TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03-14-00735-CV

Appellant, Entergy Texas, Inc.//Cross-Appellants, Office of Public Utility Counsel

and Public Utility Commission of Texas

v.

Appellees, Public Utility Commission of Texas and Texas Industrial Consumers//

Cross-Appellees , Office of Public Utility Counsel and Entergy Texas, Inc.

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 353RD JUDICIAL DISTRICT

NO. D-1-GN-13-000121, HONORABLE JOHN K. DIETZ, JUDGE PRESIDING

O P I N I O N

This is an appeal from a final order of the Public UtilityCommission in a ratemaking

proceeding filed by Entergy Texas, Inc. (Docket Number 39896) for authority to raise its electric

rates and reconcile its fuel costs. Both Entergy and the Office of Public Utility Counsel filed suits

for judicial review of various aspects of the Commission’s order, and the suits were consolidated.

The district court affirmed the Commission’s order on all issues but one, pertaining to the

Commission’s use of a contemporaneous line-loss study in Entergy’s fuel reconciliation, which

the Commission appeals. Entergy complains that (1) the Commission improperly disallowed

recovery of certain hurricane-restoration costs and (2) substantial evidence does not support

the Commission’s determination that Entergy’s projected future purchased-capacity costs and

transmission-equalization costs were not “known and reasonable changes” to its historical test-year
costs. The Office of Public Utility Counsel (OPUC) complains that substantial evidence does not

support the Commission’s inclusion of Entergy’s 1997 ice-storm-repair expenses when computing

its insurance reserve. We will affirm the district court’s final judgment.

BACKGROUND

In 2011, Entergy, an electric utility that remains subject to traditional cost-of-service

rate regulation, see Tex. Util. Code § 39.452(a)(until date that Commission authorizes non-ERCOT

utility to implement customer choice, utility’s rates shall be regulated under traditional cost-ofservice regulation), initiated a general base-rate case seeking an annual increase of over $100 million

to cover its increased cost of service (Docket Number 39896). See id. § 36.051 (utility is entitled

to rates that afford it “a reasonable opportunity to earn a reasonable return on [its] invested capital

used and useful in providing service to the public in excess of the utility’s reasonable and necessary

operating expenses”).

The Commission sets rates based on a utility’s cost of rendering service to the

public during a historical “test year,” adjusted for known and measurable changes. See 16 Tex.

Admin. Code § 25.231(a), (b) (Pub. Util. Comm’n, Cost of Service). During the regulatory “lag”

between rate cases, the utility bears the risk that its actual operating expenses will exceed the

expectations incorporated into the rate, while retail customers bearthe converse risk. City of El Paso

v. Public Util. Comm’n, 344 S.W.3d 609, 613 (Tex. App.—Austin 2011, no pet.). Exceptions to this

general rule of risk exist for certain categories of costs, such as fuel costs and energy-efficiency

costs. For these types of costs, the utility has a separate rider through which it collects its projected

costs, and it later must reconcile those revenues with its actual, reasonable costs so that it recovers

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no more or less than its actual, reasonable costs for the category of expense covered by the rider.

See, e.g., 16 Tex. Admin. Code §§ 25.181 (Pub. Util. Comm’n, Energy Efficiency Goals) (providing

for recovery of energy-efficiency costs), .235–.237 (Pub. Util. Comm’n, various) (providing for

recovery of fuel costs). In Docket 39896, Entergy also sought to reconcile its fuel costs for a twoyear period ending June 2001.

Entergy, the Commission, and OPUC each appeal a portion of the district court’sfinal

order in this suit for judicial review of the Commission’s Final Order on Rehearing in this docket.

STANDARD OF REVIEW

Our review is governed by the “substantial evidence” rule. Tex. Util. Code § 15.001;

Tex. Gov’t Code § 2001.174; see Anderson v. Railroad Comm’n, 963 S.W.2d 217, 219 (Tex.

App.—Austin 1998, pet. denied). When an appellant contendsthat an agency’s order is not supported

by substantial evidence, we determine whethersubstantial evidence supports the challenged finding

or conclusion, that is, not whether the agency reached the “correct” conclusion, but whether some

reasonable basis exists in the record for the agency’s action. Texas Health Facilities Comm’n v.

Charter Med.-Dall., Inc., 665 S.W.2d 446, 452 (Tex. 1984); see also City of El Paso v. Public Util.

Comm’n, 883 S.W.2d 179, 185 (Tex. 1994) (in conducting substantial-evidence review, we

determine whether evidence as whole is such that reasonable minds could have reached conclusion

agency must have reached in order to take disputed action). A reviewing court is not bound by the

reasons given in an agency order, provided there is a valid basis for the action taken by the agency.

Charter Med.-Dall., 665 S.W.2d at 452.

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DISCUSSION

Entergy’s issues

A. Hurricane-reconstruction costs

In its first issue, Entergy contends that the Commission improperly disallowed over

$11 million of costs that it incurred to restore its system after Hurricane Rita. See Tex. Util. Code

§§ 39.458(a) (purpose of statutory sections pertaining to “hurricane reconstruction costs” is “to

enable an electric utility subject to this subchapter to obtain timely recovery of hurricane

reconstruction costs and to use securitization financing to recover these costs, because that type

of debt will lower the carrying costs associated with the recovery of hurricane reconstruction

costs relative to the costs that would be incurred using conventional financing methods”), .459(a)

(defining “hurricane reconstruction costs” and “Hurricane Rita”). Resolution of the parties’ dispute

hinges on whether the Commission properly determined that Entergy had already recovered the

disallowed amount through rate-setting conducted in a prior docket.

After Hurricane Rita and pursuant to applicable statutes, Entergy filed an application

with the Commission to recover its eligible hurricane-reconstruction costs through “securitization.”1

In that docket, Number 32907, the Commission and Entergy reached a settlement in which the

parties agreed that over $380 million of Entergy’s requested reconstruction expenses were eligible

for securitization and that Entergy would deduct from that amount the insurance proceeds it

expected to receive in the future. Because the insurance proceeds were an estimate, the parties

Securitization is a specialized form of debt financing where repayment of bondholders 1

achieves a high degree of assurance, resulting in very low bond interest rates.

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further agreed that after Entergy had received all of its insurance payments, a true-up would occur

to determine the difference between the estimate and the amount actually received. The agreement,

however, did not specify a method for recovering any insurance under-recovery from ratepayers,

but implicit in the true-up provision was the Commission’s approval of Entergy’s future recovery

of any such insurance-proceeds shortfall.

In Entergy’s next base-rate case, Docket Number 37744, Entergy specifically

requested the previously anticipated true-up by seeking (1) approval of a regulatory asset in the 2

amount of nearly $26 million (including accrued “carrying costs,” or interest), due to its insuranceproceeds estimate from the securitization docket being lower than its actual receipts (the Rita asset)

and (2) amortization of Rita asset through its base rates over five years. That docket also resolved

by settlement, in which the parties entered into a “black box settlement” resolving all of the issues

between the parties and raised by Entergy. In a “black box settlement,” the parties agree to a total

amount that the utility may recover in its rates without specifying any of the individual numbers

used to calculate the amount. See Cities of Dickinson v. Public Util. Comm’n, 284 S.W.3d 449, 450

(Tex. App.—Austin 2009, no pet.) (defining “black box settlement”). Notably, neither the parties’

stipulation nor the Commission’s order in Docket Number 37744 directly referred to the Rita asset,

although there is no dispute that Entergy specifically requested recovery of the Rita asset, amortized

A “regulatory asset” is a mechanism by which a utility carries a cost on its books as a

2

balance-sheet asset based on the expectation that the Commission will allow the utility to recover

the cost over a period of years in the future (through amortization) instead of at the time the

expenditure is made. See City of Corpus Christi v. Public Util. Comm’n, 51 S.W.3d 231, 238

(Tex. 2001).

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through its rates over five years, and that the Commission had previously authorized a true-up after

Entergy’s receipt of insurance proceeds.

In the docket presently on appeal, Entergy again requested approval of a Rita

regulatory asset to recover the balance of its overestimated insurance proceeds, amounting to

approximately $26 million, plus carrying costs. Several parties objected to the request, arguing that

all or some of the amount should be denied because Entergy had (1) already recovered the balance

via the black-box settlement reached in Docket Number 37744 and (2) received additional,

unaccounted-for insurance proceeds since the conclusion of that docket. We therefore turn to the

evidence before the Commission concerning prior Docket Number 37744 and Entergy’s receipt of

insurance proceeds.

In their Proposal for Decision (PFD)in the docket on appeal here, the Administrative

Law Judges (ALJs) noted that in prior Docket Number 37744: (1) no party objected to Entergy’s

requested regulatory asset or amortization; (2) the stipulation and settlement agreement stated 3

that the parties resolved “all issues” except for one not relevant to this appeal; and (3) neither the

stipulation and settlement agreement northeCommission’s orderspecificallydisapproved, excluded,

or deferred consideration of the recoveryof the Rita asset, although those documents did specifically

exclude or disapprove other items not relevant to this appeal. The ALJs also opined that whether

Entergy contends that the Administrative Law Judges’ (ALJs’) recitation in the PFD that 3

in Docket 37744 no party objected to Entergy’s proposed amortization is incorrect, as in that docket

witness Jacob Pous had testified on behalf of several intervening cities that instead of amortizing the

Rita asset and recovering it through rates, Entergy should have to book the amount as a credit in its

storm reserve. While Pous did so testify, he did not object to the length of amortization proposed

by Entergy (five years) or submit that any other amortization period should be utilized, should the

Commission reject his storm-reserve recommendation.

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the Rita-asset issue was resolved or left unresolved in Docket Number 37744 was a “close call.”

Identifying factors supporting both findings and discussing the issue at length, the ALJs ultimately

concluded that the prior docket did approve the Rita asset and that Entergy should have been

amortizing the asset since the effective date of the rates approved in that docket and that,

accordingly, Entergy’s requested recovery should be reduced. The PFD proposed an $11 million 4

reduction in Entergy’s requested amount, calculated as follows: beginning with the Rita-asset

balance that Entergy requested in Docket Number 37744, subtracting the portion of that amount

that should have been amortized for the period between when rates from that docket took effect

until the end of the test yearfor this present docket, and subtracting the additional insurance proceeds

that Entergy had received since the conclusion of Docket Number 37744. The Commission adopted

the ALJs’ findings and recommendations on the issue as set forth in the PFD without amendment. 

On appeal, the Commission argues that any “ambiguity” in the prior order from

Docket Number 37744 must be resolved in accordance with its interpretation because courts

generally defer to an agency’s interpretation of its prior order. See Office of Pub. Util. Counsel v.

Texas-New MexicoPowerCo., 344 S.W.3d 446, 452–53 &n.5 (Tex. App.—Austin 2011, pet. denied)

(agency is entitled to interpret its own prior order as long as it does not use occasion to amend

prior order, and if prior agency order is ambiguous, we defer to agency’s reasonable interpretation);

The ALJs concluded their discussion of whether the prior docket approved the Rita asset 4

thus: “Moreover, when there is uncertainty whether an undisputed issue was deferred for future

consideration or was included within the rates set in a black-box settlement, the burden should be

on the utility to establish that the issue was deferred for future consideration.” As already indicated,

nothing in the black-box settlement or the Commission’s order approving the settlement indicated

that resolution of the Rita asset would be deferred for future consideration.

7
AEP Tex.N.Co. v. Public Util.Comm’n, 297 S.W.3d 435, 447 (Tex. App.—Austin 2009, pet. denied)

(“Just as we give great weight to an agency’s interpretation of its own rules and regulations, we give

great weight to an agency’s interpretation of its administrative orders.”); Cities of Abilene v Public

Util. Comm’n., 146 S.W.3d 742, 748 (Tex. App.—Austin 2004, no pet.) (“If the Settlement Order is

ambiguous, we will affirm theCommission’sinterpretation ofit in the Final Order ifthe interpretation

is supported by substantial evidence.”). We agree.

Because (1) the issue of recovery and amortization of the Rita asset was specifically

before the Commission and undisputed in Docket 37744; (2) the black-box settlement in that docket

resolved “all issues”; and (3) the Rita-asset issue was not specifically excluded or deferred for

future consideration, the Commission’s interpretation of its prior order as approving the Rita

asset, including it in Entergy’s rates, and authorizing Entergy’s requested amortization schedule

is reasonable. We conclude that there is a reasonable basis in the record for the Commission’s 5

determination to disallowthe approximate$11million ofEntergy’srequested hurricane-reconstruction

costs. Accordingly, we overrule Entergy’s first issue.6

The Commission’s interpretation is also in line with the doctrine of res judicata, which was 5

raised by various parties and has been applied to administrative proceedings. See McMillan v. Texas

Nat. Res. Conservation Comm’n, 983 S.W.2d 359, 364–65 (Tex. App.—Austin 1998, pet. denied)

(res judicata applies to final decisions made by administrative agencies in their adjudication of

contested cases, including final orders embodying settlement agreement among parties); see also

Citizens Ins. Co. of Am. v. Daccach, 217 S.W.3d 430, 449 (Tex. 2007) (listing elements of res

judicata); Coalition of Cities for Affordable Util. Rates v. Public Util. Comm’n, 798 S.W.2d 560

(Tex. 1990) (even where Commission’s final order purported to defer issue of prudence of expenses

for future resolution, because utility had not met burden of proof in prior docket to show that

expenses were prudently incurred, res judicata barred issue’s later review byCommission, where no

statute authorized Commission to defer and reconsider issue). 

In this issue, Entergy also asserts that the Commission erroneously interpreted Public 6

Utility Regulatory Act (PURA) section 39.462(a) to “require” it to resolve the issue of hurricane8
B. Adjustments for anticipated “purchased capacity” costs

In its second issue, Entergy contends that the Commission’s disallowance of over

$30 million of its anticipated expenses for purchasing “capacity” (generated power) from third

parties (“purchased-capacity costs” ) was not supported by substantial evidence. The Commission 7

responds that Entergy failed to meet its burden to prove that its projected capacity costs were

“known and measurable changes” to the costs incurred during the test year, see 16 Tex. Admin.

Code § 25.231(b) (“In computing an electric utility’s allowable expenses, only the electric utility’s

historical test year expenses as adjusted for known and measurable changes will be considered.”),

and that it properly exercised its broad discretion in disallowing the expenses, see Cities of Corpus

Christi v. Public Util. Comm’n, No. 03-06-00585-CV, 2008 WL 615417 at *9 (Tex. App.—Austin

Mar. 5, 2008, no pet.) (mem. op.) (“The Commission may decide in its discretion whether to

incorporate ‘known and measurable’ changes to the test-year data.”); Central Power & Light/Cities

of Alice v. Public Util. Comm’n, 36 S.W.3d 547, 563 (Tex. App.—Austin 2000, pet. denied)(“[T]he

reconstruction costs in Docket 37744 rather than in the present docket on appeal. See Tex. Util.

Code § 39.462(a) (“An electric utility subject to this subchapter is entitled to recover hurricane

reconstruction costs consistent with the provisions of this subchapter and is entitled to seek recovery

of amounts not recovered under this subchapter, including hurricane reconstruction costs not yet

incurred at the time an application is filed under Subsection (b), in its next rate case proceeding

or through any other proceeding authorized by Subchapter C, Chapter 36.” (emphasis added)).

Because we conclude that substantial evidence supports the Commission’s determination that

Entergy already sought and recovered the amounts in dispute, we need not address this statutory

argument because it pertains only to unrecovered amounts.

“Capacity costs” represent the seller’s fixed costs in generating power, see City of El Paso 7

v. El Paso Elec. Co., 851 S.W.2d 896, 898 (Tex. App.—Austin 1993, writ denied), and they are

generally recoverable in base rates, see City of El Paso v. Public Util. Comm’n, 344 S.W.3d 609, 614

(Tex. App.—Austin 2001, no pet.).

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Commission’s authority to allow post-test-year adjustments for ‘known and measurable changes

to historical test-year data’ is discretionary.”). We agree with the Commission.

In this case, Entergy demonstrated that it incurred purchased-capacity costs of over

$245 million for the test year; it sought an additional $31 million based upon what it believed it

would incur through purchased-capacity agreements during the “rate year”—the first year that

new rates set by the case would take effect. Several parties opposed Entergy’s request for this

adjustment to test-year expenses and submitted testimony to support their opposition, arguing that

the additional rate-year costs were mere projections, not “known and measurable changes.” Such

evidence showed the following: (1) many of the payments that Entergy claimed it would pay

under third-party purchased-capacity contracts in the future did not contain fixed-price terms, and

Entergy’s costs would fluctuate based on factors such as availability and performance; (2) Entergy’s

projections under these purchased-capacity contracts contained assumptions about availability

and performance that were not supported by historical payments for third-party contracts; (3)

Entergy’s costs under its purchased-capacity contracts with affiliates would also fluctuate, based on

a complicated formula set out in a Federal Energy Regulatory Commission (FERC) tariff with

multiple variables, unknown at the time of the rate case; (4) some purchased-capacity contracts at

issue had not yet received requisite regulatory approval and did not have set pricing, awaiting

development of future pricing schedules; and (5) Entergy’s expected load growth in the coming

years, including the rate year, would likely offset or completely outpace its projected future

purchased-capacity costs.8

Entergy correctly notes that the Commission is not directly authorized by the Legislature 8

to consider future load growth in setting base rates; however, neither has the Legislature directed the

10
The Commission was free to weigh this and other evidence, and we may not

substitute our judgment for its on the weight of the evidence. See Central Power &Light, 36 S.W.3d

at 561; see also Charter-Med. Dall., 665 S.W.2d at 452–53 (even if court would reach different

conclusion from one agency reached, court must uphold agency’s decision if it is within bounds of

reasonableness). The ALJs considered the evidence before them and concluded that Entergy “failed

to meet its burden to prove that the adjustment it seeks to its Test year[purchased-capacity contracts]

is known and measurable” and found that the intervenors had “presented substantial evidence that

all of the components of [Entergy]’s purchased power capacity contain significant variability and

uncertainty in costs.” The Commission agreed with the ALJs and denied Entergy’s request. We

hold that substantial evidence supports the Commission’s determination and accordingly overrule

Entergy’s second issue. See Charter-Med. Dall., 665 S.W.2d at 452 (substantial evidence requires

only more than mere scintilla of evidence, and we must affirm agency decision if rational basis for

it exists in record).

C. Adjustments for anticipated “transmission equalization” expenses

In its third issue, Entergycontends that theCommission’srefusal tomake adjustments

to Entergy’stest-year level of “transmission equalization” expenses was not supported by substantial

9

Commission to consider projected future expenses. See Central Power & Light Co/Cities of Alice.

v. Public Util. Comm’n, 36 S.W.3d 547, 564 (Tex. App.—Austin 2000, pet. denied) (upholding

Commission’s decision to deny post test-year adjustment that failed to take into account attendant

impacts of increased electricity sales from load growth).

“Transmission equalization” refers to the allocation of operating costs among various 9

Entergy operating companies (located in several southern states) for shared use of Entergy’s

transmission grid. The costs of operating this system are allocated pursuant to a FERC tariff,

referred to by the parties as Service Schedule MSS-2, and designed to ensure that each company

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evidence. TheCommission respondsthat, as with the purchased-capacitycosts, Entergyfailed tomeet

its burden to prove that the requested expenses were “known and measurable.” See 16 Tex. Admin.

Code § 25.231(b). Entergy sought to recover $9 million more for transmission-equalization expenses

than it incurred in the test year, seeking these adjustments based on its estimates of transmissionconstruction projects expected to be completed after the test year and incurred in the rate year.

10

Expert witnesses testifying on behalf of the Commission and intervening parties

opposed Entergy’s request and identified several “unknowns” with respect to the request: (1) the

transmission-equalization formula is complex and involves the input of a number of interdependent

variables from the various operating companies, including things such as each company’s future

transmission investment, deferred taxes, depreciation reserves, and costs of capital; (2) Entergy’s

post-test-year adjustment was predicated on a calculation that required numerous predictions about

these unknown future variables; and (3) the projected expenses were premised on transmission

projects that were not yet in service and were in varying stages of design and construction, some

with completion dates of six months after Entergy’s new rates would go into effect, and in-service

contributes its just and reasonable share of the costs. Depending on varying transmission capacity

and needs among the individual operating companies—for instance, some months Entergy may be

“long” (owning more capacity than it needs) or “short” (owning less than it needs)—the companies

pay or receive MSS-2 payments from or to one another, and the payments that Entergy makes when

it is “short” are recoverable in its rates.

During the test year, Entergy was “short” and paid more than $1.7 million in MSS-2 10

payments to the other operating companies. The additional $9 million that Entergy requested as

post-test-year adjustments was based on its estimates of transmission-construction projects expected

to be completed after the test year, resulting in changes to the relative transmission-line-ownership

ratios among the operating companies, with the apparent result that Entergy would be increasingly

“short” and its MSS-2 payments would grow.

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dates are not guarantees and can change, while investment for MSS-2 purposes is not counted until

projects actually go into service.

Based on this and other evidence, the ALJs concluded that Entergy did not meet its

burden to prove that the adjustments it was seeking were for “known and measurable” changes, and

the Commission agreed. As discussed with respect to Entergy’s previous issue, the Commission was

the sole judge of the weight of the evidence, and we may not substitute our judgment for its. See

Central Power & Light, 36 S.W.3d at 561. We conclude that substantial evidence supports the

Commission’s determination, and we accordingly overrule Entergy’s third issue. See Charter-Med.

Dall., 665 S.W.2d at 452.

The Commission’s issue

In its sole issue, the Commission contends that the trial court erred in reversing its

order on the question of whether it properly used a contemporaneous “line loss study” in Entergy’s 11

fuel reconciliation rather than the same, historical study that it used in previously setting Entergy’s 12

A “line loss study” estimates the amount of electricity that is lost through transmission as 11

a utility delivers it from the generator to the end-user. The cost for generating that lost electricity

is billed to customers so that the utility can recover its reasonable and necessary expenses. Based

on the study, different “loss factors” are computed to allocate the losses to the utility’s various rate

classes, based on the voltage at which the electric service is provided, and the loss factors are

incorporated into the “fuel factor,” a temporary rate (or “rider”) included in the rates that customers

pay. See, e.g., 16 Tex. Admin. Code §§ 25.237(a)(1) (Pub. Util. Comm’n, Fuel Factors) (“Fuel

factors must account for system losses and for the difference in line losses corresponding to the

voltage at which the electric service is provided.”), .237(a)(3) (“Fuel factors are temporary rates,”

subject to periodic review for the reasonableness of fuel costs that a utility has incurred.).

A fuel reconciliation is a periodic proceeding in which the Commission makes adjustments 12

to a utility’s rates to account for fluctuations in the cost of fuel, which is volatile and constitutes a

large part of a utility’s expenses. The Commission uses a two-step process to allow recovery for fuel

expenses: (1) first, the Commission sets a temporary, estimated rate called a “fuel factor” and (2)

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fuel factor and which Entergy proposed using. Entergy’s application to change rates in the docket

before us on appeal also included a request for a fuel reconciliation for the period from July 2009

to June 2010 (the “reconciliation period”). See 16 Tex. Admin. Code § 25.236(b) (Pub. Util.

Comm’n, Recovery of Fuel Costs) (“Electric utilities shall file petitions for reconciliation on a

periodic basis so that any petition for reconciliation shall contain a maximum of three years and a

minimum of one year of reconcilable data and will be filed no later than six months after the end of

the period to be reconciled.”); see also Tex. Util. Code § 36.203(e) (“The Commission by rule shall

provide for the reconciliation of a utility’s fuel costs on a timely basis.”). Entergy determined that

it had over-recovered its fuel costs during the reconciliation period by about $243 million;

established that it had already refunded about $237 million of that amount in accordance with

interim Commission orders; and sought to “roll forward” the remaining fuel over-recovery balance

of approximately$5.6 million “to serve as the beginning balance for the next Reconciliation Period,”

rather than refund that amount to customers.

later, the Commission makes adjustments to the utility’s rates by reconciling the amounts the utility

received under the fuel factor with the actual, reasonable expenses that the utility incurred for fuel

to generate electricity for its customers. See Texas Utils. Elec. Co. v. Public Util. Comm’n, 881

S.W.2d 387, 411–12 (Tex. App.—Austin 1994), aff’d in part, rev’d in part, 935 S.W.2d 109 (Tex.

1996). In a fuel reconciliation, the utility may ask to refund any over-recovery or surcharge any

under-recovery, and those refunds or surcharges will be allocated to different rate classes based on

the usage of each class, adjusted for line losses. See 16 Tex. Admin. Code §§ 25.236(e)(3) (Pub.

Util. Comm’n, Recovery of Fuel Costs) (“Interclass allocations of refunds and surcharges . . . shall

be based on the historical kilowatt-hour usage of each rate class . . . adjusted for line losses . . .”),

.237(a)(3)(A) (Public Util. Comm’n, Fuel Factors) (“The reasonableness of the fuel costs that an

electric utility has incurred will be periodically reviewed in a reconciliation proceeding, as described

in § 25.236 of this title, and any disallowed costs resulting from a reconciliation proceeding will be

reflected in the calculation of the utility’s recoverable fuel and over/(under) collections.”).

14
The dispute between the parties concerns whetherthe Commission properlyfollowed

the recommendation of the intervenor Cities to use a contemporaneous (2010) line-loss study 13

that Entergy presented during this ratemaking proceeding to support its cost-of-service analysis for

its requested base rates or whether the Commission should have used the same line-loss study

from 1997 that was used when it approved the fuel factor for the reconciliation period. The

resolution of the parties’ dispute turns on construction of the Commission’s rules applying to fuel

reconciliations, as the ALJs and the district court noted.

TheALJs rejected the Cities’ “unprecedented” recommendation that theCommission

use the contemporaneous line-loss study in allocating Entergy’s fuel costs actually incurred over

the reconciliation period. The Cities recommended using the newer 2010 study because its expert

witness, Carl Nalepa, explained that allocatingEntergy’s fuel expenses between retail and wholesale

customers using the more recent loss factors revealed that retail customers were “subsidizing”

wholesale customers in the approximate amount of $3.8 million. According to the Cities, updating

Entergy’s allocation of fuel costs to reflect current line losses would result in a more accurate

amount that Entergy actually expended to provide service to retail customers (rather than to

wholesale customers) over the reconciliation period. The ALJs rejected the Cities’ proposal,

determining that (1) its recommendation would result in a “mismatch” between the allocation of

fuel costs to customer classes and the already-received collections from those customers for fuel

costs (which were determined through the use of historical line losses) and (2) the Commission’s

The Cities of BridgeCity, Groves, Orange, Pine Forest, and West Orange (the Cities)—all 13

municipalities in the service territory of Entergy—filed a joint motion to intervene in the rate-case,

which the Commission granted.

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rules “require the use of Commission-approved line losses that were in effect at the time fuel costs

were billed to customers in a fuel reconciliation.” See 16 Tex. Admin. Code § 25.236(e)(3)

(“Interclass allocations of refunds and surcharges, including associated interest, shall be developed

on a month-by-month basis and shall be based on the historical kilowatt-hour usage of each rate

class for each month during the period in which the cumulative under- or over-recovery occurred,

adjusted for line losses using the same commission-approved loss factors that were used in the

electric utility’s applicable fixed or interim fuel factor.” (emphasis added)).

In its final order, the Commission agreed with the Cities and reversed the PFD on the

issue, determining that the “same currently available [2010] line-loss factors [that Entergy used to

calculate demand- and energy-related allocations in its cost-of-service analysis supporting its

requested base rates] should have been utilized in Entergy’s fuel reconciliation.” Based on using the

contemporaneous line-loss study, the Commission determined that approximately $3.8 million

should be removed from Entergy’s recoverable fuel expenses. While adding a new finding of fact

and conclusion of law to reflect this determination, the Commission did not revise any of the 14

PFD’s findings of fact reciting that Entergy’s fuel expenses incurred during the reconciliation period

were “reasonable and necessary. . . to provide reliable electric service to retail customers” or its legal

The new finding of fact, number 246A, reads: “E[ntergy]’s 2010 line-loss factors 14

should be used to reconcile [its] fuel costs. Therefore, E[ntergy]’s fuel reconciliation over-recovery

should be reduced [sic—Entergy submits that the word should read “increased,” and the

Commission does not disagree] by $3,981,271.” The new conclusion of law, number 19B, reads:

“R[ule] 25.236(d)(2) defines the scope of a fuel reconciliation proceeding to include any issue

related to the reasonableness of a utility’s fuel expenses and whether the utility has over- or underrecovered its reasonable fuel expenses. It is proper to use the new line-loss study to calculate

Entergy’s fuel reconciliation and over-recovery.” 

16
conclusion to the same effect. See id. § 25.236(d)(1)(A) (“In a proceeding to reconcile fuel factor

revenues and expenses, an electric utility has the burden of showing that: its eligible fuel expenses

during the reconciliation period were reasonable and necessary expenses incurred to provide reliable

electric service to retail customers.”). In short, the Commission did not determine that Entergy had

not reasonably or actually incurred the $3.8 million in fuel expenses, but, rather, that those

expenses—using new line-loss data—should be allocated to wholesale customers rather than retail

customers and, therefore, removed from the “pot” of expenses to be reconciled with revenues. The

Commission did not provide for any procedure through which Entergy would be credited for the

$3.8 million it indisputably spent on fuel expenses and that its expert witness testified would be

“stranded” if disallowed.

The district court reversed the Commission’s determination concerning use of the

contemporaneous line-loss studyand $3.8 million adjustment to Entergy’s over-recovery, upholding

Entergy’s issue in which it asserted that the Commission violated two of its rules in using the

2010 study. See id. §§ 25.236(e)(3) (providing for methods to be used in developing interclass

allocations of fuel refunds and surcharges), .237(a), (c)(2)(B) (Pub. Util. Comm’n, Fuel Factors)

(providing for use and calculation of fuel factors and scope of fuel-factor-revision proceeding). We

agree with the district court and the ALJs that by using the 2010 line-loss study, the Commission

did not follow the plain, unambiguous language of its own rule 25.236(e)(3) in reconciling

Entergy’s fuel costs and, thereby, acted arbitrarily. See Reliant Energy, Inc. v. Public Util. Comm’n,

153 S.W.3d 174, 199 (Tex. App.—Austin 2004, pet. denied) (agency decision is arbitrary when it

fails to follow clear, unambiguous language of its own regulations); Southwest Pharmacy Sols.,

Inc. v. Texas Health & Human Servs., 408 S.W.3d 549, 558 (Tex. App.—Austin 2013, pet. denied)

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(courts will not defer to agency’s interpretation of its own rules if interpretation is plainly erroneous

or contradicts text); see also Public Util. Comm’n v. Gulf States Utils. Co., 809 S.W.2d 201, 207,

211 (Tex. 1991) (in reviewing decision for arbitrariness, we may not substitute our judgment for

that of agency, and our review is limited to determining whether administrative interpretation is

“plainly erroneous or inconsistent with the regulation”).

Rule 25.236(e)(3) unambiguously provides that under- and over-recoveries of fuel

expenses shall be allocated to different rate classes and adjusted for line losses using the same

Commission-approved loss factors that were used in setting the fuel factor:

Interclass allocations of refunds and surcharges, including associated interest, shall

be developed on a month-by-month basis and shall be based on the historical

kilowatt-hour usage of each rate class for each month during the period in which the

cumulative under- or over-recovery occurred, adjusted for line losses using the same

commission-approved loss factors that were used in the electric utility’s applicable

fixed or interim fuel factor.

16 Tex. Admin. Code § 25.236(e)(3). The Commission contends that this rule is inapplicable

because (1) Entergy was not seeking to refund its over-recovery (but only to carry it forward as a

balance into the next fuel reconciliation) and (2) it applies only to Entergy’s retail-rate classes and

“does not concern allocating fuel costs between retail and wholesale service.”

While it is true that Entergy did not seek to outright refund its over-recovery, its

proposal to carry the balance forward is effectively a “refund” and will be the starting point for

determining over- or under-recoveries going forward. The various customer classes will nonetheless

receive the benefit of any dollars they overpaid, allocated appropriately to each class, under this

rule when the next fuel reconciliation occurs. Furthermore, the rule does not speak to the actual

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issuance of refunds or imposition of surcharges, but instead to “allocations” of them to various

classes—whether and whenever the utility actually makes a refund or collects a surcharge from its

various customer classes (or merely rolls the balance forward), the utility must nonetheless make

regular allocations of the over- or under-recoveries to its customer classes and maintain those

amounts on its books until reconciled. See id. (“Interclass allocations of refunds and surcharges,

including associated interest,shall be developed on a month-by-month basis. . . .”); cf.id. 25.236(e)(5)

(“Unless otherwise ordered by the commission, all refunds shall be made through one-time bill

credit and all surcharges shall be made on a monthly basis . . . .”).

As for the Commission’s argument that Rule 25.236(e)(3) does not apply because it

does not concern allocating costs between retail and wholesale classes but only applies to allocations

among various retail customers, that contention directly conflicts with the rule’s specific definition

of “rate class” as meaning “all customers taking service under the same tariffed rate schedule.” Id.

§ 25.236(e)(2). Both retail and wholesale customers take service under tariffed rate schedules,

although the Commission does not itself set the wholesale tariffed base rates (FERC does). Neither

this rule nor any rule or statute the Commission has identified prohibits the utility from recovering

costs merely because those costs were incurred to provide energy to wholesale rather than retail

customers. Cf. 16 Tex. Admin. Code §§ 25.231(a), (b) (rates are to be based on electric utility’s

cost of rendering service “to the public” during historical test year, and allowable expenses are

those “reasonable and necessary to provide service to the public”), .235(a)(Pub. Util. Comm’n, Fuel

Costs—General) (Commission must set utility’s rates at level that will permit utility “a reasonable

opportunity to earn a reasonable rate of return on its invested capital and to recover its reasonable

and necessary expenses, including the cost of fuel and purchased power”).

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Moreover, the same rule also contemplates that a utility will make refunds to or

collect surcharges from all customer classes, including wholesale classes, see id. § 25.236(e)(4)

(noting that all wholesale customers shall be given refunds or assessed surcharges based on their

individual actual historical usage), and undoubtedly both retail and wholesale customers paid the

fuel factor and contributed to revenues during the reconciliation period. Furthermore, in subsection

(a) of Rule 25.236, there is a limited list of “eligible fuel expenses” for which a utility may seek

recovery, see id. § 25.236(a); the list does not mention expenses incurred for energy produced that

is delivered only to retail customers. In sum, the Commission has not advanced any convincing

arguments that Rule 25.236(e)(3) does not apply to Entergy’s fuel reconciliation, nor has it offered

an alternate, reasonable interpretation of the phrase “using the same commission-approved loss

factors that were used in the electric utility’s applicable fixed or interim fuel factor.” The loss factors

that were used in setting Entergy’s fuel factor relevant to the fuel reconciliation at issue are the 1997

loss factors that Entergy proposed using to reconcile its fuel costs. The rule unambiguously requires

the Commission to use these same 1997 factors in calculating the amount of refund that Entergy

may carry forward on its books.

Despite Rule 25.236(e)(3)’s directive, the Commission relies on the rule’s

subparagraphs (d)(1)(A) and (d)(2) to support its determination. However, the first of those

subparagraphs recites merely that the utility has the burden of proving that its eligible fuel

expenses during the reconciliation period were reasonable and necessary expenses incurred to

provide reliable electric service to retail customers, see id. § 25.236(d)(1)(A). The Commission

explicitly found that Entergy had met this burden in its findings of fact and conclusions of law.

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Moreover, even had the Commission not made these explicit findings, we are not convinced by its

contention that subparagraph (d)(1)(A) permits the Commission to deduct the actual expenses for

providing electricity to wholesale customers from the “pot” of total fuel expenses that a utility

incurred—such allocation among classes is the very purpose of subparagraph (e) and its specific

outline of procedures for so doing.

The other subparagraph, (d)(2), cited by the Commission merely recites that

the “scope of a fuel reconciliation proceeding includes any issue related to determining the

reasonableness of the electric utility’s fuel expenses during the reconciliation period and whether

the electric utility has over- or under-recovered its reasonable fuel expenses,” see id. § 25.236(d)(2).

The Commission supports its decision to exclude $3.8 million from Entergy’s fuel expenses

incurred during the reconciliation period by arguing that whether the expenses were incurred to

provide energy to retail or wholesale customers is “related” to whether it has “over- or underrecovered” itsfuel expenses. There is no basisin subparagraph (d)(2)fortheCommission’s contention

that this retail–wholesale distinction is relevant to whether a utility has over- or under-recovered its

fuel expenses. There is no dispute that Entergy did over-recover its fuel expenses. Moreover, as

already noted, the Commission’s determination is directly at odds with the more specific directive

in subparagraph (e) of the same rule to adjust allocations of refunds using the same line-loss factors

that were used in setting the fuel factor.15

The Commission alternatively argues that Entergy was not harmed by its determination 15

on this issue. See Tex. Gov’t Code § 2001.174(2) (directing court to “reverse or remand the case

for further proceedings if substantial rights of the appellant have been prejudiced”). However,

Entergy’s expert witness testified that if the costs were disallowed, they would be “stranded” and

not recovered otherwise, and the Commission has identified no record evidence indicating other

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The Commission acted arbitrarily and abused its discretion by not following Rule

25.236(e)(3), using the 2010 line-loss study to reconcile Entergy’s fuel costs, and disallowing

$3.8 million of Entergy’s eligible fuel expenses incurred during the reconciliation period in

determining the amount of refunds that Entergy may keep on its balance sheets. We overrule the

Commission’s issue and hold that the district court did not err in reversing the Commission’s

determination on the issue of the line-loss study and remanding the issue for further proceedings

consistent with the district court’s order.

OPUC’s issue

In its sole issue, OPUC contends that the Commission committed legal error, acted

arbitrarily and capriciously, and abused its discretion by allowing the inclusion of about $13 million

of 1997 ice-storm restoration costs in Entergy’s storm-reserve account because the costs were

allegedly directly related to Entergy’s imprudence and were reasonably anticipated. Entergy and the

Commission respond that OPUC’s argument hinges on two false premises: (1) that the Commission

determined in a prior docket that some of Entergy’s $13 million in 1997 ice-storm costs were

imprudently incurred and (2) that Entergy presented no evidence demonstrating the reasonableness

and necessity of the $13 million in costs associated with the 1997 ice storm. Our review of the

record leads us to agree with Entergy and the Commission. While OPUC frames its issue in various

ways, it essentially is asking this Court to re-weigh the evidence before the ALJs and Commission,

which we may not do. See Central Power &Light, 36 S.W.3d at 561 (agency is sole judge of weight

procedures through which Entergy would recoup them.

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to be accorded testimony of each witness); see also Charter-Med. Dall., 665 S.W.2d at 452–53 (even

if court would reach different conclusion from one agency reached, court must uphold agency’s

decision if it is within bounds of reasonableness).

The prior docket to which OPUC cites, Number 18249, was severed from a 1996 rate

case for the purpose of hearing and resolving issues relating to Entergy’s service quality after it had

merged with Gulf States Utilities, Inc. A small portion of the order in Docket Number 18249

addressed the 1997 ice storm and found that Entergy’s service-qualityissues (such as poor vegetation

management in failing to trim trees above transmission lines) contributed to the extent of the icestorm damage. However, the Commission also found that significant damage would have occurred

even with exemplary vegetation-management and other preventive measures. Significantly, the

Commission did not address the prudence of the ice-storm restoration costs (or of any particular

expenditure) or conclude that any portion of the restoration costs should be disallowed; in fact, it did

not adjudicate cost-recovery issues at all in Docket 18249 but did penalize Entergy for its deficient

maintenance and other forms of poor service quality by requiring it to retroactively reduce its return

on its equity (ROE) by making refunds to customers.

Nonetheless, OPUC essentially argues that the Commission’s findings in Docket

18249 regarding the ice storm estop it from allowing recoveryfor ice-storm restoration expenditures

in this docket. However, none of the actual expenditures that Entergy incurred to restore its system

after the 1997 ice storm nor the prudence of those particular expenditures were at issue in the prior

docket or were essential to the Commission’s decision in that docket. Cf. El Paso Elec. Co. v. Public

Util. Comm’n, 917 S.W.2d 846, 859 (Tex. App.—Austin 1995, writ dism’d by agr.) (to invoke

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collateral estoppel, party must establish that (1) facts sought to be litigated in second action were

fully and fairly litigated in prior action and (2) those facts were essential to judgment in first action).

We conclude that Entergywas not estopped byDocket Number 18249 from requesting the ice-storm

restoration costs in this docket.

Regarding whether Entergy met its burden in this docket to show that its ice-storm

restoration costs were reasonable and necessary and were not reasonably anticipated, we conclude

that substantial evidence supports the Commission’s determination in favor of Entergy. Entergy

witness Shawn Corkran described the severity of the storm and the area affected; detailed the work

performed to restore the system; described how the accumulation of ice caused many of the

distribution lines to collapse, without regard to damage from falling tree limbs; described the

company’s response to the damage, including hiring numerous contractors to assist with the

restoration effort; and described how he evaluated the reasonableness of the costs that were

incurred during the restoration effort. Entergy witness Michael Considine opined that Entergy

could not have reasonably anticipated the costs because annual expenditures are extremely variable,

both in amount and with respect to timing.

OPUC did not challenge any specific item in the requested restoration expenses but

rather relied upon the Commission’s findings in Docket 18249 and its insistence that Entergy failed

to make a prima facie case that its ice-storm restoration costs were prudently incurred. .See

Entergy Gulf States, Inc. v. Public Util. Comm’n, 112 S.W.3d 208, 214–15 (Tex. App.—Austin

2003, pet. denied) (utility has burden to establish prima facie case of prudence of expenses; if utility

makes such case, burden shifts to intervenor to present evidence that reasonably challenges

expenditure). However, the utility may meet its burden without proving the reasonableness and

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necessity of every individual dollar paid on a granular level, but may present evidence that is

comprehensive. Id. at 215 n.5.

To support its prima facie case, Entergy submitted evidence of the costs it incurred

to restore service to customers as quickly as possible after the ice storm and expert testimony that

such expenses were reasonable and necessary to repair the damage and restore power. Entergy

witness Corkran discussed Entergy’s distribution operations, industry-recognized comprehensive

storm plans, annual storm drills, storm response and restoration processes, distribution maintenance

and asset-improvement processes, service quality and continuous-improvement programs, and

vegetation-management practices. He described how Entergyprepares for emergencysituations and

how charges to the storm reserve are captured and recorded. He also submitted exhibits showing

that Entergy’s operation and maintenance costs for distribution compare very favorably to the costs

of other utilities.

Because there is substantial evidence supporting the Commission’s determination on

the issue of ice-storm restoration costs, and because Entergywas not estopped from recovering these

costs by prior Docket Number 18249, we overrule OPUC’s sole issue and hold that the district court

properly upheld the Commission’s order on these costs.

CONCLUSION

Having overruled all of Entergy’s issues, the Commission’s issue, and OPUC’s issue,

we affirm the judgment of the district court reversing and remanding the Commission’sfinal order on

the issue of its use of a contemporaneousline-lossstudy to adjust Entergy’srecoverable fuel expenses

for the reconciliation period and upholding the Commission’s final order in all other respects.

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__________________________________________

David Puryear, Justice

Before Justices Puryear, Goodwin, and Bourland

Affirmed

Filed: April 8, 2016

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