NO. 03-14-00706-CV

IN THE

TEXAS COURT OF APPEALS

THIRD COURT OF APPEALS DISTRICT

AT AUSTIN

ENTERGY TEXAS, INC.,

 APPELLANT,

V.

PUBLIC UTILITY COMMISSION OF TEXAS,

 APPELLEE

ON APPEAL FROM THE FINAL JUDGMENT

IN CAUSE NO. D-1-GN-13-002623

345TH JUDICIAL DISTRICT COURT, TRAVIS COUNTY, TEXAS,

HONORABLE AMY CLARK MEACHUM, JUDGE PRESIDING

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

CLERK

 FILED IN 3rd COURT OF APPEALS AUSTIN, TEXAS 3/9/2015 3:33:37 PM JEFFREY D. KYLE Clerk
i

TABLE OF CONTENTS

TABLE OF CONTENTS............................................................................................i

TABLE OF AUTHORITIES .................................................................................. iii 

GLOSSARY OF ABBREVIATIONS AND TECHNICAL TERMS.......................vi

ISSUES PRESENTED...............................................................................................1

STATEMENT OF FACTS .......................................................................................2

SUMMARY OF THE ARGUMENTS ......................................................................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 review....................................................8

B. There is substantial evidence to support the Commission’s 

determination that ETI’s advocacy regarding financial-based 

incentive compensation was “unreasonable” and “overly 

aggressive.”. ............................................................................................10

C. The Commission’s decision to disallow a portion of ETI’s rate-case 

expense is also supported by the totality of the record............................14

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 compensation. The Commission did 

not act arbitrarily or capriciously nor abuse its discretion. ............................18
ii

A. The Commission was not bound by any policy to allow rate case 

expenses for efforts to recover impermissible financially-based 

incentive compensation. ..........................................................................19

B. ETI was afforded due process. ................................................................21

C. The Commission’s decision was a case-by-case determination and 

was not impermissible adjudicative rulemaking......................................24

III. The Commission’s method of quantifying the amount of disallowed rate 

case expenses is supported by substantial evidence in the record and was 

not arbitrary, capricious, or an abuse of its discretion. ..................................29

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.....33

PRAYER FOR RELIEF...........................................................................................35

CERTIFICATE OF SERVICE ................................................................................37

CERTIFICATE OF COMPLIANCE .......................................................................38

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)
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) ..................................35

City of Amarillo v. Railroad Commission

894 S.W.2d 491 (Tex. App. – Austin 1995, writ denied)................ 14-15, 18, 32

City of El Paso v. Public Utility Commission 

609 S.W.2d 574 (Tex. App. – Austin 1980, writ ref’d n.r.e.)............................16

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

Industrial Utilities Service v. Tex. Natural 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. – Austin 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, 33, 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 Commission

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, 33
iv

Richards v. Comm’n for Lawyer Discipline

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.).................................. 26-27

Texas State Board 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)...................26, 27, 29, 34

STATUTES

Administrative Procedure Act (APA), TEX. GOV’T CODE §§ 2001.001-.902 

(Vernon 2008 & Supp. 2013)...................................................................................26

TEX. GOV’T CODE § 2001.003(6)................................................................. 26-27, 34

TEX. GOV’T CODE § 2001.174(2).............................................................................35

TEX. GOV’T CODE § 2001.174(2)(e)...........................................................................9

Public Utility Regulatory Act (PURA), TEX. UTIL. CODE §§ 11.001-66.017

(Vernon 2007 & Supp. 2013)................................................................... 4, 19, 25, 32

TEX. UTIL. CODE § 36.003..............................................................................4, 27, 29

TEX. UTIL. CODE § 36.006....................................................................................5, 33

TEX. UTIL. CODE § 36.051..............................................................................4, 27, 29

TEX. UTIL. CODE § 36.061....................................................................................6, 14
v

TEX. UTIL. CODE § 36.061(b).....................................................................................8

TEX. UTIL. CODE § 36.061(b)(2) ....................................................................4, 25, 30
vi

GLOSSARY OF ABBREVIATIONS 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 – Application 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.

OPUC – Office 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 OPUC appeals in this suit for judicial 

review.

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

PFD – Proposal for Decision

PURA – Public Utility Regulatory Act, TEX. UTIL. CODE ANN. §§ 11.001-66.017

(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 this brief in 

support of the final judgment of the District Court on judicial review of the Final Order 

on Rehearing of the Public Utility Commission of Texas (Commission or PUC) in 

Docket No. 42059. Appellee, OPUC respectfully presents the following:

ISSUES 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 that is the 

subject of this appeal, the Commission denied the rate case expenses Appellant

incurred while attempting to include the financially-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 expenses associated with Appellant’s request for financiallybased employee incentive compensation expenses in the related rate case a 
2

violation of Appellant’s due process rights or an improper ad hoc rulemaking –

or was it within the Commission’s broad authority and discretion?

3. Assuming the Commission’s decision to reject the rate case expenses related to 

the financially-based employee incentive compensation expenses was supported 

by the record and a reasonable exercise of its discretion, was 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 District Court’s Judgment 

which affirmed the Commission’s Final Order in Docket No. 40295.1 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 application 

seeking a $111.8 million increase in base rates.

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 Commission 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 financially-based employee incentive 

compensation expenses.6 ETI had previously failed to obtain such expenses in the two 

immediately preceding rate cases involving the Company (Docket Nos. 34800 and 

37744) and failed to do in Docket No. 39896 as well.7

During the 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. 40295, which is the subject of this appeal, ETI sought recovery 

of $8,752,576 in rate case 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 Commission Staff and Intervenors, “a substantial cut to ETI’s rate case 

expenses is warranted.”10 In the Final Order, the 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, Item 32 (PFD at 30).
4

adopting the relevant portions of the Proposal for Decision (PFD) and finding that “the 

amount of rate case expenses sought by ETI ($8.8 million) is high, both in absolute 

terms and in relation to the rate increase ultimately obtained by ETI in Docket 39896 

($27.7 million).11

The Commission reduced the amount of recoverable rate case expenses 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 financially-based incentive compensation.13

SUMMARY OF THE ARGUMENTS

Under the Public Utility Regulatory Act (PURA),

14 the Commission has broad 

powers and discretion in regulating and setting the rates of public utilities, and in 

particular, in determining what 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 case16 that ETI failed to meet its burden to prove that certain 

financially-based employee incentive 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, Binder 2, Item 55 (Final Order at 6, FOF No. 18.f).

14 Public Utility Regulatory Act (PURA), TEX. UTIL.CODE ANN. §§ 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 the Commission decided to 

reject rate case expenses associated with Appellant’sfruitless 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, Appellantsimilarly 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 support 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 expenses rejected by the Commission and under PURA § 36.006 retained 

the burden of persuasion on the entire case. Appellant had notice and an opportunity to 

provide evidence and argument with respect to each of those expenses. Appellant

further had the opportunity to provide rebuttal evidence 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 Commission considered the 

ALJ’s PFD, weighed the evidence in the record, and considered the parties’ arguments. 

 16 PUC Docket No. 39896, AR Volume I, Binder 2, Item 55 (Final Order).

17 AR Volume II, 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 arbitrary and capricious 

manner and the Commission did not abuse its discretion. Further, an agency is not 

required to adopt a rulemaking prior to exercising its discretionary authority under 

these circumstances. The Commission has the authority to decide cases 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 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.” 

In the rate case expense proceeding which is the subject of this appeal, Docket 

No. 40295, the Commission disallowed Appellant’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 compensation 
7

expenses ran contrary to longstanding Commission precedent. 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 instead, the Commission’s decision to reject ETI’s rate case 

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 discretion. 

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 

Commission’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 incentive 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 the 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 to 
8

past Commission orders in an attempt to 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 disallowed 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 importantly, 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 review

In this case, the Commission acted pursuant to a statutory grant of authority. The 

relevant statute states that the Commission “may allow as a cost or expense . . . 

reasonable costs of participating in a [rate case] not to exceed the amount approved by 

the regulatory authority.” PURA § 36.061(b) (emphasis added). In interpreting this 
9

section, the Third Court has found that the Commission has a broad grant of discretion 

to determine the recovery of expenses in utility rates – including 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 substantial 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 committed 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 have 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.” TEX. GOV’T CODE § 2001.174(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 was

“unreasonable” and “overly aggressive.”

The evidence in the record supports the Commission’s determination that it is 

not reasonable for the customers 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 compensation. 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 their 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 outlined 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, agreed 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 case 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 financiallybased 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 “compensation 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 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.). 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 turns 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 financially-based incentive compensation 

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 single 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 uniformly 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 Commission 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 demonstrates 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 overly aggressive, the Commission’s decision must be examined in 

the larger context whereby the Commission determined that ETI’s overall litigation 
14

expenses were excessive and sought a reasonable means to trim them.

C. The Commission’s decision to disallow a portion 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 record 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 consider 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 consideration 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 limited to line-item disallowances or 

charges related to underlying unreasonable costs. In City of Amarillo, the Third Court 

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 cost 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 demonstrate 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, the 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 39896 ($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 notice of an alleged error and give the agency the opportunity to correct the 

error or prepare to defend it.34

 32 AR Volume I, Binder 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’d 
17

This uncontroverted finding of fact, and relevant portions of the PFD, 

demonstrates that the Commission’s decision considered the overall context of 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 After 

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 After considering the methods 

proffered 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 which 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 Amarillo, 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 expenses 

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 ETI’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 purported 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 the 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 supported 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 

begins by improperly citing to Commission orders that are not part of the record before 

the Court.42 Appellant alleges that the orders show that the Commission has 

“consistently allowed utilities to recover their expenses associated with their efforts to 

recover the incentive costs.”43

Appellant introduces the orders as an Appendix to Appellant’s brief and gives 

no indication that the orders are part of the administrative record.44 To the extent that 

the orders 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 orders here, the orders are irrelevant and do not show the Commission 

policy that ETI contends.

Each of the orders cited by ETI were issued as the result of either stipulated 

agreements or the case was not contested at all. The Commission 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 there was a Commission precedent relating to recovery of rate 

case expenses accrued seeking financially-based employee incentive compensation; the 

Commission was not bound to follow that precedent in this case. The Third Court has 

held that even 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 specific 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 statutory grant of authority each time the 

Commission made a determination.

B. ETI was afforded due process.

Appellant cites the Third Court’s Oncor Electric Delivery Company LLC v. 

Public Utility Commission opinion for the proposition that parties “are entitled to know 

what agency standards will be applied to them in advance of the administrative process.” 

Appellant’s Brief at 19; Citing Oncor Electric Delivery Company LLC v. Public Utility 

Commission, 406 S.W.3d 253 (Tex. App.—Austin 2013, no pet.). Appellant 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 discretion 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 Commission 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 violation 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 states that the Commission’s

decision in this case was similar because the “post-hearing 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 inapplicable 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 Oncor “the 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, the Commission’s determination in this case was based upon substantial 

evidence showing that ETI’s rate case expenses were 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 

receiving notice 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 case 

expenses, whereas in this 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 for them. 

In addition, in the underlying 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 overturn 
24

Commission 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 

Docket 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 positions 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 decision was a case-by-case determination and was not 

impermissible adjudicative rulemaking. 

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 II, Binder 3, OPUC 1, Direct Testimony and Workpapers of Nathan A. Benedict.
25

created no new rule. The only rule that guided the Commission’s decision was its 

statutory discretion to determine rate case expenses on a case-by-case basis under 

PURA. TEX. UTIL.CODE § 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 Board 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 without any consideration 

for the differences in factual circumstances between the two matters constituted illegal 

rulemaking. Id.

This 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. TEX.UTIL.CODE § 36.061(b)(2). The Commission’s decision was discrete

and particular to the totality of the facts of this particular record. The Commission did 

not announce a rule of general applicability for future matters regardless of the factual 

circumstances. The Commission was simply exercising its statutory discretion to 
26

determine the reasonableness of rate case expenses on a case-by-case basis.

The most distinguishing fact that separates the matter at hand from Witcheris 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 Administrative 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 policy; 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 not 

affecting private rights or procedures.

TEX. GOV'T CODE § 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 interpretation 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 disallowed 

pursuant to PURA §§ 36.003 and 36.051. 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; TEX. GOV’T. CODE §

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 rests 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 is the type of issue that would be appropriate to include in that 
28

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 intention 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 Commission 

“improperly announce[d] new, clarified record-keeping rules” relating to his recordkeeping 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 Chairman 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 not 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 intended its decision in this matter to be generally applicable or binding 

regardless of the facts. The Commission simply used its discretion pursuant to PURA §§ 

36.003 and 36.051to determine that it would be unreasonable for Appellant to recover 

certain rate case expenses based upon the totality of the 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 substantial 

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 reversible, 

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 the 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 TEX. UTIL. CODE § 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, the Commission decided that some amount of reduction in 

rate case expenses was warranted due to Appellant’s choice to take an unreasonable 

position in the underlying rate case – a position that ran counter to long-standing 

Commission precedent. The Commission thoroughly explained how its determination 

in this matter was particular to the facts 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. The Commission found that the total amount of rate case 

expenses sought by ETI was “high, both in absolute terms, and in relation to the rate 

increases ultimately obtained by ETI in Docket 39896 ($27.7 million).”52

Based upon these facts in the record, the Commission had several ways to 

determine the amount of rate case expenses to reject. The Commission relied on 

evidence 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, the 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 proportion 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 proportionately to the amount of specific overreaching - in this 

case financially-based incentive compensation).54

Each 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 Commission 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, Item 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. The 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 unreasonable position.

57 In other 

words, the Commission concluded that the Appellant failed to meet its burden to 

separate reasonable, from unreasonable, rate case expenses.58 The Court should reject 

Appellant’s suggestion to flip the burden of proof set forth in 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 evidence 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, or an abuse of its discretion.

Appellant contends that 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 Section II for the 

purpose of responding to this argument. Summarized, the reasons discussed above are:

(1) The Commission’s use of its broad 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. Second, Appellant’s due 

process rights were not violated. Unlike the applicant in Oncor, Appellant

 59 TEX. UTIL. CODE § 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 reasonableness 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 announced. Appellant has failed to 

show there 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.” TEX. GOV'T CODE § 2001.003(6).

In addition to the responses summarized above, OPUC notesthe 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, the 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 calculating the accounting treatment of a

 60 Appellant ETI’s Initial Brief at 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 figure:

[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 

inferences 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 Commission’s Order should be affirmed.

PRAYER FOR RELIEF

WHEREFORE, PREMISES CONSIDERED, Intervenor OPUC prays that 

pursuant to TEX. GOV’T CODE § 2001.174(2) and other applicable law, the Court will

deny Appellant Entergy Texas, Inc.’s Issues Presented, and affirm 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 Nathan A. Benedict; and 
36

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 PUBLIC 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 9th day of March, 2015.

Marnie A. McCormick

John F. Williams

Duggins, Wren, Mann & Romero, LLP

P.O. Box 1149

Austin, Texas 78767-1149

(512) 744-9300

(512) 744-9399 (fax)

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@texasattorneygeneral.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) 469-6100

(512) 469-6180 (fax)

rex.vanm@tklaw.com

benjamin.hallmark@tklaw.com

Counsel for Texas Industrial Energy 

Consumers

/s/ Ross W. Henderson ___________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Ross W. Henderson
38

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. Henderson ___________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

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)