N O . 03-14-00706- CV IN THE TEXAS COURT OF APPEALS THIRD COURT OF APPEALS DISTRICT AT AUSTIN ENTERGY TEXAS, INC., A PPELLANT , V. PUBLIC UTILITY COMMISSION OF TEXAS, A PPELLEE O N A PPEAL FROM THE F INAL J UDGMENT IN C AUSE N O . D-1- GN -13-002623 345 T H J UDICIAL D ISTRICT C OURT , T RAVIS C OUNTY , T EXAS , H ONORABLE A MY C LARK M EACHUM , J UDGE P RESIDING APPELLEE BRIEF OF THE OFFICE OF PUBLIC UTILITY COUNSEL

OFFICE OF PUBLIC UTILITY COUNSEL Tonya Baer Public Counsel State Bar No. 24026771 Ross Henderson Assistant Public Counsel State Bar No. 24046055 ross.henderson@opuc.texas.gov P.O. Box 12397, Capitol Station Austin, Texas 78711-2397 (512 ) 936-7500 (Telephone) (512 ) 936-7525 (Facsimile)

March 9, 2015 ACCEPTED 03-14-00706-CV 4425431 THIRD COURT OF APPEALS

AUSTIN, TEXAS 3/9/2015 3:33:37 PM JEFFREY D. KYLE

CLERKi TABLE OF CONTENTS

TABLE OF CONTENTS

................................ ................................ ............................ i
TABLE OF AUTHORITIES

................................ ................................ .................. iii
GLOSSARY OF A BBREVIATIONS AND TEC HNICAL TERMS

....................... v i
ISSUES PRESENTED

................................ ................................ ............................... 1 STATEMENT OF FACTS

................................ ................................ ....................... 2 SUMMARY OF THE ARGUMENT S

................................ ................................ ...... 4 ARGUMENT AND AUTHORITIES

................................ ................................ ........ 6
I. There is substantial evidence in the record to support the Commission’s decision to reject ETI’s rate case expenses related to Appellant’s advocacy for financially

- based employee incentive compensation.

. ............... 7
A. Substantial evidence standard of r eview

. ................................ ................... 8
B. There is substantial evidence to support the Commission’s determination that ETI’s advocacy regarding financial

- based incentive compensation w as “unreasonable” and “overly aggressive.”

. ................................ ................................ ............................ 10 C. The Commission ’s decision to disallow a portion of ET I’s rate

- case expense is also supported by the totality of the record.

.. ......................... 1 4
II. The Commission acted well within its broad discretion when it disallowed ETI’s rate case expenses related to Appellant’s advocacy for financially

- based employee incentive comp ensation. The Commission did not act arbitrarily or capriciously nor abuse its discretion.

............................ 1 8ii A. The Commission was not bound by any policy to allow rate case expenses for efforts to recover impermissible financially

- based incentive compensation.

................................ ................................ .......... 1 9
B. ETI was afforded due process

. ................................ ................................ 21 C. T he Commission’s decision was a c ase - by

- case d etermination and was not impermissible adjudicative r ulemaking

. ................................ ..... 24
I I I. The Commission’s method of quantifying the amount of disallowed rate case expenses is supported b y substantial evidence in the record and was not arbitrary, capricious, or an abuse of its discretion.

................................ .. 2 9
A. The Commission’s quantification of the unreasonable rate case expenses is supported by substantial evidence in the record

.................. 30
B. The Commission ’s quantification of the unreasonable rate case expenses was not arbitrary, capricious, or an abuse of its discretion

..... 3 3
PRAYER FOR RELIEF

................................ ................................ ........................... 3 5 CERTIFICATE OF SERVICE

................................ ................................ ................ 3 7 CERTIFICATE OF COMPLIANCE

................................ ................................ ....... 3 8 APPENDIX A A

pplication of Entergy Texas, Inc. , Docket N o. 39896 , Direct Testimony of Kevin G. Gardner (ETI Application at B ates p. 3155 to 3159 ) (Nov. 1, 2012) (Interchange item No. 142 )iii TABLE OF AUTHORITIES CASES Burke v. Central Educ. Agency 725 S.W.2d 393 (Tex. App

. – Austin 1987, writ ref’d n. r.e.)

................ 16

- 17, 19 Cities of Corpus Christi v. Public Utility Commission 188 S.W.3d 681 ( Tex. App

. – Austin 2005, pet. denied)

................................ .. 3 5 City of Amarillo v. Railroad Commission 894 S.W.2d 491 (Tex. App

. – Austin 1995, writ denied)

................ 14

- 15, 18, 32 City of El Pas o v. Public Utility Commission 609 S.W.2d 574 (Tex. App

. – Austin 1980, writ ref’ d n.r.e.)

............................ 1 6 City of Port Neches v. Railroad Commission 212 S.W.3d 565 (Tex. App.

– Austin 2006, no pet.)

....... 6, 13, 14, 15

- 16, 32, 34 Indus trial Utilities Service v. Tex. N atural Resource Conservation Commission 947 S.W.2d 712 (Tex. App

. – Austin 1997, writ denied)

................................ .. 18 McHaney v. Tex. Comm’n on Environmental Quality No. 03

- 13

- 00280, 2015 WL 869197 *8 (Tex. App.

– Aus tin mem. op. ).

......... 28 Oncor Electric Delivery Company , LLC v. Public Utility Commission 406 S.W.3d 253 ( Tex. App

. – Austin 2013, no pet. ).

......................... 21

- 23 , 3 3, 34 Pedernales Electric Cooperative, Inc. v. Public Utility Commission 809 S.W.2d 332 (Tex. App

. – Austin 1991, no pet.).

................................ ........ 18 Pioneer Natural Resources USA , Inc. v. Public Utility Comm ission 303 S.W.3d 363 (Tex. App.

– Austin 2009, no pet. )

............. 9, 13, 15, 32 , 34

- 35 Reliant Energy, Inc. v. Public Utility Commission 153 S.W.3d 174 (Tex. App

. – Austin 2004, pet. denied).

........................... 20, 33iv Richards v. Comm’n for Lawyer Discipl ine 35 S.W.3d 243 (Tex. App. Houston 2000)

. ................................ ....................... 19 State of Texas’ Agencies and Institutions of Higher Learning v. Public Util. Comm’n of Tex. , No. 03

- 11

- 00072

- CV, 2014 WL 6893871 ( Tex. App.

– Austin Dec. 4, 2014, no pet.)

. ................................ ....................... 12 Texas Dep't of Transp. v. Sunset Transp., Inc. 357 S.W.3d 691 (Tex. App

. – Austin 2011, no pet.)

................................ .. 26

- 2 7
Texas State Boar d of Pharmacy v. Witcher 447 S.W.3d 520 (Tex.App.

– Austin 2014, pet. filed)

............................. 25, 26, 27 Trinity Settlement Services, LLC v. Texas State Securities Board 417 S.W. 3d 494 (Tex.App

. – Austin 2013, pet. denied)

................... 2 6, 27, 29, 34

STATUTES Administrative Pr ocedure Act (APA) , T EX
. G OV ’ T C ODE §§ 2001.001

- .902 (Vernon 2008 & Supp. 2013)

................................ ................................ ................... 2 6
T EX
. G OV ’ T C ODE § 2001.003(6)

................................ ................................ . 2 6

- 27, 34
T EX
. G OV ’ T C ODE § 2001.174(2)

................................ ................................ ............. 3 5
T EX
. G OV ’ T C ODE § 2001.174(2)(e)

................................ ................................ ........... 9 Public Utility Regulatory Act (PURA), T EX
. U TIL
. C ODE §§ 11.001

- 66.017 ( Vernon 2007 & Supp. 2013 )

................................ ................................ ... 4, 19, 25, 32
T EX
. U TIL
. C OD E § 36.003

................................ ................................ .............. 4, 27, 29
T EX
. U TIL
. C ODE § 36.006

................................ ................................ .................... 5 , 3 3
T EX
. U TIL
. C ODE § 36.051

................................ ................................ .............. 4 , 27, 29
T EX
. U TIL
. C ODE § 36.061

................................ ................................ .................... 6 , 14v T EX
. U TIL
. C ODE § 36.061(b)

................................ ................................ ..................... 8
T EX
. U TIL
. C ODE § 36.061(b)(2)

................................ ................................ .... 4, 25, 30vi GLOSSARY OF ABBREVI ATIONS AND TECHNICAL TERMS APA

– Administrative Procedure Act , Tex. Gov’t Code §§ 2001.001

- .902 (Vernon 2008 & Supp. 2013) AR

– Administrative Record Commission

– Public Utility Commission of Texas, Defendant in this appeal Docket No. 39896

– Applicati on of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and Obtain Deferred Accounting Treatment. The Public Utility Commission of Texas rate case proceeding in which the rate case expenses at issue were incurred.
Docket No. 40295

– Application of Entergy Texas, Inc. for Rate Case Expenses Pertaining to PUC Docket No. 39896

. The Public Utility Commission of Texas proceeding from which this appeal is taken. OP U C

– Offi ce of Public Utility Counsel, an Intervenor in this appeal Order

– The final and appealable order of the Commission in Docket No. 40295 , signed on May 21, 2013 , from which OP U C appeals in this suit for judicial review

. Appellant

– Entergy Texas, Inc. (ETI), an electric utility.
PFD

– Proposal for Decis i on PURA

– Publ ic Utility Regulatory Act , T EX
. U TIL
. C ODE A NN
. §§ 11.001

- 6 6

. 017 (Vernon 2007 & Supp. 2013 )1 BRIEF OF APPELLEE , OFFICE OF PUBLIC UTILITY COUNSEL TO THE HONORABLE COURT OF APPEALS: The Office of Public Utility Counsel (OPUC), Appellee, submits th is brief in support of the final judgment of the District C ourt on judicial review of the F inal Order on Rehearing of the Public Utility Commission of Texas (Commission or PUC) in Docket No. 42059. Appellee, OPUC respectfully presents the following:
ISSUE S PRESENTED
1. In Commission Docket No. 39896, Appellant failed to prove that certain financially

- based employee incentive compensation expenses were just and reasonable. The Commission had rejected those , or similar , expenses in previous dockets. In Docket No. 40295 , the rate case expense hearing tha t is the subject of this appeal , the Commission denied the rate case expenses Appellant incurred while attempting to include the financial ly

- based employee incentive compensation expenses in its rates in Docket No. 39896

. Was the Commission’s case

- by

- case determination within the Commission’s broad authority and discretion to grant or disallow rate case expenses?
2. Was the Commission’s case - by

- case determination , after notice and hearing, to reject rate case expe nses associated with Appellant ’s request for financial ly

based employee incentive compensation expenses in the related rate case a2 violation of Appellant’s due process rights or an improper ad hoc rulemaking

–

or was it within the Commission’s broad author ity and discretion?
3. Assuming the Commission’s decision to reject the rate case expenses related to the financial ly

- based employee incentive compensation expenses was supported by the record and a reasonable exercise of its discretion , w as the Commission’s method of quantifying those rate case expenses , after notice and hearing, within the Commission’s broad authority and discretion and supported by substantial evidence in the record?
STATEMENT OF FACTS Appellant Entergy Texas, Inc. (ETI) appeals the Distri ct Court’s Judgment which affirmed the Commission’ s Final Order in Docket No. 402 95. 1 This docket (Docket No. 40295) was a rate case expense hearing that was severed from a previous rate application ( Docket No. 39896 ). In Docket No. 39896 , ETI filed an a pplication seeking a $111.8 million increase in base rate s . 2 Docket No. 39896 was ETI’s third
rate case application in only four years. 3 ETI subsequently reduced its requested increase to $104.8 million. 4

1 Appellant ETI’s Initial Brief. 2 AR Volume I, Binder 2, Item 55 (Final Order at 4, FOF No. 2). 3 AR Volume I, Binder 2, Item 32 (PFD at 23). 4 AR Volume I, Binder 2, Item 55 (Final Order at 5, FOF No. 10).3 In its final order for Docket No. 39896 , the Com mission substantially reduced ETI’s overall increase to $27.7 million

– a fraction of the original $111.8 million increase requested

. 5 Approximately $6.5 million of the $84.1 million reduction from the original request in Docket No. 39896 was for financia lly

- based employee incentive compensation expenses. 6 ETI had previously failed to obtain such expenses in the two immediately preceding r ate cases involving the Company ( Docket Nos. 34800 and
37744 ) and failed to do in Docket No. 39896 as well. 7 During t he underlying rate case, SOAH granted ETI’s unopposed motion to sever rate case expenses and the PUC docketed the severed proceeding as Docket No. 40295. In Docket No. 402 95, which is the subject of this appeal, ETI sought recovery of $8,752,576 in rate c ase expenses related to Docket No. 39896. 8 Of that total, $7.6 million was incurred by ETI with the remainder being incurred by the intervening Cities. 9 The Administrative Law Judge (ALJ) held that, based upon the general concerns raised by PUC Com missio n Staff and Intervenors, “a substantial cut to ETI’s rate case
expenses is warranted.” 10 In the Final Order, t he Commission agreed with the ALJ,

5 AR Volume I, Binder 2, Item 55 (Final Order at 5, FOF No. 12). 6 AR Volume I, Binder 2, Item 32 (PFD at 29, third bullet point). 7 AR Volume I, Binder 2, Item 32 (PFD at 23). 8 AR Volume I, Binder 2, Item 55 (Final Order at 5, FOF No. 13). 9 AR Volume I, Binder 2, Item 55 (Final Order at 5, FOF No. 14). 10 AR Volume I, Binder 2, Ite m 32 (PFD at 30 ).4 adopting the relevant portions of the Proposal for Decision (PFD) and fin d ing that “the amount of rate case exp enses sought by ETI ($8.8 million ) is high, both in absolute terms and in relation to the rate increase ultimately obtained by ETI in Docket 39896 ($27.7 million). 11
T he Commission reduced the amount of recoverable rate case expense s to $6,896,037.73. 12 Of the reduced amount of rate case expenses , the Commission determined that $522,244.66 should be disallowed because this amount of expense was

“ attributable to unreasonable and overly aggressive arguments ” pursued by ETI in Docket No. 39896 related to the f inancially

- based incentive compensation. 13
SUMMARY OF THE ARGUMENTS
Under the Public Utility Regulatory Act (PURA) , 14 t he Commission has broad powers and discretion in regulating and setting the rate s of public utilities, and in particular, in determining w hat reasonable costs of participating in a proceeding a utility may be allowed to recover as a cost or expense. 15 The Commission found in the underlying ETI rate case 16 that ETI failed to meet its burden to prove that certain financially

- based employee ince ntive compensation expenses were just and reasonable.

11 AR Volume I, Binder 2, Item 55 (Final Order at 5, FOF No. 17 ). 12 AR Volume I, Binder 2, Item 55 (Final Order at 5, FOF No. 18). 13 AR Volume I, Bin der 2, Item 55 (Final Order at 6 , FOF No. 18.f). 14 Public Utility Regulatory Act (PURA), T EX
. U TIL
. C ODE A NN
. §§ 11.001

- 66.017 (Vernon 2007 & Supp. 2013 )

. 15 PURA §§ 36.003, 36.051 and 36.061(b)(2).5 In this appeal from the rate case expense hearing, Appellant maintains that the Commission acted outside of its broad authority when t he Commission decided to reject rate case expenses associated with Appellant ’s fruitless efforts to obtain approval for the financially

- based incentive compensation expenses in Docket No. 39896

. Appellant also argues that the Commission should be required to conduct a rulemaking prior to rejecting such rate case expenses

. Additionally, Appellant similarly argues that the Commission ’s method of determining the amount of the rate case expenses attributable to the Company’s financially

- based incentive compensation request is in

error . However, Appellant fails to provide su pport under the law for its positions and the District Court’s Judgment affirming the Commission’s Order should be affirmed

. Appellant , as the public utility, had the burden to provide evidentiary support for the rate case expen ses rejected by the Commissi on and under PURA § 36.006 retained the burden of persuasion on the entire case

. Appellant had notice and an opportunity to provide evidence and argu ment with respect to each of those expenses. Appellant further had the opportunity to provide rebuttal evi dence and argument in response to the direct cases of the intervening parties and Commission Staff, including the Direct Testimony and Workpapers of Nathan A. Benedict. 17 The C ommission considered the ALJ’s PFD, weighed the evidence in the record , and cons idered the parties’ arguments

.

16 PUC Docket No. 39896, AR Volume I, Binder 2, Item 55 (Final Order ). 17 AR Volume I I, Binder 3 , OPUC 1, Direct Testimony and Workpapers of Nathan A. Benedict

.6 Ultimately , the Commission adopted the PFD with some changes

. The Commission’s decisions were a reasonable exercise of its statutory authority and are supported by substantial evidence. The Commission did not act in an arbi trary and capricious manner and the Commission did not abuse its discretion. Further, a n agency is not required to adopt a rulemaking prior to exercising its discretionary authority under these circumstances

. The Commission has the authority to decide ca ses through the contested case process. The Court should decline Appellant ’s request to substitute its own judgment for that of the Commission.
ARGUMENT AND AUTHORITIES The Commission has broad discretion to determine recovery of expenses in a ratemaking proceeding. City of Port Neches v. Railroad Commission , 212 S.W.3d 565 , 579 (Tex. App.

– Austin 2006, no pet.) . PURA § 36.061 r eflects this authority and states that the regulatory authority (here, the Commission) “may allow” as a cost or expense the “re asonable costs of participating in a proceeding under this title not to exceed the amount approved by the regulatory authority.”
In the rate case expense proceeding which is the subject of this appeal , Docket No. 40295, the Commission disallowed Appella nt ’s rate case expenses associated with financially

- based employee compensation expenses in the associated rate case

. Appellant ’s request to include the financially

- based employee incentive compensation7 expenses ran contrary t o longstanding Commission pre cedent

. In seeming contrast to Appellant ’s arguments, the issue presented in this appeal is not the Commission’s rejection of the financially

- based employee incentive compensation expenses in the underlying rate case , but i nstead, the Commission ’s decisio n to reject ETI’s rate ca se expense associated with pursuing the financially

- based incentive compensation expense request

. Appellant argues in its brief that the Commission’s Order was arbitrary and capricious and was an abuse of the Commission’s broad di scretion. Appellant ’s argument is without merit. The Commission’s Order is supported by the record and was a proper exercise of its broad grant of authority under PURA and should be affirmed.
I. There is substantial evidence in the record to support the Co mmission’s decision to reject ETI’s rate case expenses related to Appellant’s advocacy for financially
- based employee incentive compensation . No party to this proceeding argues that the Commission’s decision to deny the financially

- based employee incentiv e compensation in the underlying rate case (Docket No. 39896) was unreasonable. Instead, Appellant disputes the Commission’s determination that it was “unreasonable” and “overly aggressive” for ETI to expend the litigation costs associated with seeking th e incentive compensation expense. Appellant contends this, despite the fact that the Commission has repeatedly rejected the same financially

- based incentive compensation expenses in prior dockets. Appellant cites to8 past Commission orders in an attempt t o persuade the Court that the Commission’s policy on such expenses was unclear or evolving. However, Appellant’s argument is incorrect. While it is certainly a fact question for the Commission to decide whether certain incentive compensation may be disal lowed if it is tied to financial

- based incentives (versus allowable if it is tied to operational performance), the record demonstrates that the rejection of this type of financially

- based incentive compensation was settled Commission precedent. More impo rtantly, Appellant’s argument ignores the larger context by which the Commission made its determination. The totality of the record demonstrates that the Commission’s decision to disallow the specific rate case expenses in question was simply the means by which the Commission accomplished its ultimate objective of trimming ETI’s excessive overall rate case expense. In sum, there is substantial evidence in the record to support the Commission’s partial disallowance of ETI’s rate
case expenses. A. Substantial evidence standard of r eview In this case, the Commission acted pursuant to a statutory grant of authority. The relevant statute states that t he Commission “ may allow as a cost or expense . . . reasonable costs of participating in a [rate case] not to exce ed the amount approved by the regulatory authority.” PURA § 36.061(b) (emphasis added). In interpreting this9 section, the Third Court has found that the Commission has a broad grant of discretion to determine the recovery of expenses in utility rates

– in cluding the reasonable costs of participating in the rate

- making proceeding (i.e., rate case expenses). Pioneer Natural Resources USA, Inc. v. Public Utility Commission , 303 S.W.3d 363, 376 (Tex. App.

– Austin 2009, no pet.). With regard to the substanti al evidence review standard in rate making, the Third Court has said, “we are prohibited from substituting our judgment for the Commission’s . . ..” Pioneer , 303 S.W.3d at 367. The Commission is the sole judge of the weight of the evidence on questions co mmitted to agency discretion. Id. The Court described its role as determining whether there is some reasonable basis in the record to support the agency decision even “if the evidence actually preponderates against the Commission’s finding . . . as long as there is enough evidence to suggest that the Commission’s determination was within the bounds of reasonableness.” Id. The substantial evidence standard of review requires the court to reverse the Commission if the substantial rights of the appellant ha ve been prejudiced because the Commission’s “administrative findings, inferences, conclusions, or decisions are not reasonably supported by substantial evidence considering the reliable and probative evidence in the record as a whole.” T EX
. G OV ’ T C ODE § 2 001.174(2)(e). Appellant fails to meet this standard of review and the Commission’s Order should be affirmed.10 B. There is substantial evidence to support the Commission’s determination that ETI’s advocacy regarding financial
- based incentive compensation w as “unreasonable” and “overly aggressive.” The evidence in the record supports the Commission’s determination that it is not reasonable for the custome rs to bear the costs of ETI’s “unreasonable and overly aggressive arguments.” 18 OPUC provided evidence in the form of direct testimony by its expert witness, Nathan A. Benedict, who testified about the propriety of the rate case expense request as well as how to quantify disallowances for issues such as the financially

- based incentive compensation request. 19 Further, official notice was taken of the record in the underlying rate case, Docket No. 39896. 20 The record in Docket No. 39896 includes evidence related to the Commission’s established precedent and policy with regard to financially

- based incentive compe nsation. Intervening Cities and Commission Staff each presented testimony addressing the issue in Docket No. 39896. When seeking the inclusion of the financially

- based incentive compensation expenses in rates, the Appellant’s own witnesses admitted in t heir pre

- filed direct testimony that their respective recommendations were contrary to Commission precedent and policy , but they hoped to provide new evidence that financial incentive measures benefit
customers

. See Appendix A. 21

18 AR Volume I, Binder 2, Item 55 (Final Order at 6, FOF No. 18.f). 19 AR Volume II, Binder 3, OPUC 1, Direct Testimony and Workpapers of Nathan A. Benedict. 20 AR Volume III, Binder 3, Vol. A, Hearing on the Merits Transcript, p. 16, l. 14 to 24. 21 AR Volume I, Binder 2, Item 32 (PFD at 21 ) ; See also Appendix A, Application of Entergy Texas,11 In the PFD, the ALJ outli ned what contributed to his reasoned determination to disallow the rate case expenses associated with the financially

- based incentive compensation expenses. First, the PFD states: “In Docket 39896 [the underlying rate case], all parties, including ETI, ag reed that the Commission precedent mandated that financially

- based incentive compensation is not recoverable. 22 The PFD also recognized other pertinent considerations, including the fact that the underlying rate case docket was the third consecutive rate c ase in which Appellant sought, but failed to obtain, authority to charge ratepayers for this type of financially

- based incentive
costs. 23 The ALJ also recognized that Appellant would have been aware that other utilities have sought recovery of this type of financially

- based incentive compensation, and been uniformly denied by the Commission. 24 In the Court below, ETI stated that it “does not disagree that past Commission decisions weigh against including financially

based incentive compensation in rates.” 25 Nevertheless, ETI asked the Commission to reconsider its long

- standing precedent on this issue and demands that the customers to pay for its fruitless efforts. 26 Appellant concedes that this Court recently upheld the Commission’s

Inc. , Docket No. 39896, Direct Testimony of Kevin G. Gardner (ETI Application at Bates p. 3155 to 3159) (Nov. 1, 2012) (Interchange item No. 142) 22 AR Volume I, Binder 2, Item 32 (PFD at 21 ). 23 AR Volume I, Binder 2, Item 32 (PFD at 23). 24 AR Volume I, Binder 2, Item 32 (PFD at 24). 25 Appellant ETI’s Initial Brief at13.12 disallowance of “compens ation payments that are tied to financial performance measures rather than those tied to strictly operational measures such as reliability and safety

. ” Appellants Brief citing State of Texas’ Agencies and Institu tions of Higher Learning v. P ublic Util. Co mm’n of Tex. , No. 03

- 11

- 00072

- CV, 2014 WL 6893871 ( Tex. App.

— Austin Dec. 4, 2014, no pet.). Appellant correctly notes that the question of which expenses are disallowable financial measures versus allowable operational measures is a fact question for the Commission to decide based upon the record. Id

. However, Appellant attempts to stretch the holding of State of Texas’ Agencies to argue that it was not unreasonable for ETI to seek the rejected financial

- based incentive compensation when such a question t urns on facts. 27 In support of its argument, Appellant paints a picture of a murky question before the Commission regarding the disallowed expense. Appellant argues that the Commission’s precedent on the recovery of financial ly

- based incentive compensatio n is evolving, and that the door was open for Appellant to seek such expenses. 28 Appellant cites orders in which, it argues, applicants have made inroads into recovery of certain financially

- based incentive compensation. 29 However, ETI has not cited to a s ingle case where the Commission granted the

26 AR Volume I, Binder 2, Item 32 (PFD at 21, 2.a). 27 Appellant’s Brief, p. 16. 28 Appellant ’s Brief, p. 14. 29 Appellant’s Brief, p. 14.13 particular financial

- based incentive compensation ETI was seeking. Appellant cannot change the fact that the Commission’s precedent was clear with respect to the financial

- based incentive compensation. It was u niformly disallowed. Even Appellant’s own witnesses admitted that the precedent was clear

- cut with respect to the rejected expense. Appendix A. The record demonstrates that ETI expended litigation efforts in a failed attempt to overturn long

- standing Com mission precedent. The Commission was not persuaded to overturn its long

- standing precedent and determined that ETI’s rate case expenses “attributable to [ETI’s] unreasonable and overly aggressive arguments . . .is properly disallowed

. ” 30 When determining the reasonableness and necessity of rate case expenses, the agency is the sole judge of the weight of the evidence and the credibility of the witnesses. City of Port Neches , 212 S.W.3d at 579. The record before the Commission and now the Court demonstra tes that there is more than “enough evidence to suggest that the Commission’s determination was within the bounds of reasonableness.” Pioneer , 303 S.W.3d at 367. However, even if ETI could demonstrate that its litigation efforts were not unreasonable and o verly aggressive, the Commission’s decision must be examined in the larger context whereby the Commission determined that ETI’s overall litigation14 expenses were excessive and sought a reasonable means to trim them. C. The Commission’s decision to disallow a p ortion of ETI’s rate
- case expense is also supported by the totality of the record. Appellant’s single

- minded reliance on the Commission’s determination that ETI made “unreasonable and overly aggressive arguments” 31 is misplaced. The Commission’s specific disallowance of rate case expense related to financial

- based incentive compensation does not exist in a vacuum. Even if ETI could demonstrate that it was reasonable to advocate for those specific expenses in the underlying rate case, the totality of the r ecord demonstrates that the Commission was still well within its allowed discretion to reduce ETI’s overall rate case expenses. The Commission has broad discretion to determine recovery of expenses in a ratemaking proceeding. City of Port Neches , 212 S.W .3d at 579 . PURA § 36.061 reflects this authority and states that the regulatory authority (here, the Commission)

“ may allow” as a cost or expense the “reasonable costs of participating in a proceeding under this title not to exceed the amount approved by the regulatory authority.” The Commission may draw inferences and conclusions based on its experience, and to make its own determination of what expenses are reasonable, so long as the Commission includes a reason or explanation in its order. Further , the reasonableness of the Commission’s determination is looked at in light of the whole record. See City

30 AR Volume I, Binder 2, Item 55 (Final Order at 6, FOF No. 18.f).15 of Amarillo v. Railroad Commission , 894 S.W.2d 491 (Tex. App.

– Austin 1995, writ denied). The Commission’s discretion includes the authority to con sider the context of the rate proceeding for which the expenses were incurred and the authority to disallow rate case expenses based upon the propriety of bringing the proceeding. See Pioneer , 303 S.W.3d at 377 ( “ The Commission was entitled to take into c onsideration the fact that Cap Rock's rates had not been regulated by the Commission for a substantial period of time and, therefore, that Cap Rock had to create much of its rate

- filing package from scratch.”). Further, the Commission’s authority is not l imited to line

- item disallowances or charges related to underlying unreasonable costs. In City of Amarillo , the Third C ourt upheld the Railroad Commission’s decision to reduce the uncontested rate case expenses related to one analyst’s charges by 20% due to insufficiency of support. City of Amarillo , 894 S.W.2d at 496

- 97

. In addition, the Third Court of Appeals in another opinion also confirmed that it is within the agency’s discretion to find rate case expenses to be unreasonable even if the underlying c ost item in the rate case is found to be reasonable. The court stated in its opinion in City of Port Neches that: It is true that, in order to include . . . costs as an “expense or cost of service” in TGS’s rate calculation, TGS was required to demonstrat e that those costs were reasonable and necessary. But the leap cannot be made

31 AR Volume I, Binder 2, Item 55 (Final Order at 6, FOF No. 18.f).16 from this fact to TGS’s conclusion that any fee incurred by TGS in presenting its “cost of service” argument is automatically recoverable as a rate case expense. This is where the Commission’s discretion . . . plays an integral role. City of Port Neches , 212 S.W.3d at 581 (emphasis added ). In this case, Appellant’s argument focuses solely on the specific reduction in rate case expense and ignores the larger context by which the Commission made its decision. However, t he Commission’s decision was not as narrow as Appellant would suggest

. The Commission determined from the record that ETI’s overall rate

- case
expenses were too high and sought a reasonable means to reduce them.
In Finding of Fact No. 17 of the Commission’s Final Order, the Commission determined that “the amount of rate

- case expenses sought by ETI ($8.8 million is high, both in absolute terms, and in relation to the increase ultimately obtained by ETI in Docket 3989 6 ($27.7 million).” 32 ETI has waived any error with respect to this finding because ETI was required to have presented this point of error to the Commission in its Motion for Rehearing. 33 A motion for rehearing must be specific enough to put an
agency on n otice of an alleged error and give the agency the opportunity to correct the error or prepare to defend it. 34

32 AR Volume I, Bin der 2, Item 55 (Final Order at 5, FOF No. 17 ). 33 City of El Paso v. Public Utility Commission of Texas , 609 S.W.2d 574, 577

- 578 (Tex. App.

— Austin 1980, writ ref’d n.r.e.) (Appellant could not raise potential problems with a PUC Order, including substantial evidence questions, which it failed to raise in its motion for rehearing). 34 Burke v. Central Educ. Agency , 725 S.W.2d 393, 396

- 97 (Tex. App.

— Austin 1987, writ ref’d17 This uncontroverted finding of fact, and relevant portions of the PFD, demonstrate s that the Commission’s decision considered the overall context o f ETI’s rate case expense request not just the reasonableness of the specific disallowed expense. The record shows that the ALJ considered (in portions of the PFD specifically adopted by the Commission,) 35 the frequency in which ETI had filed for rate cases (three in four years); 36 the size of the increase granted relative to the increase requested (only roughly 25% granted); 37 and the disproportionally large amount of rate case expenses relative to the approved underlying rate increase (roughly one third). 38 A fter considering these general concerns, the ALJ found that “a substantial cut to ETI’s rate case expense is warranted.” 39 Only after reaching this general conclusion did the ALJ evaluate the methods by which a substantial cut could be accomplished. 40 Afte r considering the methods proff ered by the parties, the ALJ’s disallowance of the specific expenses related to ETI’s aggressive long

- shot argument (the “issue

- specific” approach) 41 was simply the means by which the reduction was accomplished. Thus, even if the record did not

n.r.e.) (Appellant must provide “(1) identification of the particular finding of fact, conclusion of law, ruling, or other action by the agency wh ich the complaining party asserts was error; and (2) the legal basis upon which the claim of error rests.”)

. 35 AR Volume I, Binder 2, Item 32 (PFD at 29). 36 AR Volume I, Binder 2, Item 32 (PFD at 29). 37 AR Volume I, Binder 2, Item 32 (PFD at 29). 38 AR Volume I, Binder 2, Item 32 (PFD at 29). 39 AR Volume I, Binder 2, Item 32 (PFD at 30). 40 AR Volume I, Binder 2, Item 32 (PFD at 31).18 conclusively show that ETI’s advocacy for certain expenses was “unreasonable and overly aggressive,” the Commission’s reduction in rate case expenses was supported by the whole record and the overall context of the record. City of Amari llo , 894 S.W.2d
at 496

- 97

. Industrial Utilities Service v. Tex. Natural Resource Conservation
Commission , 947 S.W.2d 712 (Tex. App.

— Austin 1997, writ denied). This is because the Commission has the discretion to reject even reasonably accrued rate case ex penses if the record supports such a decision

. Id. In sum, there is ample support in the record for the Commission’s disallowance of a portion of Appellant’s rate case expenses.
II. The Commission acted well within its broad discretion when it disallowed ET I ’s rate case expenses related to Appellant’s advocacy for financially
- based employee incentive compensation . The Commission did not act arbitrarily or capriciously nor abuse its discretion. Appellant complains that the Commission imposed a new standard upon it when it rejected the rate case expenses associated with the financially

- based incentive compensation expenses, and that its purp orted dissimilar treatment was arbitrary and an abuse of discretion. The Third Court has described its review under the ‘arbitrary and capricious’ standard as being “limited and deferential.” Pedernales Electric Cooperative, Inc. v. Public Utility Commission , 809 S.W.2d 332, 338 (Tex. App.

— Austin 1991, no pet.).

41 AR Volume I, Binder 2, Item 32 (PFD at 29).19 As discussed above, PURA confers considerable discretion on t he Commission in deciding the reasonable and necessary expenses to be recovered in rates. The Commission’s determination in this case to disallow rate case expenses associated with fruitless efforts to recover financially

- based incentive compensation is s upported by the record. A. The Commission was not bound by any policy to allow rate case expenses for efforts to recover impermissible financially
- based incentive compensation. To support its position that the Commission treated ETI disparately, Appellant b egins by i mproperly citing to Commission o rders that are not part of the record before the Court. 42 Appellant alleges that the o rders show that the Commission has “consistently allowed utilities to recover their expenses associated with their efforts to

re cover the incentive costs.” 43 Appellant introduces the o rders as an Appendix to Appellant’s brief an d gives no indication that the o rders are part of the administrative record. 44 To the extent that the o rders are not part of the record, they should not be given any consideration. Richards v. Comm’n for Lawyer Discipline , 35 S.W.3d 243, 250

- 51 (Tex. App. Houston 2000) ; Burke v. Central Educ. Agency , 725 S.W.2d 393 (Tex. App.

– Austin 1987, writ ref’d n.r.e.). However, even if it were proper for ETI to cite these

42 Appellant’s Brief, P. 17 and (Appellant’s Appendix D). 43 Appellant’s Brief, P. 17.20 Commission o rders here, the o rders are irrelevant and do not show the Commission policy that ETI contends. Each of the o rders cited by ETI were issued as the result of either stipulated agreements or the case was not contested at all. The Commissio n had never specifically addressed the question of whether a utility should recover rate case expenses associated with disallowed financially

- based incentive compensation expenses in a fully litigated contested case

- until now. The Commission cannot have created binding policy when it never previously addressed this issue

. There was no such policy. However, even if the policy or precedent existed as Appellant alleges, the Commission is not bound to follow its past decisions so long as the divergence is justified and explained. Reliant Energy, Inc. v. Public Utility Commission, 153 S.W.3d 174, 200 (Tex. App.

— Austin 2004, pet. denied)

. Even assuming the re was a Commission precedent relating to recovery of rate case expenses accrued seeking financially

- ba sed employee incentive compensation; the Commission was not bound to follow th at precedent in this case. The Third Court has held that e ven when the Commission has treated utilities dissimilarly, the Commission’s decision was not arbitrary and capricious where substantial evidence supported the decision and the record did not show that divergence was unjustified. Reliant , 153 S.W.3d at 200. Appellant’s own brief cites this proposition : “the

44 Appellant’s Brief, P. 17 and (Appellant’s Appendix D).21 Commission is not absolutely bound by its previous decisions and may change its policy on a given issue when relevant circumstances change.” 45
As demonstrated in the substantial evidence review above (Section I) , the Commission’s use of its broad discretion to reject some of Appellant’s rate case expenses was fact speci fic and supported by substantial evidence in the record. Further, divergence from past practice (if there was any) was not unjustified due to the totality of the record before the Commission

. In complete contradiction to the principal that the Commission is not bound by precedent in a case

- by

- case determination, Appellant argues that the Commission may only exercise its discretion on a prospective basis. Appellant’s implausible theory would impermissibly bind the Commission’s hands from exercising its st atutory grant of authority each time the Commission made a determination.
B. ETI wa s afforded due p rocess. Appellant cites the Third Court’s Oncor Electric Delivery Company LLC v. Public Utility Commission opinion for the proposition that parties “are entitle d to know what agency standards will be applied to them in advance of the administrative process.” Appellant’s Brief at 19; C iting Oncor Electric Delivery Company LLC v. Public Utility
Commission , 406 S.W.3d 253 ( Tex. App.

— Austin 2013, no pet. )

. Appellan t asserts that the Commission was required to develop new policies regarding the collection of

45 Appellant’s Brief at 16

.22 rate case expenses prospectively only, and within the context of a rulemaking. 46 In actuality, it is Appellant that is attempting to foist a new standard of disc retion on the
agency. The Commission made a case

- by

- case determination based upon the record before it. The Commission’s decision was well within the bounds of its broad discretion to award rate case expenses.
In Oncor , the Third Court held the Commiss ion failed to provide any support in the record for a conclusion of law. The court also held that the Commission’s decision to require a new procedure after the fact (a new procedure that the Applicant was now foreclosed from availing itself of) was a viol ation of due process and fundamental fairness. Oncor , 406 S.W.3d 253. Appellant argues that Docket No. 40295 was identical to the scenario presented in Oncor

. Appellant state s that the Commission’s decision in this case was similar because the “post

- hea ring imposition of a new policy was fundamentally unfair because by that time, it was too late for Oncor to comply with the new rule ” 47 Appellant is incorrect , the Oncor decision is not instructive in this case. The Third Court’s ruling in Oncor is inap plicable to the current rate appeal for two reasons. First, unlike in Oncor , the Commission’s decision to deny rate case expenses was fact

- specific to this record and thoroughly explained in the PFD and Commission Order. Oncor , 406 S.W.3d 253, 268 . In Onc or “th e Commission failed to

46 Appellant ’s Brief at 19

. 47 Appellant ’s Brief at 19

.23 articulate any rational connection between the facts of this case and its decision .” As detailed above, th e Commission’s determination in this case was based upon substantial evidence showing that ETI’s rate case expense s w er e generally too high and that the company took unreasonable positions in the rate case. Second, the holding in Oncor was primarily that the Commission’s announcement of a new policy was a departure from past precedent that precluded the utility from recei ving noti ce and opportunity to be heard and, therefore, was a violation of due
process . Oncor , 406 S.W.3d 253 , 268

. The Third Court states in Oncor , “to achieve the meaningful hearing that due process requires, the parties must be able to present evidence on the issues to be decided.” Oncor , 406 S.W.3d 253, 269. Unlike the applicant in Oncor , Appellant was afforded notice and an opportunity to be heard. In Oncor , the utility was not allowed to present any evidence on its rate ca se expenses, whereas in th is case, ETI had two full hearings to present evidence and meet its burden to prove the reasonableness of including financially

- based employee incentive compensation expenses in its cost of service and the reasonableness of expenses related to advocating f or them.
In addition, in the unde rlying rate case (Docket 39896) ETI was aware that all of the other parties opposed its request to recover financially

- based incentive compensation. Indeed, as outlined above, even ETI knew it was attempting to overturn24 C ommission precedent. ETI cannot complain about the disallowance of the rate case expenses associated with a position ETI knew was unlikely to prevail on. Furthermore, it was ETI who filed the unopposed request to sever the rate case expense issue from
Doc ket 39896 in the first place, which prevented the other parties from stating their positions on rate case expenses in the underlying rate case. In this case, (Docket 40295) the issue of disallowing rate case expense associated with ETI’s unreasonable posi tions in the rate case was raised early in the proceeding. OPUC provided direct testimony on the issue which Appellant then had the opportunity to rebut through rebuttal testimony. 48 Appellant also had multiple opportunities to brief the issue and provide argument before the Commission’s decision. The Commission simply used its broad grant of discretion to reject Appellant’s request based upon the totality of the record. Appellant’s due process rights were satisfied in the proceeding and the Commission’s Order should be affirmed. C. The Commission’ s d ecision was a c ase - by - case d etermination and was not impermissible adjudicative r ulemaking. Similarly, Appellant ’s characterization of the Commission’s decision to deny these rate case expenses as being impermissible adjudicative rulemaking also misses the mark. The Commission’s decision to deny these rate case expenses was not, as Appellant claims, a broad amendment to the Commission’ s rules

. The Commission had no rule and

48 AR Volume I I, Binder 3 , OPUC 1, Direct Testimony and Workpapers of Nathan A. Benedict.25 created no new rule. The only rule th at guided the Commission’s decision was its statutory discretion to determine rate case expenses on a case

- by

- case basis under
PURA. T EX
. U TIL
. C ODE § 36.061(b)(2) . The Commission’s decision was discrete and particular to the totality of the facts of this particular case . Appellant relies heavily upon the Third Court’s opinion in Texas State Board of Pharmacy v. Witcher to support its position that the Commission ’s use of discretion in this case was an impermissible adjudicative rulemaking. Texas State B oard of Pharmacy

v. Witcher , 447 S.W.3d 520 (Tex.App.

– Austin 2014 , pet. filed ). The court in Witcher held that the Board of Pharmacy’s decision to suspend a pharmacist’s license, due solely to a policy annunciated in a previous adjudicative matter and w ithout any consideration for the differences in factual circumstances between the two matters constituted illegal rulemaking. Id.
T his matter is distinguishable from the Witcher decision on the most crucial threshold question : The Commission in Docket No. 40295 did not create a ‘rule’ when it exercised its statutory discretion to determine rate case expenses on a case

- by

- case basis under PURA. T EX
. U TIL
. C ODE § 36.061(b)(2) . The Commission’s decision was di screte and particular to the totality of the facts of this particular record

. The Commission di d
not announce a rule of general applicability for future matters regardless of the factual circumstances

. The Commission was simply exercising its statutory discretion to26 determine the reasonableness of rate c ase expenses on a case - by

- case basis. The most distinguishing fact that separates the matter at hand from Witcher is that the Appellant in this case was not prejudiced by a previously announced Commission policy or rule. Trinity Settlement Services, LLC v. Texas State Securities Board , 417 S.W. 3d 494, 501 (Tex.App.

– Austin 2013, pet. denied) (TSSB did not express an intent to apply its decision in all future cases regardless of the factual circumstances)

. The Commission’s exercise of its discretion on a case - by

- case basis does not constitute a rule under the Admin istrative Procedure Act (APA). 49
The APA provides a definition for ‘Rule’: (A) means a state agency statement of general applicability that: i. implements, interprets, or prescribes law or p olicy; or ii. describes the procedure or practice requirements of a state agency; (B) includes the amendment or repeal of a prior rule; and (C) does not include a statement regarding only the internal management or organization of a state agency and n ot affecting private rights or procedures.
T EX
. G OV ' T C ODE § 2001.003(6)

. In order to constitute a ‘rule’ under this definition,

“ an agency statement interpreting law must bind the agency or otherwise represent its authoritative position in matters that impact personal rights. ” Texas Dep't of Transp.

49 Administrative Procedure Act (APA), Tex. Gov’t Code §§ 2001.001

- .902.27 v. Sunset Transp., Inc., 357 S.W. 3d 691, 703 (Tex.App.

— Austin 2011, no pet.) ; See Trinity Settlement Services, LLC v. Texas State Securities Board , 417 S.W. 3d 494, 501 (Tex.App.

– Austin 2013, pet. denied) . The court in Trinity specifically distinguished Witcher saying , “[i] n order to be considered a statement of ‘general applicability’ under the APA, agency pronouncements must ‘affect the interest of the public at large such that they cannot be given the effect of law without public input.’” Trinity, 417 S.W.3d at 502 (no intent for i nterpretation of suit to apply in all future cases, regardless the factual circumstances). Appellant ’s argument is incorrect because there was no binding policy on the Commission other than unreasonable and unnecessary expenses shall be disall owed pursuant to PURA §§ 36.003 and 36.0 51. The Commission’s decision in this matter does not meet the APA definition of a rule because Appellant failed to show that the decision was “a statement of general applicability.” Id; T EX
. G OV ’ T
. C ODE § 2001.003(6)

. As has been discussed previously, the Commission based its decision on the particular set of facts to the record before it. Appellant ’s argument res ts solely on a statement made by one Commissioner. Chairman Nelson is quoted by Appellant as saying: “ I think just the issue of rate case expenses, whether it’s a utility or the cities, I think it’s something we’ve needed to look at for a while, and this i s the type of issue that would be appropriate to include in that28 type of rulemaking .” 50 A single statement by one Commissioner in this context does not create or express the Commission’s policies nor does it serve as a statement of the Commission’s intenti on in adopting a final order

. The fact that the Commission mentioned adopting a rulemaking on the issue , “strongly implies that rulemaking is not occurring at that hearing.” McHaney v. Tex. Comm’n on Environmental Quality , No. 03

- 13

- 00280 , 2015 WL 869197 *8 (Tex.App.

- Austin mem. op. ).
In McHaney , the Third Court considered a strikingly similar fact pattern and argument by a waste handling facility (McHaney) that the TCEQ had engaged in improper ad hoc rulemaking

. Id. There, McHaney argued that the Commiss ion “improperly announce[d] new, clarified record

- keeping rules” relating to his record

keeping for universal waste. Id. The Third Court held that the Commission’s actions were taken pursuant to the Commission’s general discretion to assess penalties and that the actions were supported by substantial evidence. In McHaney , the TCEQ Commission made a similar comment to what C hairman Nelson made in this matter: “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. ” Id. Contrary to what McHaney argued, and what Appellant argues here, the Third Court stated that the Commissioner’s statement about rulemaking “strongly implies that rulemaking is no t occurring at that hearing. ” Id.

50 Appellant ’s Brief at 22

.29 Appellant has failed the threshold question of whether a rule was created. Trinity, 417 S.W.3d at 502. Appellant has not shown any evidence that the Commission expressed or i ntended its decision in this matter to be gener ally applicable or binding regardless of the facts

. The Commission simply used its discretion pursuant to PURA §§ 36.003 and 36.051 to determine that it would be unreasonable for Appellant to recover certain rate case expenses based upon the totality of th e record before the Commission. Therefore, the Commission’s decision is not shown to be arbitrary and capricious or an abuse of its broad discretion.
III. The Commission’s method of quantifying the amount of disallowed rate case expenses is supported by substa ntial evidence in the record and was not arbitrary, capricious, or an abuse of its discretion . Appellant argues that even if the Commission’s decision to reject the rate case expense associated with the financially

- based incentive compensation is not reve rsible, then the Commission’s method of quantifying the amount of rate case expenses to reject was “an unexplained departure from Commission precedent and should be imposed, if at all, prospectively after a rulemaking

. ” 51 Appellant’s arguments regarding th e method of disallowance are incorrect for virtually the same reasons as the arguments discussed above regarding whether the Commission should make the disallowance at all. The Commission’s decision was rationally based upon evidence in

51 Appellant’s Brief at 27.30 the record, was not arbitrary and capricious, and was well within its broad discretion under T EX
. U TIL
. C ODE § 36.061(b) (2)

. A. The Commission’s quantification of the unreasonable rate case expenses is supported by substantial evidence in the record . There is a rational basis in the evidentiary record to support the Commission’s method of quantifying the amount of rate case expenses to reject

. As was discussed in detail in Section II above, t he Commission decided that some amount of reduction in
rate case e xpenses was warrant ed due to Appellant ’s choice to take an unreasonable position in the underlying rate case

– a posit ion that ran counter to long

- standing Commission precedent. The Commission thoroughly explained how its determination in this matter was particular to the f acts of this case and that the totality of the record showed that awarding the financially

- based incentive compensation to ETI in this case would be unreasonable. T he Commission found that the total amount of rate case expenses sought by ETI was “high, bo th in absolute terms, and in relation to the rate increases ultimately obtained by ETI in Docket 39896 ($27.7 million). ” 52
B ased upon these facts in the record, the Commission had several ways to d etermine the amount of rate case expenses to reject. The Co mmission relied on

e vidence and testimony presented by the parties giving various options as to the

52 AR Volume I, Binder 2, Item 55 (Final Order at 5, FOF No. 17).31 amount of rate case expenses to reject due to Appellant ’s unreasonable overreaching. 53 In fact, t he PFD discusses the merits of three approaches provided by the parties based on the evidence presented

. The approaches discussed are: the ‘50/50 approach’ (whereby Appellant receives only 50% of its rate case expenses); the ‘results

- obtained approach’ (whereby Appellant ’s rate case expenses are reduced in propor tion to the ratio of their rate case recovery

– in this case ETI would only receive 26.4% of its rate case expenses); and the ‘issue

- specific approach’ (whereby Appellant ’s rate case expenses are reduced proportionate ly to the amount of specific overreach ing

- in this case financially

- bas ed incentive compensation). 54
E ach of the above approaches is based upon evidence in the record that was adduced at the hearing

. The ALJ ultimately recommended, and the Commission adopted, an issue

- specific reduction of rate case expenses based upon the amount of rate case expenses that were clearly overreaching, because they were based on the a position that ran counter to clear C ommission precedent. 55 The Commission’s decision to adopt the issue

- specific approach was a middle

- ground position. As the ALJ noted in the PFD “the Commission is not required to grant recovery of every reasonable expense and can take into account other considerations.” 56 The Commission could

53 AR Volume I, Binder 2, Item 32 (PFD at 29

- 30). 54 AR Volume I, Binder 2, Item 32 (PFD at 29

- 30 ). 55 AR Volume I, Binder 2, Item 55 (Final Order at 2). 56 AR Volume I, Binder 2, I tem 32 (PFD at 30

- 31 ).32 have taken a more punitive approach and its decision still would have been supported by the record. As discussed earlier, the Commission’s authority with regard to rate case expenses is not limited to line

- item disallowances or charges related to underlying unreasonable costs. See City of Amarillo 894 S.W. 2d at 496

- 97; City of Port Neches , 212 S.W.3d at 579

- 582

. Th e PFD and the Commission’s Order in Docket No. 40295 recognized this. Appellant argues that the record does not support the Commission’s determination because Appellant had put forth unrebutted evidence of actual expenses associated with the issue

- specific reduction. The ALJ considered Appellant ’s evidence and concluded that the expenses put forth by Appellant captured only a fraction of the rate case expenses associated with Appellant ’s unreas onable position

. 57 In other words, the Commission concluded that the Appellant failed to meet its burden to separate reasonable, from un reasonable, rate case expenses. 58 The Court should reject Appellant ’s suggestion to flip the burden of proof set forth i n PURA from the utility to the Commission. 59 The Court should likewise resist Appellant ’s request for the Court
to re

- weigh the evidence and substitute its judgment for that of the Commission.
Pioneer , 303 S.W.3d at 367.

57 AR Volume I, Binder 2, Item 32 (PFD at 24 ). 58 AR Volume I, Binder 2, Item 32 (PFD at 24 ).33 Simply put, there is substantial e vidence in the record to support the Commission’s reasoned decision and its Order should be affirmed

. B. The Commission’s quantification of the unreasonable rate case expenses was not arbitrary , capricious , o r an abuse of its discretion . Appellant contends t hat the Commission’s method of quantification is flawed because “it is an unexplained departure from Commission precedent, and should be imposed, if it all, prospectively in the context of a rulemaking proceeding.” 60 This contention is virtually identical to the contention addressed in Section II above and fails for all of the same reasons. OPUC adopts the responses from Secti on II for the purpose of responding to this argument

. Summarized, the reasons discussed above are: (1) The Commission’s use of its broa d discretion to reject certain of Appellant ’s rate case expenses was fact specific and supported by the record. Further, the record does not show that divergence from past practice (if there was any ) was unjustified. Reliant, 153 S.W.3d at 200. (2) The Third Court’s ruling in Oncor is inapplicable to the current rate appeal for two reasons. First, the Commission’s decision to deny rate case expenses was fact specific to this record and not generally applicable to all utilities. Reliant, 153 S.W.3d at 200. Sec ond, Appellant ’s due process rights were not violated. Unlike the applicant in Oncor , Appellant

59 T EX
. U TIL
. C ODE § 36.006.34 was afforded notice and an opportunity to be heard. Appellant had two full hearings in which to present evidence and meet its burden to prove the reasonablenes s of its rate case expenses , and multiple opportunities to brief the issues and provide argument to the Commission

. Oncor , 406 S.W.3d at 253. (3) The threshold question in determining whether adjudicative rulemaking has occurred is whether a rule has been anno unced. Appellant has failed to show the re was a rule. Trinity , 417 S.W.3d at 502

. There is no evidence in the record that the Commission intended its decision in this matter regarding methodology to have any general applicability to future applicants. In other words, the Commission’s decision did not meet the APA definition of a “rule.” T EX
. G OV ' T C ODE § 2001.003(6)

. In addition to the re sponses summarized above, OPUC notes t he Commission’s authority is not tied to any specific methodology or accounting treatment. The Commission has broad discretion to determine recovery of expenses in a ratemaking proceeding. City of Port Neches , 212 S. W.3d at 579. Further, t he Third Court has specifically upheld the Commission’s discretion to make percentage inferences from the evidence in the record as it has done in this matter. Pioneer , 303 S.W.3d at 369

- 370

. The Court in Pioneer held that in calcul ating the accounting treatment of a

60 Appellant ETI’s Initial Brief a t 21

.35 computer expense, the Commission had discretion to infer a 35% multiplier where the 35% figure was within the range of evidence supported by substantial evidence even when there was no presentation of that particular fig ure: [E] ven when no evidence suggests a specific figure explicitly, the Commission may infer the figure if it is supported by the body of evidence

. . . . Moreover, the Commission may ‘accept or reject in whole or in part the testimony of various witnesses who testify.’
Pioneer , 303 S.W.3d at 369 , quoting Cities of Corpus Christi v. Public Utility
Commission , 188 S.W.3d 681, 695 Tex. App.

— Austin 2005, pet. denied) (emphasis added by citing court)

. Indeed, the Commission makes allocations based upon infere nces in the record regularly. The Commission’s decision in this case is even stronger because there was expert testimony and evidence in the record which supported the exact figure that the Commission chose to adopt. 61 For the forgoing reasons, the Comm ission’s Order should be affirmed.
PRAYER FOR RELIEF WHEREFORE, PREMISES CONSIDERED, Intervenor OP U C prays that pursuant to T EX
. G OV ’ T C ODE § 2001.174(2) and ot her applicable law , the Court will deny Appellant Entergy Texas, Inc.’s Issues Presented, and a ffirm the Commission’s Order. OPUC further prays for any other relief to which it may be justly entitled.

61 AR Volume II, Binder 3, OPUC 1, Direct Testimony and Workpapers of Natha n A. Benedict; and36 Respectfully submitted, Tonya Baer Public Counsel State Bar No. 24026771

/s/ Ross W. Henderson

___________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ Ross W. Henderson Assistant Public Counsel State Bar No. 24046055 OFFICE OF PU BLIC UTILITY COUNSEL 1701 N. Congress Avenue, Suite 9

- 180 P.O. Box 12397 Austin, Texas 78711

- 2397 512/936

- 7500 (Telephone) 512/936

- 7525 (Facsimile) ross.henderson@opuc. texas.gov

AR Volume I, Binder 2, Item 32 (PFD at 29

- 31).37 Certificate of Service I certify that Intervenor Appellee, Office of Public Utility Counsel’s Brief was electronically filed with the Clerk of the Court using the electronic case filing system of the Court, and that a true and correct copy of this document was served upon counsel for each party of record, listed below, by electronic service and 1st Class U.S. Mail, on this 9 th day of March, 2015

. Marnie A. McCormick John F. Williams Duggins, Wren, Mann & Romero, LLP P.O. Box 1149 Austin, Texa s 78767

- 1149 (512) 744

- 9300 (512) 744

- 9399 (fax) mmcormick@dwmrlaw.com jwilliams@dwmrlaw.com Counsel for Entergy Texas, Inc. Katherine H. Farrell Administrative Law Division

– Energy Rates Section Office of the Attorney General P.O. Box 12548

– Mail Code 018

- 12 Austin, Texas 78711

- 2548 (512) 475

- 4237 (512) 936

- 0674 (fax) katherine.farrell@texasattorney general.gov Counsel for State Agencies Elizabeth R. B. Sterling Environmental Protection Division Office of the Attorney General P. O. Box 12548, Capitol Station Austin, Texas 78711

- 2548 (512) 475

- 4152 (512) 320

- 0911 (fax) elizabeth.sterling@texasattorneygeneral.gov Counsel for the Public Utility Commission of Texas Rex VanMiddlesworth Benjamin Hallmark Thompson & Knight, LLP 98 San Jacinto Blvd, Ste. 1900 Austin, Texas 78701 (512) 469

- 6 100 (512) 469

- 6180 (fax) rex.vanm@tklaw.com benjamin.hallmark@tklaw.com Counsel for Texas Industrial Energy Consumers

/s/ Ross W. Henderson

____ _______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ Ross W. Henderson38 Certificate of Compliance I certify that the Appellee Brief of the Office of Public Utility Counsel contains 7,938 words, as measured by the undersigned counsel’s word

- processing software, and therefore complies with the word limit found in Tex. R. App. P. 9.4(i)(2)(B).

/s/ Ross W. Hender son

__________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ _________________________________________________________________________ Ross W. Henderson

# APPENDIX A

Application of Entergy Texas, Inc. , Docket No. 39896, Direct Testimony of Kevin G. Gardner (ETI Application at Bates p. 3155 to 3159) (Nov. 1, 2012) (Interchange item No. 142)