goeke v. Houston Lighting & Power Co., 797 S.W.2d 12, 15 (Tex. 1990). It is ironic, then, that OPUC faults ETI for failing to challenge the Commission’s observation that ETI’s expenses were “high.”20 ETI did not challenge that finding because there is no indication in the Commission’s order that the observation was a basis for any disallowance. Because the Commission did not articulate that the two disallowances at issue here were based upon a conclusion that ETI’s expenses were “excessive,” the Commission’s order cannot be sustained on this theory. The Court is precluded from affirming the Commission’s order on a factual theory that the Commission did not rely upon in the order itself. E.g., Morgan Drive Away, Inc. v. Railroad Comm'n of Tex., 498 S.W.2d 147, 152 (Tex. 1973) (“We may consider only what was written by the [agency] in its order, and we must measure its statutory sufficiency by what it says,” and “findings of basic [underlying] facts cannot be presumed from findings of a conclusional nature.”); Continental Imports, Ltd. v. Brunke, No. 03-10-00719-CV, 2011 WL 6938489 *5 (Tex. App. – Austin Dec. 30, 2011, pet. denied) (not designated for publication) (citing City of El Paso v. El Paso Elec. Co., 851 S.W.2d 896, 899–900 (Tex. App. – Austin 1993, writ denied); 20 See OPUC’s Brief at 16. 11 Professional Mobile Home Transport v. Railroad Comm’n, 733 S.W.2d 892, 903– 04 (Tex. App. – Austin 1987, writ ref’d n.r.e.)). III. The Commission’s disallowance of ETI’s costs of litigating the incentive compensation issue is arbitrary and capricious and an abuse of discretion. A. The Commission’s finding that ETI made an unreasonable argument in the underlying rate case is arbitrary and capricious. In its order, the Commission said it was unreasonable for ETI to advocate recovery of financially-based incentive compensation in rates because, “[t]he Commission has repeatedly ruled that a utility cannot recover the cost of financially-based incentive compensation because financial measures are of more immediate benefit to shareholders and financial measures are not necessary or reasonable to provide utility services.”21 As ETI acknowledged in its initial brief, it is true that the Commission has in the past referred to a perceived dichotomy between “financial” and “operational” measures as a basis for incentive compensation. But the Commission has not clearly or consistently explained how to determine whether a given incentive program benefits customers versus shareholders such that it is or is not recoverable. The Commission concedes, and this Court has observed, that whether a particular incentive program benefits customers enough to be recoverable in rates is a fact issue to be determined on a 21 AR Part I, Binder 2, Item 55 (Final Order at 2). 12 case-by-case basis.22 See State of Texas’ Agencies & Institutions of Higher Learning v. Public Util. Comm’n of Tex., 450 S.W.3d 615, 660-61 (Tex. App. – Austin 2014, pet. filed). And as evidenced in Appendix C to ETI’s initial brief, the Commission has not treated materially-similar incentive programs consistently over time. In fact, the Commission was persuaded in part by some of ETI’s testimony in this case, and allowed ETI to recover some $1 million in cost-control incentives that another utility was unable to recover in the past.23 Contrary to appellees’ rhetoric, ETI’s advocacy in this case was not “futile,” “fruitless,” or “unsuccessful.” In light of these circumstances, it makes no sense to characterize ETI’s advocacy as “overly-aggressive” or “unreasonable.” In an attempt to avoid this conclusion, the Attorney General sets up a straw man. The Attorney General contends that the Commission did not fault ETI for arguing about which incentives should be considered recoverable under what it terms the “two bucket” policy. According to the Attorney General, the Commission faulted ETI for something else -- arguing to eliminate the distinction between the “buckets.” First, and most important, the Commission did not say anything like that. Second, the two “arguments” the Attorney General attempts to distinguish are shades of the same thing. Whether a particular incentive program 22 E.g., PUCT’s Brief at 5. 23 Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and Obtain Deferred Accounting Treatment, Docket No. 39896 (Final Order at 4-5) (allowing recovery of incentive compensation programs tied to “cost control” measures). 13 falls in one bucket or another is not just a matter of superficial labeling. It requires the fact-finder to decide whether a given program “more immediately” benefits shareholders or ratepayers. ETI’s position was that its incentive compensation programs at issue in this case benefit customers substantially and meaningfully and should be recovered.24 That is the same thing as arguing that ETI’s programs fall in the bucket that is recoverable from customers. The Attorney General’s “bucket” argument does not hold water. OPUC suggests this case presents a simple question of evidentiary sufficiency. It does not. An agency decision may pass the “substantial evidence” test and still be invalid for arbitrariness. Starr County v. Starr Indus. Services, Inc., 584 S.W.2d 352, 355 (Tex. App. -- Austin 1979, writ ref’d n.r.e.) (citing Lewis v. Metropolitan Savings & Loan Association, 550 S.W.2d 11, 13-14 & 16 (Tex. 1977)). In determining whether an agency has acted arbitrarily or capriciously, a court must decide whether the agency order was based on a consideration of all relevant factors. Starr County, 584 S.W.2d at 355-56 (citing Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 91 S.Ct. 814, 28 L.Ed.2d 136 (1971)). There must appear a rational connection between the facts and the decision of the agency. Starr County, 584 S.W.2d at 356 (citing Bowman 24 Id., ETI Exh. 36 (Gardner Direct at 29-33 of 77); ETI Exh. 50 (Gardner Rebuttal at 2-10 of 18); ETI Exh. 15 (Hartzell Direct at 3-31 of 31); ETI Exh. 53 (Hartzell Rebuttal at 2-15 of 15); PFD at 166-176. 14 Transportation, Inc. v. Arkansas-Best Freight System, Inc., 419 U.S. 281, 95 S.Ct. 438, 42 L.Ed.2d 447 (1974); 5 B. Mezines, J. Stein and J. Gruff, Administrative Law § 51.03, at 51-33 (1979)). Stated differently, the reviewing court must remand “. . . if it concludes that the agency has not actually taken a hard look at the salient problems and has not genuinely engaged in reasoned decision-making.” Starr County, 584 S.W.2d at 356 (citing Texas Medical Association v. Mathews, 408 F.Supp. 303, 305 (W.D. Tex. 1976)). The testimony of OPUC’s witness Nathan Benedict does not reasonably support the Commission’s decision in this case. Mr. Benedict generally testified that the Commission excluded financially-based incentive compensation from ETI’s rates set in Docket No. 39896.25 But he did not acknowledge that, in the same docket, the Commission allowed recovery of costs it had previously disallowed because they were supposedly “financially-based” incentives. And contrary to OPUC’s suggestion,26 the Commission may not use its own “experience” to fill in evidentiary gaps. Railroad Commission of Texas v. Lone Star Gas Co., 611 S.W.2d 908, 911 (Tex. Civ. App. – Austin 1981, writ ref’d n.r.e.). The Commission’s characterization of ETI’s argument in the rate case is not reasonable in light of the record or its past decisions. 25 AR Part II, Binder 3, OPUC Exh. 1 (Benedict Direct at 8). 26 OPUC’s Brief at 14. 15 B. Regardless, the Commission’s decision is reversibly wrong on procedural grounds. Even if the appellees’ characterization of ETI’s advocacy on this issue were in line with the facts, the Commission’s decision to disallow the expenses of the advocacy was arbitrary and an abuse of discretion. 1. The Commission changed its past practice without explanation or advance notice. As ETI explained in its initial brief, though many utilities have sought to include incentive compensation in rates, the Commission has never before disallowed the cost of making unsuccessful incentive compensation arguments. In fact, the Commission has expressly determined that other utilities’ rate case expenses were reasonable, necessary, and recoverable from ratepayers, even in cases where the utilities made unsuccessful arguments on incentive compensation. See Appendix D to ETI’s Appellant’s Brief. The Commission has also allowed ETI and its predecessor to recover rate case expenses in dockets where ETI made similarly unsuccessful requests in the past. See Docket No. 34800, supra (Mar. 16, 2009, Order at FOF 27); Docket No. 37744, supra (Dec. 13, 2010, Order at FOF 18). The Commission cannot point to any case where it has disallowed the 16 expenses of making unsuccessful arguments about incentive compensation, or for making some other argument the Commission deems a “long shot.”27 The Commission contends its decision in this case is not a departure from its earlier decisions because ETI’s request in this case was different from requests in previous cases. That is not so. In every one of these past cases, a utility proposed to recover incentive costs that were “financially based.” For example:  In Docket No. 28840, AEP sought to recover its entire test-year level of incentive compensation expense, even though only 34% of it was set through “operational” measures. Application of AEP Texas Central Co. for Authority to Change Rates, Docket No. 28840 (Aug. 15, 2005, Final Order at FOFs 165- 67);  In Docket No. 33309, part of the incentive compensation AEP sought to include in rates was “related to financial incentives.” Application of AEP Texas Central Co. for Authority to Change Rates, Docket No. 33309 (Mar. 4, 2008, Order on Rehearing at FOF 82);  In Docket No. 34800, ETI’s predecessor unsuccessfully sought to include in rates its incentive compensation costs that were “financially-related,” arguing even those costs meaningfully 27 OPUC argues that this Court may not consider orders from previous Commission dockets because they are not part of the administrative record in this case. See OPUC’s Brief at 19. This Court rejected that same argument in Oncor. See Oncor Elec. Delivery Co. LLC v. Public Util. Comm’n of Tex., 406 S.W.3d 253, 267 (Tex. App. – Austin 2013, no pet.). This Court specifically acknowledged it may consider how the Commission has treated other utilities to determine whether a particular policy is new in a given case. Id. at 267. The Court can take judicial notice of agency decisions like these, which are publicly available and the authenticity of which is readily verifiable. See Office of Pub. Util. Counsel v. Public Util. Comm'n, 878 S.W.2d 598, 600 (Tex. 1994) (holding that court of appeals must take judicial notice of agency's published order if asked to do so) (citing Tex. R. Civ. Evid. 201(b)(2)); Hendee v. Dewhurst, 228 S.W.3d 354, 377 n.30 (Tex. App. -- Austin 2007, pet. denied) (likening agency decisions to court decisions with regard to judicial notice). 17 benefited customers. See Application of Entergy Gulf States, Inc. for Authority to Change Rates and to Reconcile Fuel Costs, Docket No. 34800, ETI Exh. 72 (Direct Testimony of J. Hartzell, PhD, on Remand);28  In Docket No. 35717, Oncor sought to recover its entire test- year level of incentive compensation expense, even though about 25% of it was “related to financial measures.” See Application of Oncor Electric Delivery Co. LLC for Authority to Change Rates, Docket No. 35717 (Nov. 30, 2009, Order on Rehearing at FOFs 91-93);  In Docket No. 37744, ETI sought to include in rates its incentive compensation costs that were “financially-based,” arguing even those costs meaningfully benefited customers. See Application of Entergy Texas, Inc. for Authority to Change Rates and Reconcile Fuel Costs, Docket No. 37744, ETI Exh. 14 (Direct Testimony of J. Hartzell, PhD);29  In Docket No. 38339, CenterPoint sought to include in rates both its short-term and long-term incentive compensation plans, but the Commission included only the former in rates, finding it was “directly tied to metrics such as customer service and safety.” See Application of CenterPoint Energy Houston Electric, LLC for Authority Change Rates, Docket No. 38339 (Jun. 23, 2011, Order on Rehearing at FOFs 81-83); and  In Docket No. 40443, Southwestern Electric Power Company sought to recover its roughly $10.7 million test-year level of incentive compensation, even though roughly half of it was tied to “financial measures.” See Application of Southwestern Electric Power Co. for Authority to Change Rates and Reconcile Fuel Costs, Docket No. 40443 (Mar. 6, 2014, Order on Rehearing at 13 & FOFs 214-220). 28 See Appendix A. 29 See Appendix B. 18 There is no material distinction between ETI’s request in this case and the utility proposals made in previous cases. OPUC argues that the Commission’s past decisions did not establish “policy” because they were “not contested.”30 But again, the Commission expressly found in each of these past cases that it was reasonable for the utility to recover its expenses, and never carved out costs of making unsuccessful arguments about incentive compensation. The fact that parties may have agreed with these decisions does not undermine them. If anything, it bolsters them. To be clear, ETI does not contend that the Commission can never change its policy on a given issue. But when it does, the Commission must give advance notice that it is considering a policy change, and articulate a reason if a change is made. The Attorney General does not even suggest that the Commission met these requirements in this case.31 The Commission’s failure in each of these respects is reversible error, just like it was in Oncor Elec. Delivery Co., 406 S.W.3d 253. Appellees’ attempts to distinguish Oncor are not persuasive. First, this Court in Oncor reversed the Commission’s decision because the Commission did not explain its departure from a past practice. The same thing happened in this case – the Commission had always acted one way under a given set of facts, and then took the opposite path on the same set of facts. Second, another basis for this 30 OPUC’s Brief at 20. 31 See PUCT’s Brief at 33. 19 Court’s reversal of the Commission’s decision in Oncor was that the Commission departed from its past practice when it was too late for the utility to do anything about it. The same thing happened in this case. The administrative process at issue began when Docket No. 39896 was filed. At that time, the Commission had given no indication whatsoever that it would not continue to allow recovery of otherwise reasonable expenses related to litigating incentive compensation. The opportunity to file rebuttal testimony in the severed expense docket did not adequately protect ETI’s interests. By the time the new standard was proposed and vetted in the severed expense docket, ETI had already incurred the very costs proposed to be disallowed. The fact that ETI had the opportunity to file rebuttal testimony in the expense docket does not mean ETI had proper notice of the Commission’s new policy at the critical time, before ETI incurred the costs at issue. All the appellees cite Industrial Utils. Serv. Co. v. Texas Natural Resources Conservation Comm’n, 947 S.W.2d 712, 718 (Tex. App. – Austin 1997, no writ) as support for the Commission’s decision. But that case proves ETI’s point. In Industrial Utils. Serv. Co., the utility sought a rate increase, asked the agency to deny it, and then sought to recover its expenses of prosecuting the rate case. This Court upheld the agency’s denial of the expenses. This case is quite different. Here, ETI sought and received a rate increase, based in part upon ETI’s successful 20 request to recover what have historically been deemed to be financially-based incentive compensation. It is not, therefore, unreasonable for ETI to seek the expenses of making that request. Moreover, the agency in Industrial Utils. Serv. Co. did not have a historical practice of allowing recovery of expenses for making unwanted rate proposals. Here, in contrast, the Commission has consistently allowed recovery of expenses for making even unsuccessful incentive compensation arguments. The Commission has never disallowed the expenses of seeking to include financially-based incentive compensation in rates. Industrial Utils. Serv. Co. is simply inapposite to this case. 2. Additionally, the Commission effectively and improperly adopted a new rule in this contested case. The Commission’s imposition of a new policy in this case also constitutes improper ad hoc adjudication. Appellees contend the agency did not craft a “rule” of general applicability in this case, but only applied the statutory principle that a utility may not recover “unreasonable” expenses.32 State Agencies also contend the scope of the Commission’s decision is not clear, so it cannot be a “rule.”33 But regardless of whether the Commission meant it is unreasonable to take any “long shot” position or just to seek recovery of financially-based incentive compensation, it is clear the Commission intended to apply its new allocation of risk to the 32 E.g., PUCT’s Brief at 35; OPUC’s Brief at 25-26; State Agencies’ Brief at 17 & 19. 33 State Agencies’ Brief at 17. 21 industry going forward. The Commission did not in its order identify any facts peculiar to this case that suggest the new policy applies only to this case. The Commission broadly declared that it is “unreasonable” to incur expense to litigate the recoverability of financially-based incentive compensation. And the Commission based its conclusion solely upon something the Commission characterized as “well-established policy” – not facts.34 Again, Chairman Nelson confirmed at an open meeting that the Commission was in this case setting a “new policy.”35 She even observed, on the record, that the subject is more properly addressed in a rulemaking.36 Appellees contend this statement somehow implies the opposite. They cite this Court’s recent decision in McHaney v. Texas Comm’n on Environmental Quality, No. 03-13-00280-CV, 2015 WL 869197 at *8 (Tex. App. – Austin Feb. 27, 2015, no pet. h.). In McHaney, this Court considered a TCEQ Commissioner’s statement that “if there is a need for clarity in our rules, I would encourage our staff to look at that and see if we need to go through the rulemaking or provide some other guidance.” McHaney, 2015 WL 869197 at *8 (emphasis in original). The Court viewed that statement as support for the conclusion that the agency did not intend to impose a “rule” in the contested case at issue. Chairman Nelson, however, did not suggest that the Commission 34 AR Part I, Binder 2, Item 55 (Final Order at 2). 35 See April 11, 2013 Transcript at 7:25-8:14. 36 Id. 22 was following established policy or merely question whether the Commission’s rules reflect the policy clearly enough. Chairman Nelson unequivocally acknowledged that the PUCT was adopting a “new policy” in this case, and recognized that new agency policy should be adopted through the formal rulemaking process. The Attorney General and State Agencies also argue that the agency’s formal adoption of a rule after this case indicates that the Commission was not adopting a rule in this case.37 That is a non-sequitur. The fact that the agency ultimately followed the formal rulemaking process does not shed any light on what the agency intended earlier, in this case. The Commission declared for the first time in this case that it is “unreasonable” to propose to recover what in the past has been deemed “financially-based” incentive compensation, and that it is “unreasonable” to incur expenses for such a proposal. It was improper to impose these new policies outside the context of a formal rulemaking because none of the justifications for ad hoc adjudication apply. State Agencies cite Entergy Gulf States, Inc. v. Public Util. Comm’n of Tex., 173 S.W.3d 199, 212 (Tex. App. – Austin 2005, pet. denied) as support for the Commission’s action. That case recognizes that an agency may engage in ad hoc adjudication when it “may not have had sufficient experience with a particular 37 See PUCT’s Brief at 38; State Agencies’ Brief at 23. 23 problem to warrant rigidifying its tentative judgment into a hard and fast rule.” Entergy Gulf States, 173 S.W.3d at 212. But the Commission has had plenty of experience considering the expenses of advocacy related to incentive compensation issues, as discussed above. If the Commission wanted to change its policy going forward, it was bound to do so in the context of a formal rulemaking. IV. The Commission further erred in quantifying its disallowance of ETI’s expenses of seeking to include financially-based incentive compensation in rates. The Commission used a “proxy” to measure the disallowance discussed above. Specifically, the Commission determined the percentage of ETI’s requested rate increase that was attributable to its unsuccessful incentive compensation argument, and then disallowed that same percentage of ETI’s rate case expenses. The Commission has never done that before. The Commission’s sole justification for using a proxy is that ETI did not track all of its expenses by issue over the life of the rate case. But utilities have not tracked their rate case expenses by issue because the Commission has never before imposed a disallowance for litigating an issue. Indeed, the Commission has repeatedly allowed utilities to recover the expense of making the very same argument ETI made here. It is the Commission’s after-the-fact change in policy, not a failing of ETI’s, that caused 24 the difficulty in measuring the actual expenses of litigating a particular issue in this case. The problem with the Commission’s “proxy” approach is that it does not logically approximate the actual amount of costs ETI incurred to litigate the incentive compensation issue. Instead, the Commission’s proxy method is keyed to the value of the litigated issue. State Agencies argue that there is a logical correlation between the value of a litigated issue and the amount of money a utility spends to litigate it. There is not. It is true that the raw, maximum value of a litigation position might represent an upper limit on the expenses that may reasonably be incurred to pursue it. But that is where any correlation stops. It may cost relatively little to pursue even a high-dollar-value litigation position. The value of the position simply does not inform what it actually costs to litigate. Contrary to the Commission’s argument, the agency’s use of a proxy in this case does not resemble the way the agency quantified a disallowance in Docket No. 28840. There, the Commission disallowed half of the expenses associated with a witness’s testimony — specifically, the expenses of Dr. Goodfriend’s testimony on quality-of-service issues.38 Dr. Goodfriend’s testimony was 117 38 See Application of AEP Texas Central Co. for Authority to Change Rates, Docket No. 28840 (Jul. 2, 2004, PFD at 125); Proceeding to Consider Rate Case Expenses Severed from Docket No. 28840 (Application of AEP Texas Central Company for Authority to Change Rates), Docket No. 31433 (Mar. 3, 2006, Final Order at FOF 29). 25 pages long. Roughly 60 pages of it concerned the quality-of-service issue.39 The disallowance of half the cost of the testimony almost exactly correlates with the portion of the testimony the Commission found was flawed. That is, the Commission disallowed the actual expenses of unreasonable testimony in Docket No. 28840, not some unrelated amount of money based upon the value of the position the witness was advocating. State Agencies and OPUC point to the Pioneer Natural Resources case as support for the Commission’s use of a proxy to measure a disallowance.40 The Commission did not use a proxy, or “infer” anything, to quantify the disallowance in that case. In Pioneer, the Commission limited the utility to recovering only 35% of the cost of a computer system because only 70% of the system served the utility, and because only half the system was operational in the test year. The 35% multiplier was, as this Court noted, simply the mathematical product of the 70% and 50% components (i.e., 70% x 50% = 35%). Pioneer Natural Resources, 303 S.W.3d at 369. The Commission’s quantification of the expense it deemed unreasonable in Pioneer contrasts sharply with what the Commission did here. Here, the Commission did not quantify the actual expenses of making an argument. The Commission quantified something else, based upon the value of the argument. The Commission imposed its new policy at the end of the case, after the expenses 39 Id. (Direct Testimony of S. Goodfriend at 11-71 of 117). 40 See State Agencies’ Brief at 27 (citing Pioneer Natural Res., 303 S.W.3d at 369). 26 had already been incurred and tracked according to historically accepted practices, when it was too late for ETI to do anything about it. V. The Commission’s disallowance of depreciation expense associated with ESI’s efforts in the rate case is not supported by any evidence and is arbitrary and capricious. As ETI explained in its initial brief, the Commission disallowed over $207,000 of depreciation expense associated with assets ESI employees used in their work on the rate case. The Commission in its order said only that this expense was “not reasonable.”41 That is an “ultimate” finding of fact, stated in statutory language. See Tex. Util. Code Ann. §§ 36.051(rates must permit utility to recover “reasonable” and necessary operating expenses) & 36.061(b)(2) (contemplating recovery of “reasonable” rate case expenses). The Commission was bound to, but did not, make any underlying finding of fact supporting this ultimate finding. See Tex. Gov’t Code Ann. § 2001.141(d). The Court may not presume findings of underlying facts. E.g., Vista Medical Center Hosp., 416 S.W.3d at 26. The Commission’s decision is reversible for this reason alone. CenterPoint Energy Entex v. Railroad Comm’n of Tex., 213 S.W.3d 364, 373 (Tex. App. – Austin 2006, no pet.) (reversing agency’s disallowance of expense as “unreasonable” because agency failed to make underlying findings permitting court to review reasonableness of its decision). 41 AR Part 1, Binder 2, Item 55 (Final Order at FOF 18(a)). 27 Assuming arguendo the Commission could escape that flaw in its decision, the only basis the ALJ articulated for his decision on this issue was rank speculation that ETI might not incur depreciation expense if it had hired an unaffiliated company to do the same work.42 This speculation is not supported by any evidence in the record, and it is directly contrary to the Commission’s treatment of test-year ESI depreciation expense in the underlying rate case. In response, the Attorney General now says Entergy did not explain what assets were being depreciated. This was not a stated reason for the disallowance in the Commission’s order or the ALJ’s PFD. The order cannot be sustained on this basis. Morgan Drive Away, Inc., 498 S.W.2d at 152; Continental Imports, Ltd., 2011 WL 6938489 *5 (citing City of El Paso, 851 S.W.2d at 899–900); Professional Mobile Home Transport, 733 S.W.2d at 903–04. More important, this detail is in the record. As noted by ETI’s witness Michael Considine in this case, Company witness Stephanie Tumminello explained (in the rate case) the process by which depreciation costs were billed to ETI.43 Ms. Tumminello explained what ESI assets were being depreciated.44 Her testimony was part of the record officially noticed in this case.45 42 AR Part I, Binder 2, item 32 (PFD at 12); AR Part I, Binder 2, Item 55 (Final Order at 1). 43 AR Part II, Binder 3, ETI Exh. 6 (Oct. 25, 2012, Considine Supp. Direct at 4). 44 See Docket No. 39896, supra, ETI Exh. 41 (Tumminello Direct at 79). 45 AR Part III, Vol. A (Transcript of Hearing on Merits at 16). 28 The Attorney General argues that Ms. Tumminello’s testimony pertained only to test-year expenses and not expense incurred while ESI was working on the rate case. The Attorney General ignores that Ms. Tumminello’s testimony was filed with ETI’s application in Docket No. 39896, which included both requests for a base-rate increase and recovery of rate case expenses.46 Ms. Tumminello did sponsor schedules and testify about test-year ESI depreciation expense. But her testimony was not limited to test-year processes or expenses. Her explanation of what assets ESI depreciates, how the expense is recorded by project, why the expense is necessary, and how it is billed and allocated to operating companies like ETI addresses the company’s practices generally.47 And Ms. Tumminello confirmed, based upon a survey she conducted, that ESI’s costs are in line with those of peer service companies and do not include any profit or markup.48 Ms. Tumminello’s testimony that control processes ensure depreciation costs billed to ETI are no higher than the costs billed to other affiliates is equally unqualified.49 A PricewaterhouseCoopers opinion letter further confirms that ESI has established processes generally to ensure that it bills only actual costs, and that its charges to 46 See Docket No. 39896, supra, (Application) & ETI Exh. 8_ (Considine Direct at 18). 47 See Docket No. 39896, supra, ETI Exh. 41 (Tumminello Direct at 79-86 & SBT-26 (list of depreciable assets by account number)). 48 Id. at 82-84. 49 Id. at 84-85 & Tumminello Direct Exh. SBT-15 (Attachment 8, “Affiliate Billing Process Controls”). 29 ETI are no higher than costs billed to other affiliates.50 Mr. Considine’s testimony in the severed expense docket echoes these conclusions multiple times.51 The Attorney General further muses that the depreciation expense for ESI’s work in the rate case might contain depreciation on aircraft. But again, Ms. Tumminello testified generally that ESI aircraft depreciation expense is “included as a component of total flight costs of ESI aircraft” and not included in general depreciation.52 The spreadsheet Mr. Considine sponsored in the expense docket, showing expenses charged to ETI for ESI’s services in the rate case, does not include any “flight” or “aircraft” costs.53 This argument is specious. The Attorney General now contends ETI’s evidence does not meet the standards for affiliate expenses set out in Docket No. 16705 and PURA section 36.058. See Tex. Util. Code Ann. § 36.058(c). This argument is incredible, given that the Commission expressly found in this case that “Entergy met the requirements in PURA § 36.058 regarding payments to its affiliates for its rate- case expenses.”54 Clearly, the “heightened affiliate standard” was not the basis for the Commission’s disallowance of ESI depreciation expense. 50 Id. at Tumminello Direct Exh. WP SBT-4. 51 AR Part II, Binder 3, ETI Exh. 4 (Considine Supp. Direct at 3-4 of 5); AR Part II, Binder 3, ETI Exh. 5 (Considine Supp. Direct at 3-5 of 6); AR Part II, Binder 3, ETI Exh. 6 (Considine Supp. Direct at 3-5 of 5); AR Part II, Binder 3, ETI Exh. 7 (Considine Rebuttal at 9-11 of 11). 52 See Docket No. 39896, supra, ETI Exh. 41 (Tumminello Direct at 83-84). 53 AR Part II, Binder 3, ETI Exh. 7 (Considine Rebuttal at Exh. MPC-R-1). 54 Order at 3, FOF 19, & COL 11. 30 Because the Commission’s disallowance of this expense is not supported by any evidence in the record, and because it cannot reasonably be reconciled with its treatment of analogous expense in the rate case, the decision must be reversed. CONCLUSION AND PRAYER For the foregoing reasons, Entergy Texas, Inc. respectfully requests the relief it requested in its appellant’s brief. Respectfully submitted, DUGGINS WREN MANN & ROMERO, LLP By: /s/ Marnie A. McCormick John F. Williams State Bar No. 21554100 jwilliams@dwmrlaw.com Marnie A. McCormick State Bar No. 00794264 mmccormick@dwmrlaw.com P. O. Box 1149 Austin, Texas 78767-1149 (512) 744-9300 (512) 744-9399 fax ATTORNEYS FOR APPELLANT ENTERGY TEXAS, INC. 31 CERTIFICATE OF COMPLIANCE I certify that this document contains 7,474 words in the portions of the document that are subject to the word limits of Texas Rule of Appellate Procedure 9.4(i), as measured by the undersigned’s word-processing software. /s/ Marnie A. McCormick Marnie A. McCormick 32 CERTIFICATE OF SERVICE As required by Texas Rule of Appellate Procedure 9.5, I certify that on the 27th day of April, 2015, the foregoing document was electronically filed with the Clerk of the Court using the electronic case filing system of the Court, and that a true and correct copy was served on the following lead counsel for all parties listed below via electronic service: Elizabeth R. B. Sterling Environmental Protection Division Office of the Attorney General P. O. Box 12548 (MC 066) Austin TX 78711-2548 Counsel for Appellee Public Utility Commission of Texas Rex D. VanMiddlesworth Benjamin Hallmark Thompson Knight LLP 98 San Jacinto Blvd., Ste. 1900 Austin TX 78701 Counsel for Appellee Texas Industrial Energy Consumers Katherine H. Farrell Administrative Law Division Office of the Attorney General P. O. Box 12548 (MC018-12) Austin TX 78711-2548 Counsel for Appellee State Agencies Ross Henderson Office of Public Utility Counsel 1701 N. Congress Ave., Ste. 9-180 P. O. Box 12397 Austin TX 78711-2397 Counsel for Appellee Office of Public Utility Counsel /s/ Marnie A. McCormick Marnie A. McCormick 33 APPENDICES A. Direct Testimony of Dr. J. Hartzell on Remand in PUCT Docket No. 34800 B. Direct Testimony of Dr. J. Hartzell in PUCT Docket No. 37744 34 APPENDIX A Direct Testimony of Dr. J. Hartzell on Remand in PUCT Docket No. 34800 SOAR Docket No. XXX-XX-XXXX PUC Docket No. 34800 EGSI - 2007 Rate Case EGSI Remand Ex. No. 72 DOCKET NO. ~ APPLICATION OF ENTERGY § PUBLIC UTILITY COMMISSION GULF STATES, INC. FOR § AUTHORITY TO CHANGE RATES § AND TO RECONCILE FUEL COSTS . § OF TEXAS DIRECT TESTIMONY OF JAY C. HARTZELL ON BEHALF OF ENTERGY GULF STATES, INC. SEPTEMBER 2007 2007 Texas Rate Case 10. I DOCKET N O . - - - - ENTERGY GULF STATES. INC. DIRECT TESTIMONY OF JAY C. HARTZELL 2007 TEXAS RATE CASE - TABLE OF CONTENTS Page I. Witness Identification and Qualifications 1 II. Purpose and Organization of Testimony 2 Ill. Financlal·Based Incentive Compensation as a Tool for Improving Consumer Welfare 4 A. The Positive Effect of Incentive Compensation on Utility Customer Weffare 4 B. The Reasons for Providing Financial·Based Incentive Compensation 10 EXHIBIT Exhibit JCH· 1 Resume 2007 Texas Rate Case J().2 Entergy Gulf States, Inc. Page1of19 Direct Testimony of Jay C. Hartzea 2JXJ7 Texas Rate Case 1 I. WITNESS IDENTIFICATION AND QUALIFICATIONS 2 Q. PLEASE STATE YOUR NAME, OCCUPATION, AND BUSINESS 3 ADDRESS. 4 A. I am Jay C. Hartzell. I am an Associate Professor of Finance at the 5 Mccombs School of Business at the University of Texas at Austin. My 6 work address is Department of Finance, T:he University of Texas at Austin, 7 1 University Station B6600, Austin, Texas, 78712. 8 9 Q. FOR WHOM ARE YOU TESTIFYING? 10 A. I am testifying on behalf of Entergy Gulf States, Inc. ("£GSI"). 11 ( 12 Q. PLEASE DESCRIBE YOUR EDUCATIONAL BACKGROUND AND 13 PROFESSIONAL EXPERIENCE. 14 A. I provide my complete resume in my Exhibit JCH-1. In brief, I obtained a 15 Bachelor of Science degree (cum laude) from Trinity University in May 16 1991, with majors in Business Administration and Economics. After 17 graduating, I went to work as a consuhant for Hewitt Associates, in The 16 Woodlands, Texas. Hewitt is a -consulting firm that specializes in benefits 19 and compensation. While there, I specialized in the area of defined 20 contribution plans. I left Hewitt lo go to graduate school at the University 21 of Texas at Austin in 1993. I completed my PhD in finance there in May 22 1998. Upon graduating, I took a job as an Assistant Professor of Finance 23 at New York University's Stem School of Business, where I worked 2.007 Texas Rate Case W.-3 Entergy Gulf States, Inc. Page2of 19 Direct Testimony of Jay C. Hartzell 2007 Texas Rate Case 1 until 2001. At that time, the University of Texas at Austin hired me as an 2 Assistant Professor at the McCombs School of Business .("McCombs 3 Schooi-), where I have work~ since. I was promoted to the rank of 4 Associate Professor (with tenure), effective in the fall 2006. I also now 5 serve as the Director of the Real Estate Finance and Investment Center at 6 the McCombs School. 7 8 a. WHAT ARE YOUR MAIN AREAS OF RESEARCH? 9 A. My primary research interest is in the area of corporate governance. This 10 area encompasses several topics, including executive compensation, the 11 role of institutional investors, mergers and acquisitions, and boards of 12 directors. I have also written papers in the area of real estate finance, with 13 many of these also focusing on the areas of corporate governance, using 14 data from that industry. 15 16 II. PURPOSE ANO ORGANIZATION OF TESTIMONY 17 Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY? 18 A. EGSI has asked me to comment on the use of financial-based goals in a 19 company's incentive compensation plans, and how those goals affect 20 consumer welfare. I first address the factors specific to the utility industry 21 that support the conclusion that the presence of financial-based goals in 22 an incentive compensation plan is consistent with consumers' interssts. I 23 then tum to the broader topic of how an incentive mpensation plan 2007 Texas Rate Case J()..4 Entergy Gulf States, Inc. Page3of 19 Direct Testimony of Jay C. Hartzell 2001 Texas Rate-case 1 including financial measures provides incentives to a firm's employees to 2 take actions that improve customer welfare. 3 4 a. WHY ARE YOU OUALlflED TO ADDRESS THESE SUBJECTS AND TO 5 PROVIDE THIS TESTIMONY? 6 A. In addition to my formal training as a student, I have studied and 7 conducted research on corporate governance, including executive 8 compensation, for more than 10 years, starting with work in graduate 9 school, including my dissertation. Since that time, I have written nine 1O papers on corporate governance topics, plus my dissertation. Six of those 11 have been published in peer-reviewed academic journals, including the ( 12 top such journals in the field of finance. I have presented and discussed 13 papers on corporate governance (including compensation) at the major 14 conferences in the field. I have also taught related topics to PhD students, 15 as part of a PhD class in empirical corporate finance. 16 17 Q. DO YOU SPONSOR ANY EXHIBIT? 18 A. Yes. My exhibit is listed in the table of contents to this testimony. 2007 Texas Rate Case 10..S Entergy Gulf States, Inc. Page4of19 Direct Testimony Qf Jay C. Hartzell 2007 Texas Rate Case 1 Ill. FINANCIAL-BASED INCENTIVE COMPENSATION AS A TOOL FOR 2 IMPROVING CONSUMER WELFARE 3 Q. WHAT IS YOUR UNDERSTANDING OF THE COMMISSION'S 4 RATEMAKING TREATMENT OF A UTILITY'S INCENTIVE 5 COMPENSATION EXPENSES? 6 A. It is my understanding that in recent cases, the Public Utility Commission 7 has had a policy of excluding from base rates compensation that is based 8 on the firm's financial measures, but has allowed compensation that is 9 based on operational measures such as quality of service, reliability, 10 public safety, cost control, power plant performance, reduction of 11 absenteeism, and cost containment. 12 13 Q. WHAT ISSUES REGARDING INCENTIVE COMPENSATION WILL YOU 14 ADDRESS? 15 A. I will comment on the coexistence of these two types of incentives 16 (financial-based and operational-based), and the role of financial-based 17 incentives in ultimately contributing to customer welfare. 18 19 A. The Positive Effect of Incentive Comoensation on 20 Utility Customer Welfare 21 a. IS THERE A LINK BETWEEN CUSTOMER WELFARE AND A FIRM'S 22 FINANCIAL PERFORMANCE? 23 A. Yes. Satisfied customers clear1y experience greater customer welfare, all 24 else equal, as they are happy with the products they consume. This is 2007 Texas Rate Case 10-6 Entergy Gulf States, Inc. Page5of 19 Direct Testimony of Jaye. Hartzell 2007 Texas Rate Case 1 true not only for customers in unregulated industries, but also for 2 customers in regulated industrieS. For example, customers who 3 experience fewer power outages will suffer less disutility from being 4 without power, but will also spend less time and expend fewer resources 5 compensating for outages, or complaining about the service they have 6 received. 7 In addition to benefiting eustomers, greater satisfaction tends to 8 benefrt the firm, as well. Satisfied customers are likely to buy more of the 9 firm's products, which leads to higher revenues and profits, and a higher 10 stock price, all else equal. Satisfied customers are also more likely to be 11 retained as customers, and customer retention helps the firm's profitability ( 12 via higher net revenues than they would have .experienced without such 13 satisfaction. Companies with better reputations for customer satisfaction 14 are also more likely to attract new customers who can leam of firms' 15 reputations prior to making their purchasing decisions. At the same time, 16 because improved customer satisfaction tends to lead to improved 17 financial performance, the prospect for improved financial results can play 18 a positive role in motivating mana~rs to improve customer welfare. 19 Although regulated utility -companies do not deal with the same type 20 of competitive dynamics faced by unregulated companies, the general 21 concepts r~ated to customer satisfaction still apply. For example, 22 potential industrial customers and other large users face choices when 23 they decide where to locate a new facility (a factory, a campus, etc.) or 2007 Texas Rate Case Entergy Gulf states, Inc. Page6of 19 Oirec:t T eslimony of Jay C. HartzeU 2007 Texas Rate Case 1 whether to expand a current facility or instead build a new one, or whether 2 to produce their own power rather than rely on the local utility company. 3 Holding the rates they are offered constant, if the customer has a facility in 4 a location with an electricity provider who provides good service, then the 5 customer's satisfaction with that service would make the customer more 6 likely to expand that facility, and would make the customer less likely to 7 look for alternative locations or to self-generate, all else equal. A 8 customer that is more likely to expand in the current location rathe~ than 9 l~k elsewhere would in tum benefit -the financial performance of the 10 customer's current utility company. - 11 This conceptual link between customer welfare and financial 12 performance also applies to residential utilify customers. Residential 13 customers can choose, for example, between gas (including propane) 14 appliances and electrical appliances. The more satisfied they are with 15 their electrical service provider, the more likely they are to ~oose 16 electrical appliances (all else equal). This customer behavior in response 17 . to good service again leads to better financial performance for the electric 18 utility. 19 20 Q. WHY WOULD TODAY'S FINANCIAL HEALTH OF THE FIRM 21 POSITIVELY AFFECT FUTURE CUSTOMER WELFARE? 2007 Texas Rate Case 10-8 Entergy Gulf States, Inc. Page7of 19 Direct Testimony of Jay C. Hartzell 2007 Texas Rate Case 1 A. I can see at least five channels through which a more financially 2 successful company will be associated with greater customer welfare both 3 now, and in the future. 4 First, companies that are financially healthy will be able to raise 5 capital at lower cost. Put another way, companies that are less healthy 6 financially and therefore are more likely to enter into financial distress 7 (including bankruptcy) will face higher costs of capital. These higher costs 8 of capital will in tum lead to higher rates for customers and lower customer 9 welfare. This channel is straightforward: as a .company gets closer to 10 distress, the expected costs of distress increase, and lenders (including 11 bondholders) charge more for their loans to the firm. Because the cost of 12 debt is one of the key components of the cost of capital, these higher 13 borrowing costs lead to a higher oven1ll cost of capital. In addition, if 1he 14 higher costs of capital are large enough, this effectively limits the less 15 healthy finn's acce5s to funds, implying that financially healthy firms have 16 broader access to capital than their less healthy oountefparts. This cost of 17 capital effect is especially relevant to the utility industry given the 18 industry's reliance on large capital spending projeGts and use of debt 19 capital. 20 Second, in an industry where prices that finns can chatge are 21 regulated, if managers have incentives to increase fmancial performance, 22 then this will lead them to focus on cutting oosts. By linking managers' 23 pay to stock price, for example, managers will, among other goals, attempt 2007 Texas Rare Case J().9 Entergy Gulf States, Inc. Page8of 19 Direct Testimony of Jay C. HartzeQ 2001 Texas Rate case 1 to increase stock price by operating mere efficiently. This improved 2 efficiency will lead to a lower cost basis in the future than what one would 3 have observed without such incentives, which will in tum lead to lower 4 future prices for customers (compared to .what would likely have been 5 charged otherwise) and increased customer welfare. 6 Third, the utility industry is characterized by high fixed costs of 7 production and economies of scale. This cost structure implies that larger 8 firms can operate at lower marginal costs (all else equal). Thus, as higher 9 customer service or satisfaction leads to greater customer attraction and 1O retention, these in tum lead to growth in the customer base and revenues. 11 The magnitude of these effects may be smaller for a regulated utility than 12 for a firm in an ~nregulated industry, but I see no reason why the effects 13 would not still be present and go in the same direction. Such growth in 14 reven.ues is associated with greater financial perfonnance, but the 15 Increase in size allows the firm to produce more cheaply due to the large 16 fixed costs in the industry and economies of scale. These cost savings 17 again materialize in lower future rates for customers (compared to what 18 they would have been without the growth in the1irtn's operations). 19 Fourth, managers who care about the financial performance of the 20 company are more likely to make better investment decisions. The stock 21 market, via analysts who follow the firm's behavior and traders who act 22 based on their beliefs about the firm's prospects, acts as a monitor of a 23 wide range of managerial actions, including investment decisions. Stock- 2007 Texas Rate Case 10-10 Entergy Gulf States, Inc. , Pege9of 19 Direct Testimony of Jay~. Hartz.en 2007 Texas Rate'Case 1 price based incentives can help discipline managers, and constrain ihem 2 from investing in ways that might not benefit the finn. 3 Fifth, companies that are less healthy financially - or, to put it 4 another way, closer to financial distress - will likely experience greater 5 costs, which will in tum be passed on to customers. This is because 6 stakeholders who have relationships with the company will demand more 7 favorable terms from the firm in order to compensate them for the greater 8 risk of dealing with a less healthy a>mpany. For example, consider a 9 supplier who sells machinery to a utility company that is not financialty 10 healthy (or is believed to be near distress). Such a supplier will likely 11 demand higher prices from the utility before committing to any sort of ( 12 investment in a relationship with the utility, In order to oompensate for the 13 risk that the revenues from the relationship may cease to exist before the 14 supplier can recoup its costs. These effects are predicted to be stronger 15 where firm-specific investments are required - such as customized 16 machinery - or, the relationship is expected to nave a longer tenn. In 17 addition, suppliers to less healthy finns (firms that are nearer distress) are 18 likely to provide less attractive terms of trade --for example, requiring f the 23 firm, such as employees of the firm. Employees of firms that a~ mor-e 2007 Texas Rate Case 1-0-1] Entergy Gulf States, Inc. Page 10of 19 Direct Testimony of Jay C. Hartzell 2007 Texas Rate Case · 1 likely to become financially distressed will likely demand higher wages in 2 order to compensate them for the risks they face in working for such a 3 company. Absent a StJfftcient wage differential, financially distressed firms 4 are likely to lose skilled and talented employees and to find it difftcUlt to 5 attract good new ones, further exacerbating these firms' situations. 6 In summary, by providing managers with incentive compensation 7 that is based in part on the financial performance of the firm, managers 8 have incentives to keep the firm financially healthy. A utility's financial 9 health is very likely to benefit customers via lower oosts than otherwise 10 would be experienced, which in tum lead to lower rates than otherwise 11 would be the case. These lower costs occur because of (I) a lower cost of 12 capital; (ii) more efficient operations; (iii) greater scale of production; 13 (iv) better investment decisions by managers; and {v) better prices and/or 14 terms from stakeholders, such as suppliers and employees. 15 16 B. The Reasons for Providing Financial-Based Incentive Compensation 17 Q. WHAT TOPICS DO YOU DISCUSS IN THIS SUBSECTION OF YOUR 18 TESTIMONY? 19 A. I explain how incentive compensation is used as an effective tool in 20 aligning the interests of a firm's employees and its stakeholders, including 21 the firm's customers and shareholders. I also discuss how this improved 22 incentive alignment motivates a firm's employees to take actions that tend 23 to ultimately benefit the firm-including customers and shareholders. 2007 Texas Rate Case 10~12 Entergy-Gulf States, Inc. Page11of19 Direct Testimony of Jay C. Hartzel 2007 Texas Rate C8se 1 a. WHAT IS THE BASIC UNDERLYING THEORY OF INCENTIVE 2 COMPENSATION AS IT APPLIES TO A PUBLICLY·TRADED 3 COMPANY? 4 A. The traditional paradigm of incentive-based compensation centers around 5 the role of incentive pay in solving a •moral hazard• problem, where the 6 principals involved cannot observe the actions of an agent who acts on 7 their behalf. This agent is expected to act in a way that maximizes his or 8 her personal welfare, which is not necessarily the same set of actions that 9 would maximize the welfare of the principals. This potential conflict of 10 interest, tenned an agency problem, gives rise to a role for incentive 11 compensation. Because the principats cannot observe or write eontraots 12 based on the ager.it's actions (because it is assumed that those actions 13 cannot be observed or legally verified), incentives are put in place such 14 that the agent is more likely to benefit when they take the oourse of action 15 that is desired by the principals. SpecificaUy, the agent receives higher 16 pay when he or she takes actions that benefit the principals. 17 Understanding this, the agent is mor.e likely to take those actions desired 18 by the principal - put forth more effort, -pick better projects, or shirk less, 19 tor example. 20 The typical view in finance is from the .perspective of the 21 sharehotders: shareholders are the principals and owners of the finn, and 22 they hire managers to act as agents on their behalf. Incentive pay has a 23 role in tt)at it provides for greater compensation to managers when there 2007 Texas Rate Case 10-13 Entergy Guff Slates, Inc. Page12of19 Direct Testlmony of Jay C. Hartzetl 2007 Texas Rate Case 1 are indications that they took actions that benefited shareholders. One of 2 the most fundamental and accepted theoretical results from the principal- 3 agent academic literature is that an agenfs pay should be linked to a 4 particular performance measure (such as stock price, accounting profits. 5 or a score based on customer satisfaction) if that measure provides an 6 additional informative signal of the manager's actions. 7 If a principal (such as the Commission) has a goal of maximizing 8 customer welfare. then the same principal·agent theory still applies. In 9 this context, pay should optimally be related to any performance measure 10 that contains marginally useful information about whether managers acted 11 in a way that Is consistent with maximizing customer welfare. In other 12 words. even if the goal is to maximize customer welfare, pay should also 13 be related to financial performance so long as the financial perfonnance 14 measures contain some additional information about customer welfare. 15 16 Q. HOW CAN INCENTIVES BASED ON FINANCIAL MEASURES IMPROVE 17 MANAGERS' FOCUS ON CURRENT AND FUTURE CUSTOMER 18 SERVICE? 19 A In the extreme, this most basic principal-agent theory is developed in a 20 one-period setting, without regard to future periods. In this set.up, the 21 manager acts, outcomes are realized at the end of the period (depending 22 in part on those actions). and the manager receives his or her pay. 2007 Texas Rate Case 10-14 Entergy Gulf States, Inc. Page13of 19 Direct Tatimony of Jfl'f C. Hartzell 2007 Texas Rate Case 1 A more realistic setting would allow for multiple periods, where both 2 managers and principals would have to consider not only their immediate 3 actions, but also their expected Mure actions, and trade-offs between 4 what they choose to do today versus what they may receive in the future. 5 This more realistic setting leads to another common problem or incentive 6 conflict between managers and principals: these parties having differing 7 time horizons. Typically, managers are expected to have a shorter..term 8 focus than otherwise would be optimal. As a result of their possibly 9 shorter time horizons, managers may make decisions that focus solely on 10 the short term at the expense of the long-term. Incentive compensation 11 tied to measures that look both to the short-tenn (such as the current 12 year's earnings) and long-term {such as stock price) is an accepted 13 solution to extend the managers' time horizons. and to balance short-term 14 and long-tenn perspectives, in decision-making and execution. 15 16 a. DOES EXTENDING THE MANAGERS' TIME HORIZONS HAVE A 17 POSITIVE EFFECT ON EXPECTED CONSUMER WELFARE? 18 A. Yes. In the context of maximizing -customer welfare. the horizon of the 19 manager is an important issue. To the extent the Commission wishes to 20 maintain and .enhaooe -customer welfare not only in the short-run, but also 21 in the future, financial measures like stock price performance play a useful 22 role in an incentive oompensation structure in order to aocomplish this 23 objective. '2007 T-exas Rate Case 10-15 Entergy Gulf States, Inc. Page14fof 19 Direct Testimony of Jay C. Hartzell 2007 Texas Rate Case 1 In addition to providing incentives for managers to optimize their 2 decisions in the current year. a financial-based incentive plan can provide 3 this perspective by capitalizing the long-term benefits of managers' 4 decisions. In other words, via incentives based .on financial perfonnance 5 measures such as stock Priee. the expected long-term impact of 6 managers' decisions has immediate impad on financial perfonnance 7 measures, thereby affecting managers' pay and incentives. Stock prices 8 are based on the present value of the firm's expected future cash flows. 9 So, by making a manager's compensation depend on stock price. one ties 10 the manager's wealth to expected future cash flows. This makes him ~ 11 her more willing to make decisions that produce long-term benefits for the 12 firm, even if it is at the cost of short.term cash flows or profits. 13 14 a. HOW DO FINANCIAL-BASED INCENTIVES EXTEND THE MANAGERS' 15 TIME HORIZONS TO THE BENEFIT OF CONSUMER WELFARE? 16 A. To see how incentive pay affects customer welfare over multiple years, 17 first take an extreme hypothetical example where managers are only 18 compensated based on this year's customer welfare. This could create an 19 incentive for the manager to make deeisions that would sacrifice the future 20 of the finn (and its customers) for the benefit of the Immediate welfare of 21 customers. The manager might •over·lnvest" in immediate customer 22 service, weakening the finn's future financial position and its ability to 23 provide high-quality. low cost service in the future. With limited resources, 2007 Texas Rate Case 10~16 Entergy Guff States, Inc. Page 15of 19 Direct T.estimony of Jay C. HartzeM 2007 Texas Ratecase 1 the firm might decide to pay for this •over-investmenr In immediate 2 customer service by taking money from long-tenn maintenance spending 3 or capital investment that would produce long-term efficiency or 4 productivity gains. 5 But, by linking a manager's pay at least in part to the financial 6 health of the firm, one forces the manager to think about more than just 7 the short term, and to consider future years and the future performance of 8 the firm when they decide on a course of action. If the manager over- 9 invested in immediate customer welfare, then it would weaken the firm's 10 financial position and potentially, consumers' future welfare. Conversely, 11 by weighing not only immediate customer welfare, but also financial ( 12 measures like stock price that are related to the firm's short- and long.term 13 viability, the manager has the incentive to position the firm to provide 14 higher levels of customer welfare in the future. 15 16 a. WHY SHOULD THERE BE A POSITIVE RELATION BETWEEN 17 CUSTOMER WELFARE AND FINANCIAL PERFORMANCE? 18 A. Back to the basic theory, then, financial measures should be part of the 19 manager's a>mpensation structure if one wants to maximize customer 20 welfare so long as those financial measures are related to {or are signals 21 of) customer welfare. This is plausible and r.easonable for several 22 reasons. First, customer welfare is difflcult to measure oompletely, so it is 23 unlikely that objective customer-based measures that one - ..c 8 3l"' 6 c: &. ~ 4 0:: 0 2 =t:I: 0 __.___ _ _ __ A Excellent BGood C Fair D Poor F Fail Grades for Performance 5 Q. WHAT IS TCC'S GRADE POINT AVERAGE? 6 A. Using 4.0 for A, 1.0 for D and 0 for F, TCC's overall grade point is 1.834. 7 Q. WHAT ARE YOUR COMMENTS ON THIS CHART? 8 A. Although the numerical results are interesting, they lack the consistency that appears 9 across the repeated written responses. The frequency distributions that result visually 10 from the ranking exercises provide information about where most responses lie 11 (central tendency) but also report some inconsistencies that exist in the responses. 12 The qualitative responses are much more uniform. DIRECT TESTIMONY 28 GOODFRIEND 1 Q. HOW IS THE PUCT STANDARD THAT YOU RECOMMEND RELATED TO 2 THESE REP STANDARDS? 3 A. The PUCT standard is more stringent because the PUCT has the responsibility of 4 evaluating service quality in light of all market costs, costs to REPs, to the market, to 5 the competitive process and to end-users. 6 Q. IF YOU WERE GRADING TCC, WHAT GRADE WOULD YOU GIVE TCC? 7 A. Applying the standard I urge the Commission to adopt, and based on the evidence I 8 will present, I would give TCC a grade of unacceptable, a Dor an F. 9 3. QUALITATIVE RESULTS 10 Q. HOW WILL YOU PROCEED IN THIS SECTION? 11 A. This section is divided into four subsections for each of the four survey areas. The 12 survey asked REPs for comment on TCC practice, and on best practices, whether 13 AEP-TCC could achieve best practice and, if so, how. For each survey area, I created 14 tables to catalogue all the narrative responses I received. There are three table rows. 15 The rows are: (1) TCC Practice, (2) Best Practice Standards/Suggestions for 16 Improvement and (3) Issue Subject to Further Analysis and/or Testimony 17 Recommendations for this area. Comments are further classified by the columns of 18 the table. Table columns identify the dimension of service quality to which the 19 comment most pertains. These service quality dimensions, which have been 20 discussed above, are: Quality and Timeliness of Communication, Speed of Response, 21 Pro-Active Problem Solving, Dedication of Resources, and Accuracy of Response. DIRECT TESTIMONY 29 GOODFRIEND 1 LACK OF RESPONSIVENESS TO REP INQUIRIES 2 Q. WHAT ARE YOUR GENERAL FINDINGS IN THIS AREA? 3 A. REPs found TCC slow to respond to inquiries and poor at maintaining 4 communication. They had many suggestions for improvement. A representative 5 statement of response is the following: At the REP relations level we are rarely able 6 to reach TCC representatives via telephone. Issue resolution usually takes between 7 2-4 weeks when we are able to reach a representative via phone. Issue resolution, 8 when communicated via email, usually takes 4-6 weeks. We attribute many of these 9 problems to lack of resources. We have one contact who handles all issues, from ES! 10 ID questions to tariff questions. This contact is the only contact for many other 11 REPs. 12 In contrast, REPs report that other TDSPs had a habit of maintaining 13 communication regardless of whether there was an outstanding issue or not. Other 14 TDSPs routinely send back data within 2 days without follow up contact. The 15 following table summarizes results. DIRECT TESTIMONY 30 GOODFRIEND 1 Dimensions of Service Quality Figure 3 Quality and Speed of Pro- Dedication Accuracy Responsiveness Timeliness of Response active of of to REP Inquiries Communication Problem Resources Response Solving At the REP relations level we rec is slow in TCC has relatively TCC Practice are rarely able to reach TCC responding to limited account representatives via historical usage management telephone. Issue resolution requests. For resources available usually takes between 2-4 example, in a to REPs to handle weeks when we are able to [redacted] letter of inquiries outside the reach a representative via authorization was scope of day to day phone. Issue resolution, when sent to TCC with operational issues. communicated via email, multiple ESI IDs. Responses to usually takes 4-6 weeks. We TCC was contacted business practices attribute many of these [redacted] times and policies, tariffs, problems to lack of and has not etc. are often resources. We have one responded. Often delayed if one or contact who handles all have to follow up on more contacts are issues, from ESI ID questions usage requests and unavailable. to tariff questions. This resend LOAs contact is the only contact for multiple times to get From our many other REPs. usage data back experiences, the poor We do not have a responsiveness is lot of ESl-IDs in the not due to AEP territory so we performance, but do not need a lot of due to resource help. However, constraints on the when we have Customer Relations needed responses Rep. to issues timing has been slow. Improvement in the supplying of historical data when requested with an LOA is needed. 2 DIRECT TESTIMONY 31 GOODFRIEND 1 Dimensions of Service Quality Figure 3 (cont.): Quality and Speed of Pro- Dedication Accuracy Responsiveness Timeliness of Response active of of to REP Inquiries Communication Problem Resources Response Solving Other TDSPs were and are in We generally Need: Annual Need: a designated Best Practice constant contact with our receive responses meetings to point of contact -- Standards/ REP, not just in cases of from other TDSPs "get to know" name and personal problem or transaction in 2 days. the company email. Someone to Suggestions for resolution. and individual develop a working Improvement Other TDSPs: REP relations relationship with. Other Customer Relations Routinely send managers. Also, [need] Reps make it a point to back data within 2 knowledgeable communicate on a weekly or days without follow OtherTDSPs support Reps who biweekly basis to ensure up contact. have: have escalation customer care. Redundancy of support if they need Other TDSPs: Very transaction it. Go out and meet the REPs fast response to procedures they represent and make ii a requests. (i.e., policy to answer all emails. workarounds Need: Quicken through email, response times to fax and requests for telephone) historical information. (2 REPs) 2 3 NO EDUCATIONAL PROGRAMMING AND OUTREACH TO REPS 4 5 Q. WHAT WERE YOUR FINDINGS? 6 A. The strong consensus of opinion in the numerical rankings on this aspect of TCC 7 service is confirmed in what REPs had to say on this issue. Four respondents were 8 unaware of any educational or outreach program. Another commented that TCC has 9 never hosted any informational workshops for REPs. This respondent continued: No 10 proactive measures have been taken to inform REPs of TCC's business practices 11 regarding customer enrollment, billing, service order processing or issue resolution. 12 When attempting to obtain answers to these types of day to day operational questions 13 answers are at times inconsistent and the appropriate personnel are difficult to 14 contact. DIRECT TESTIMONY 32 GOODFRIEND Q. WHAT UNNECESSARY SERVICE COSTS ARE CREATED BY THIS 2 FAILURE TO COMMUNICATE? 3 A. Labor costs associated with manual interventions and reparative software costs. The 4 REP responded: TCC provides very little outreach to help educate REPs. For 5 example, TCC altered the format of usage data responses. We had no advance notice 6 of the change. Our systems are configured to automatically upload usage data. The 7 change in format did not work with our systems. This caused operational problems 8 until we recognized the change and were able to alter our systems. This REP 9 contrasted TCC with Oncor, reporting that Oncor also altered its format for usage 10 data responses but provided ample advance notice and an example of the new format. 11 This advance notice permitted system changes and the avoidance of operational 12 problems. 13 Q. WHAT IS YOUR OBSERVATION ABOUT THESE COMMENTS? 14 A. TCC's poor ranking on education and outreach show a lack of interest not a lack of 15 resources. This is not a situation where TCC must incur significant costs to support 16 market development. This is simply a lack of pro-active customer focus. For 17 example, a comment was: Holding workshops and proactive communication are 18 attainable goals for AEP; There is no clear reason why TCC should not be able to 19 host such workshops for REPs. This should not only improve the operating efficiency 20 of REPs but that of TCC as well. DIRECT TESTIMONY 33 GOODFRIEND 1 Q. HAVE YOU PROVIDED SPECIFIC RECOMMENDATIONS RESULTING 2 FROM YOUR ANALYSIS OF THIS CUSTOMER SERVICE ISSUE? 3 A. Yes. These recommendations are included in summary at the beginning of my 4 testimony. 5 6 Dimensions of Service Quality Figure 4: Educational Quality and Pro-active Dedication of Programming Timeliness of Problem Solving Resources and Outreach Communication To date, TCC has never hosted Three REPs: To respondent's any informational workshops for TCC Practice knowledge, no education or REPs. No pro-active measures outreach provided. have been taken to inform REPs of TCC's business We are not aware of any practices regarding customer educational programs offered by enrollment, billing, service order TCC. However, we have processing or issue resolution. received email When attempting to obtain updates/correspondence answers to these types of day regarding TCC processes. to day operational questions answers are at times inconsistent and the appropriate personnel are difficult to contact. TCC provides very little outreach to help educate REPs. For example, TCC altered the format of usage data responses. We had no advance notice of the change. Our systems are configured to automatically upload usage data. The change in format did not work with our systems. This caused operational problems until we recognized the change and were able to alter our systems. DIRECT TESTIMONY 34 GOODFRIEND Dimensions of Service Quality Figure 4: Educational Quality and Pro-active Dedication of Programming Timeliness of Problem Solving Resources and Outreach Communication Three REPs: Oncor and Invited to office and provided Best Practice CenterPoint have regular Detailed Billing Analysis Standards/ workshops designed to educate notebook of all accounts. Other TDSPs offer periodic REP. This is helpful because it Breakout and definition of each training &seminars. Also, Suggestions for keeps REPs up to date on type and explained how to have one specific rep relation Improvement changes with the TDSPs and interpret the bill. person assigned also allows us interaction with our CSRs in person. We never Other TDSP's meetings Other TDSPs: (Two Reps had a physical meeting with provide: gaining a better commented) Meetings provide main contact at TCC. understanding of internal TDSP opportunity to meet processes, an opportunity to representatives face to face. CenterPoint holds meetings as address specific issues or necessary to discuss procedural concerns and an opportunity to or market changes that REPs meet and greet. We would like need to know. to see TCC offer these programs as well. They(Oncor] also cover any upcoming tarriff (sic] changes and cover updates to their web site. CenterPoint holds meetings as necessary to discuss procedural or market changes that REPs need to know. (Two REPs) 1 2 INACCURACIES AND UNRESPONSIVENESS WORSEN MARKET PROBLEMS 3 Q. WHAT IS THE NEXT AREA OF EVALUATION? 4 A. The next area is how well TCC responds in resolving market problems. This subject 5 area elicited the longest and most numerous responses. Before presenting the 6 tabulated responses, I want to present the results of my investigation of a general, but 7 repeated allegation. DIRECT TESTIMONY 35 GOODFRIEND 1 Q. WHAT WAS THE REPEATED REP ALLEGATION YOU INVESTIGATED? 2 A. A REP respondent stated: rec is also usually the first group to complain about a 3 change in the market and the last to get their software updated. rec often appears 4 to want to do just what is required and nothing more. Another REP made the same 5 point more diplomatically, stating: AEP is generally somewhat inflexible in changing 6 their internal practices to accommodate market concerns. 7 Q. IS THIS ALLEGATION OF PARTICULAR INTEREST IN YOUR 8 FRAMEWORK? 9 A. Yes. These allegations are another way of identifying the alignment problem. In 10 failing to accommodate market concerns, these REP statements imply that TCC is 11 imposing costs on the market that directly diminish the quality of service delivered to 12 ERCOT retail market participants. 13 Q. WERE YOU ABLE TO FIND SOME EVIDENCE SUPPORTING THIS 14 ALLEGATION? 15 A. Yes. But before reviewing it, having a bit more background about electronic 16 transactions in ERCOT is helpful. 17 Q. WILL YOU BE DESCRIBING THE REASON FOR MOVING FROM THE 18 CURRENT VERSION OF TEXAS SET, VERSION 1.6 TO A NEW SERIES 19 RELEASE, TEXAS SET 2.0? 20 A. Yes. At the present time, service orders, such as requests for switching a customer's 21 REP, moving a customer either in or out of an existing premise, providing 22 connection, reconnection or disconnection, requests for changing when a meter is 23 read or for current or historical usage data, etc. all arrive to the TDSPs in DIRECT TESTIMONY 36 GOODFRIEND 1 chronological time. When orders arrive in chronological time but out-of-sequence for 2 the implied cycle of transactions on a single active premise location (ESI ID), rejects 3 occur. 47% ofrejects are caused by this type of problem.14 4 In these cases, the TDSPs and REPs must manually intervene and workaround 5 the reject. These manual workarounds in tum give rise to other problems. Texas Set 6 2.0 will solve the problem of multiple non-sequential transactions on a single ESI ID 7 via a "parking lot" or stacking solution. Over the last few months, ERCOT 8 information technology and customer service employees have been offering training 9 seminars to acquaint market participants with these changes. The ERCOT Protocols 10 contain gray-tone provisional sections incorporating new Protocol standards once 11 Texas SET 2.0 is in place. 12 The seminars are necessary because Texas SET is literally the standard for 13 how electronic data transactions between market participants must interface, so it is 14 mandatory that each market participants be able to fully execute Texas SET. 15 Everyone who participates in the market must update their systems with changes in 16 Texas SET. Substantial market benefits are anticipated from this major upgrade. IS 17 Finally, in the document below references to MACSS is to a customer 18 information system internal to the AEP system. References to the "parking lot" are 19 references to ERCOT's problem resolution embodied in the release of Texas Set 2.0. 14 ERCOT, Solution to Stacking Educational Seminar, 12/9/03 available from RMS (Keydoc's) section at www.ercot.com. IS ERCOT, Solution to Stacking Educational Seminar, 12/9/03 lists expected benefits as: significant reductions in rejects, significant reduction in the need for Safety Net Move-ins, better manages customer expectations regarding dates, billing, etc, fewer backdated clean up efforts, fewer cancel/rebills, helps keep systems in synch, reduces unaccounted for energy, reduces transaction volume, expedites connecting and billing the customers by the correct REP and improves transactions reliability. DIRECT TESTIMONY 37 GOODFRIEND 1 Q. WHAT IS THE DOCUMENT YOU ARE PROVIDING BELOW? 2 A. Reproduced below is a Customer Choice Operations Business Case Analysis 3 provided by TCC in discovery. This document rather perfectly illustrates my thesis: 4 absent Commission action in this case, TCC will disregard significant market costs it 5 imposes on others by its actions. Narrow profitability concerns are driving TCC 6 service quality decisions. TCC has actively resisted improvements benefiting the 7 market. The evidence corroborates the REP survey allegations I have quoted above. 8 Q. WHY DO YOU INCLUDE THE ENTIRE BUSINESS CASE ANALYSIS? 9 A. The document itself is important and the complete context of the document is an 10 important reference. The business case analysis does a good job of describing the 11 significant costs being imposed on the market by delaying the implementation of 12 Texas Set 2.0. Then, when discussing alternatives to the necessary investment the 13 analyst says: The parking lot will benefit the overall functioning of the market and will 14 benefit CRs [competitive retailers or REPs]. Due to the minimal benefit to AEP TDSP, we 15 have attempted to delay implementation through negotiation in working groups. 16 The author's use of the past tense is disturbing. 17 DIRECT TESTIMONY 38 GOODFRIEND Source: Cities 10 Q 12 FIGURE 5: BUSINESS CASE, CUSTOMER CHOICE OPERATIONS Business Case Business Unit: Customer Choice Operations Project Name: CCPRIL TX Service Order Parking Lot (Texas SET 2.0) Project ID: CHG000000724085 Start Date: End Date: Executive Summary: AEP is required to conform to the ERCOT Protocols as specified in Texas Standard Electronic Transactions (SET.) Texas SET will make periodic releases to address market issues and it is mandatory that AEP make all changes necessary to comply. Consistent with the planned release of TX SET 2.0, AEP will need a new application for Texas to properly sequence multiple future-dated service orders for a single premise. The BU and IT sponsors are Jim Sorrels and Bill Vogel, respectively. Current Situation and Problem Statement: Today, transactions are received in the order they are sent from market participants, not necessarily in chronological order. Service orders entered into MACSS that are not in chronological sequence cannot be completed. These out-ofsequence orders either must be manually processed or rejected back to the CRs for resequencing. Either of these options requires significant manual effort to resolve. Each TDU in Texas has this same problem and the market has decided that the appropriate solution is for each TDU to modify their systems to deal with out-ofsequence transactions. Project Description: Functionality will be established to ensure that as the transactions are received by MACSS, they will be "parked", or held, until just before the event when the specific transaction is needed (to provide time for other orders to arrive). The transactions will then be properly sequenced to the work management system and allowing each to complete appropriately, instead of being exceptioned for manual processing or being rejected back to the CRs. Solution Overview: Implementation would allow AEP to comply with TX SET and reduce the workload associated with.fixing problems resulting from out-ofsequence transactions. Solution Detail: MACSS has estimated a delivery cost of $106,080. There is lost opportunity costs in that other projects that have revenue benefit will be delayed. An unquantified, but tangible benefit would be the reduction in manual processing necessary to fix out-of sequence transactions. The risk of not implementing these changes is that we would be in non-compliance with TX SET, with potential regulatory repercussions. Alternatives Considered: Tlte parking lot will benefit the overall functioning of the market and will benefit CRs. Due to the minimal benefit to AEP TDSP, we have attempted to delay implementation through negotiation in working groups. Implementation Summary: The anticipated delivery date for this market requirement is May 2004, subject to formal approval of a schedule by ERCOT. Relationship to other Initiatives: This project is consistent with other system modifications and enhancements required in the TX marketplace. Metrics: Success will be measured by the successful implementation of Texas SET 2.0 and our associated internal transaction processing. The benefits should be seen in the marketplace immediately. DIRECT TESTIMONY 39 GOODFRIEND 1 Q. HOW HAVE REPS CHARACTERIZED OTHER WIRES COMPANIES' 2 PARTICIPATION IN WORKING GROUPS? 3 A. In describing best practices among other wires companies, one REP said: Other 4 Wires Companies have got a lot of active members involved in many market 5 committees and subcommittees. These members are taking the time to improve the 6 market place through new software, faster hardware, better logic, improved 7 communication between REPs and more accurate market reporting. They are 8 proactively seeking solutions to lingering problems and trying to clear out all of the 9 old ones. 10 Q. BEFORE YOU LEAVE THIS TOPIC, IS THERE OTHER EVIDENCE 11 PERTINENT TO TCC'S SUPPORT OF MARKET WIDE SERVICE 12 IMPROVEMENTS AND COST REDUCTION EFFORTS? 13 A. Yes. TCC lags significantly behind Oncor and CenterPoint in providing the resource 14 investment needed for Texas SET 2.0. Oncor is 95% through the design stage and 15 90% through the build stage for Texas SET 2.0. CenterPoint is 85% through the 16 design stage and 25% through build. In contrast, AEP is 20% into the design stage 17 with no build and TNMP is 10% in the design stage with no build, according to recent 18 self-reports. l 6 19 Q. IS THERE ANOTHER CHARACTERIZATION OF TCC THAT IS ALSO 20 CAUSE FOR CONCERN? 21 A. Yes. AEP has a history of taking unilateral action against Market Rules e.g., billing 22 customers for T&D charges who showed no REP of Record. 16 The complete ERCOT presentation is provided in Workpapers. DIRECT TESTIMONY 40 GOODFRIEND 1 Q. WERE YOU ABLE TO INVESTIGATE THIS ALLEGATION? 2 A. Not definitively. It's clear that TCC spoke with Commission staff concerning 3 unbilled customers. In the early stages of the market there were customers for whom 4 either the TDSP and/or ERCOT had no "REP of record." TCC decided to direct bill 5 these customers without a REP of record and it appears that in the test year, this 6 brought in over $1.2 million to TCC.17 Whether TCC sent the letter first and 7 discussed it with Staff after the fact or visa versa, I do not know. I was also unable to 8 determine to what extent the Commission itself had an opportunity to comment on 9 TCC's action. 10 Q. WERE YOU ABLE TO INVESTIGATE THIS ALLEGATION OF 11 UNILATERAL ACTION USING OTHER INFORMATION? 12 A. Yes. I asked about whether TCC had ever discouraged a REP from using the FasTrak 13 process. TCC responded: In fewer than a dozen instances, TCC has asked certain 14 REPs not to utilize FasTrak for particular billing and payment issues. 15 In the discovery response quoted, TCC reasoned that it was burdensome for 16 TCC to use FasTrak and so substituted its own databases and archives to track the 17 disputes. TCC opined that FasTrak in its present form "is not necessarily the best to 18 tool to use in the instances discussed above." 18 19 Q. WHAT DO YOU MAKE OF THIS UNILATERAL ACTION? 20 A. The unilateral decision to bypass market processes can impose market costs. While it 21 may be burdensome at times for market participants to use FasTrak in cases where 17 TCC Workpaper 11-E-5 line 40 "CWRR" l 8 Response to Cities 15-3 DIRECT TESTIMONY 41 GOODFRIEND 1 multiple premises share a common transactional problem, FasTrak is the means by 2 which ERCOT, as the central registration agent, monitors and identifies transaction 3 problems, trends and prioritizes needs for improvement. Once logged, FasTrak issues 4 are never deleted. They become part of the knowledge base of historical information 5 for each active premise and can be searched by individual ESI-ID when needed to 6 provide background and/or resolve issues.19 Here, again TCC seems to show a basic 7 disregard for the effects of its decisions on the market as a whole. 8 Q. WILL YOU BE PRESENTING OTHER EVIDENCE THAT 9 CORROBORATES REP'S STATEMENTS OF CONCERN ABOUT TCC 10 PERFORMANCE? 11 A. Yes, but first I will review specific survey findings. Although I have tried to 12 categorize responses in this section by quality dimension, in fact, it seems that most 13 examples indicate a combination of factors are responsible for performance problems. 14 The first two examples focus on the role of inaccuracies as the source of later market 15 problems. In the instances described, inaccuracies impose direct costs on REPs and 16 end-use customers and may impose a second round of costs because of slow 17 responsiveness in resolving the initial inaccuracies: 18 The first example addresses errors in TCC's data at ERCOT: 19 TCC still has a lot of issues with inaccurate address/ESJ-ID information at 20 ERCOT. Many consumers in the TCC region are affected by un-authorized switches 21 due to incorrect information in the ERCOT portal and information TCC provides by 22 phone to the CR. 19 See Day to Day FasTrak Issues Users Manual 10/24/2003 -Version 4.0 available from www.ercot.com. DIRECT TESTIMONY 42 GOODFRIEND l The second example shows the effects of inaccurate use of a Texas SET 2 transaction sequence. This may also be evidence of a resource or training problem at 3 TCC. 4 There have been instances where a meter exchange had occurred and TCC 5 was sending 814_20 transactions [create/maintain/retire ESI-ID request} indicating 6 a meter removal. Then, TCC would send an 814_20 transaction indicating a meter 7 add. Once this Texas SET error was acknowledged by TCC it still took 4 months for 8 them to correct the problem. This incorrect use of the ESI-ID transaction caused 9 REPs additional workload, including REPs contacting the customer via telephone to 10 question the reason for the meter removal, the submission [of} final invoices to the 11 customer and the creation of new customer accounts. 12 Q. WHAT ABOUT BEST PRACTICE IN THESE AREAS? 13 A. With respect to speed and accuracy, REPs responded that other wires companies: 14 provide timely and accurate connections based on 814-04105 [switch notification and 15 enrollment] transactions and safety-net/priority connections; are in synch with 16 ERCOT relating to address and ESI-ID information; and respond to inquiries within 17 a 2-hour time frame. DIRECT TESTIMONY 43 GOODFRIEND Figure 6: Dimensions of Service Quality Responsiveness Quality and in Resolving Timeliness of Speed of Pro-active Problem Dedication Accuracy of Response Market Communication Response Solving of Resources Problems It all comes down to An isolated AEP is generally TCC is also TCC still has a lot of TCC Practice communication and example of poor somewhat inflexible usually the issues with inaccurate responsiveness. resolution of a in changing their first group to address/ESI-ID Resource constraints market issue internal practices to complain information at ERCOT. may play a role but occurred when accommodate market about a Many consumers in the CenterPoint and TCC issued concerns change in the TCC region are affected Oncor find market market and by Un-authorized themselves well in transactions with Responds well but the last to get switches due to incorrect front of AEP and inaccurate meter other TDSPs more their software information in the TNMP data. The issue helpful. updated. TCC ERCOT portal and was identified and often appears information TCC provides AEP has a history of brought to the We have repeatedly to want to do by phone to the CR. taking unilateral attention ofTCC requested a report just what is action against in [redacted]. from TCC regarding required and There have been instances Market Rules e.g., After multiple outstanding invoices nothing more. where a meter exchange billing customers for follow up phone and TCC has failed to had occurred and TCC T&D charges who calls and emails acknowledge or All are good was sending 814_20 showed no REP of the majority of respond to voicemail except for transactions Record. the impacted ESI or email TNMP. TCC [create/maintain/retire IDs with inquiries ... Then, after could ESI-ID request] indicating When issues arise inaccurate meter months of making probably a meter removal. Then, multiple emails must data were finally requests, TCC sent a improve TCC would send an be sent before corrected and the spreadsheet with ranking with 814 20 transaction answers provided. issue was [redacted] invoices more staff. indicating a meter add. resolved entirely indicating they were Once this Texas SET in [redacted]. past due. Of those, error was acknowledged During this [7 (redacted] were by TCC it still took 4 month period] never received months for them to time, no pro- [before] and were correct the problem. active measures over 60 days old; This incorrect use of were taken by [redacted] were the ESI-ID transaction TCC to identify duplicates; caused REPs additional and correct the [redacted) were workload, including REPs relevant ESI IDs rejected (redacted] ... contacting the customer affected during via telephone to question this period. the reason for the meter removal, the submission Unmetered [of] final invoices to the service resolution customer and the creation takes 4-6 weeks. of new customer accounts based on the new meter Meter re-reads information. and cancel re-bills are not timely. DIRECT TESTIMONY 44 GOODFRIEND Many other ..it was [only] TCC also does not TCC Practice TDSPs send back through our perform a connection on (cont'd) IDR and non-IDR employees research move-in on the dates they data much faster that these issues were confirm from the 814- than TCC. The discovered. TCC did 04105. (For example, if IDR data is not offer any the CR receives an 814- especially slow in resources or 04105 from TCC with a arriving to us. A assistance in connect date of 12.09.03, quicker evaluating the the service may not be turnaround would contents of the connected until 12.14.03 be most helpful. spreadsheet. or 12.15.03. Even though TCC has a safety Luckily I have not No ESI-IDs account net/priority connect had a lot of notation is made process, they never follow problems with when a CR calls in, through when a request is TCC in quite a so there is no history made. while. However, kept on any ES I/ID. when there is a problem the response is fairly slow. Best Practice Other Wires Other wires (TCC] management Best practice Standards/ Companies : have companies: needs to make is to follow Suggestions for got a lot of active provide timely customer service a through on Improvement members involved in and accurate priority. issues. Most many market connections based issues committees and on 814-04/05 CenterPoint and resolved subcommittees. transactions and Oncor both take what easily but These members are safety-net/priority they are given from those that are taking the time to connections; are the CR's and actively more difficult improve the market in synch with participate at WMS, following place through new ERCOT relating RMS, and Texas SET through are software, faster to address and to reach out and important to hardware, better ESI-ID assist the evolution of customer logic, improved information. the best in service. communication Respond to deregulated markets between REPs and inquiries within a in the U.S. today. CNP and more accurate 2 hour time Oncor have market reporting. frame. Yes, [best practice is the better They are proactively achievable by TCC]. capability for seeking solutions to TCC has the ability working lingering problems to improve capability around and trying to clear for working around market out all of the old market problems problems ones. through structured through procedures and structured AEP TCC can be contacts for procedures assured that if they resolution. and contacts are actively involved for resolution. and listen to their customers, ERCOT can only evolve into a better market than we have now. DIRECT TESTIMONY 45 GOODFRIEND 1 BILLING AND INVOICING: FOUNDATIONS FOR ERROR 2 3 Q. DID YOU INVESTIGATE ISSUES RELATING TO THE ACCURACY OF 4 BILLING AND INVOICING? 5 A. Yes. In this section I discuss TCC's use of estimates for meter reads and related 6 problems of billing and invoicing. Prompt and accurate billing and invoicing are 7 foundational issues because poor processes here can snowball into additional 8 problems. Any deficiencies in dedicated resources appear more severe when 9 underlying processes or systems are prone to error. Another REP provided a good 10 example of the relationship between data inaccuracy and slow response: 11 An isolated example of poor resolution of a market issue occurred when TCC 12 issued market transactions with inaccurate meter data. The issue was identified and 13 brought to the attention of TCC in [redacted]. After multiple follow up phone calls 14 and emails the majority of the impacted ES! IDs with inaccurate meter data were 15 finally corrected and the issue was resolved entirely in [redacted]. During this [7- 16 month period] time, no pro-active measures were taken by TCC to identify and 17 correct the relevant ES! IDs affected during this period. 18 Another REP noted: Meter re-reads and cancel re-bills are not timely. 19 Prompt and accurate billing and invoicing are foundational issues. Wires 20 charges include kW and kWh charges and invoices must be cancelled and re-billed 21 when underlying usage data is incorrect. In the ERCOT protocols, a meter read error 22 gives rise to four separate electronic transactions, a cancel and rebill of the associated 23 usage data and a cancel and re bill of the associated invoice. DIRECT TESTIMONY 46 GOODFRIEND 1 Moreover, timeliness and accuracy are both important service dimensions, but 2 they are not independent. Estimated meter reads can become a source of inaccuracy. 3 Inaccuracy can become a drag on responsiveness as the number of errors that have to 4 be corrected increase. In tum, the volume of cancel/rebills increases and rebillings 5 take longer to send out because the necessary corrective actions for usage information 6 strain existing resources. 7 Q. DOES THE COMMISSION SET STANDARDS FOR BILLING ACCURACY? 8 A. No, however, Subst. R.§ 25.25 provides limits to the use of estimated bills. When 9 questioned as to policy concerning the use of estimates versus actual meter reads, 10 TCC said that its policy concerning the use of estimated versus actual meter reads is 11 to comply with the rule.20 The rule says: An electric utility may submit estimated 12 bills for good cause provided that an a [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/4064940. Public record. Not legal advice.